Absolute Software Corp (ABST) 2008 Q2 法說會逐字稿

Welcome to the Absolute Software Corporation second-quarter 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. 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, Thursday, February 7th, at 10 AM Eastern Time. I would now like to turn the conference over to Mr. John Livingston, Chairman and Chief Executive Officer.

Thank you, operator. Good morning, everyone, and thanks for joining us to discuss our second quarter fiscal 2008 results. We issued our results by press release this morning. If you did not receive the release, it can be found on our Web site at Absolute.com, along with our MD&A and financial statements.

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

Sales and cash from operations results, second quarter and year-to-date. We continued to build on the strong momentum we have built up over the past three years. Second-quarter sales contracts were 15 million, up 61%, or up 86% in US dollars over the same period last year. And we generated cash from operations of 9.1 million, up 111% from the same quarter last year.

Year-to-date, sales contracts are 36 million and are up 76%, or 96% in US dollars over last year, and cash from operations is 18 million, doubling over the same period last year. As 90% of our sales contracts are in US dollars, the US currency quoted growth rates remove the impact of recent currency fluctuations and help to provide a more accurate picture of our strong operating performance. Year-to-date operating cash margins have increased to 50%, compared to 44% last year at this period of time. As evidence of our strong momentum, this quarter represented the 13th straight quarter of year-over-year sales contracts growth of 50% or more.

Strong subscriber growth continues. We entered 515,000 customer subscriptions in the second quarter, up more than three times from 163,000 subscriptions in the same quarter last year. Year-to-date we have added approximately 1.1 million new subscriptions. We ended the quarter with approximately 2.5 million subscriptions under contract, up 169% from a year earlier.

Updating our subscriber and cash margin targets. With the progress made against our strategic plan, we are updating our targets as follows. We are increasing our subscription target by 50% to 6 million subscribers, up from 4 million, by June 30, 2009. And we are increasing our fiscal 2008 cash margin target to 35 to 40% of sales contracts, up from 30 to 35% previously.

Second-quarter business update. Our evolution towards mass adoption continues. Year-to-date, our gross subscription unit sales were 1.1 million. This puts our attach rates at about 7% of the estimated 15 million laptops sold in the US market during that period. As we continue to increase our attach rates, it seems to bring even better opportunities to further accelerate our market reach through existing and new partnerships in the US and internationally.

Awareness is increasing. IT managers, CIOs, CFOs, CSIOs and CEOs are clearly beginning to realize the extent of the data security issues inherent in mobile computing due to theft and loss. We see customers [trying a layered] approach, often combining Absolute's Computrace solution with encryption and other security measures to keep data private, fight identity theft, and to comply with data breach notification laws now passed in 37 states.

The trend to secure mobility drives our sales growth and suggests there are still many greenfield opportunities for us to pursue. We expect to monetize these opportunities based on our proven track record. For example, we have now recovered over 5000 stolen computers. We are recovering approximately 60 to 70 computers every week for customers across North America. We are performing post-theft data delete services on even more, and our secure data center is serving over 10 million communications a week. Every day we are identifying and breaking internal theft rings and providing customers with valuable intelligence on their internal theft vulnerabilities, deterring theft and protecting customer data, and providing customers with best practices tracking for their remote mobile computing assets.

[Partnering ecosystem and] programs. We have recently reported many new and expanded partner programs. We believe these are important indicators of our progress. Announcements during the last six months include --

Dell. We extended our US Dell consumer bundle program to Dell Canada. LoJack for Laptops is now being bundled on all Dell CompleteCare and certain laptop sales North America-wide. In the first year of this program we generated over 10 million in US in sales contracts, and expect to generate at least that much again through consumer bundled programs in the next 12 months.

HP. We rolled out a bundled program with HP's Care Pack services targeted toward the SMB space. This is an opt-in bundled program which is expected to generate meaningful sales starting in our fiscal fourth quarter.

Symantec. We co-offered a bundle at Apple stores where customers received a $50 rebate if they bought our LoJack for Laptops together with Symantec Antivirus for their Macs. This proved to be a success for both Symantec and Absolute, and we're exploring other bundling opportunities.

Best Buy Canada. We recently began selling LoJack for Laptops via the Geek Squad at Best Buy Canada, and we are looking to leverage this relationship into Best Buy US.

Microsoft. We received gold partner status with Microsoft, allowing our developers access to valuable Microsoft training and support, and were provided a software plus services endorsement.

McAfee. Became a founding member of the McAfee Security Innovation Alliance and joined their ePO integration initiative aimed at delivering best-of-breed security to McAfee's commercial customer base. This agreement brings us closer to another leader in the computer security market and gave us an opportunity to present at their recent sales conference.

Lenovo. Expanded BIOS support for Computrace to include the ThinkCentre line of desktops, and now four OEM partners have extend BIOS support to desktop PCs.

Itronix. Announced Itronix as the 10th OEM to provide BIOS support for the Computrace technology in their laptop computers. While Itronix is a smaller laptop OEM, their products are specifically targeted to the needs of US federal government customers, along with our government -- aligning along with our government vertical initiatives.

Market verticals. We continue to see strong sales activity and a diversified customer base in all of our customer segments.

The consumer segment. Consumer sales have increased significantly this year, and now represent 28% of sales. This increase is primarily due to our Dell bundle program, which was responsible for the majority of our consumer sales. We expect the Dell consumer bundle to continue generating significant sales in the coming year, and we will expand our consumer programs with other partners as well.

Commercial segment. We continue to see significant growth in opportunities within this segment, which currently represents 72% of sales. Government, healthcare and corporate customer opportunities are among the most exciting areas for growth. Our sales and channel teams continue to work closely with our OEM partners, which has produced a robust and growing sales pipeline.

International expansion. As indicated on prior calls, the UK and broader European territorial markets that we continue to invest in. Sales in the European market were approximately 5% of total sales for the quarter, and we expect this market to provide a significant future growth opportunity.

At this point I'd like to pass it over to Rob to look at select financials in more detail.

Thanks, John, and good morning, everyone. Before I get into much detail, with shareholder approval at our annual general meeting for a 2-for-1 common share split, all share information discussed on the call and in our reporting materials has been adjusted to reflect the split.

As mentioned by John, year-to-date sales contracts increased 95% in US dollars, which translated to a 76% increase in Canadian dollar terms to 36 million. Maintaining this high rate of sales growth is in part due to our software as a service business model, which produces significant recurring customer sales.

For the year-to-date, we generated 58% of our sales contracts from existing commercial customers, compared to 52% for last fiscal year and 62% the year before. We believe this trend to be a testament to the value of our business model and the service we provide. On a unit basis, we have sold 1.1 million subscriptions this year-to-date, an increase of 204% over the first six months of last year. Of these subscriptions, 484,000 were to existing customers, which is made up of renewals from the 128,000 subscriptions that expired in the period, combined with the expansion of our existing customer install base.

In the remaining two quarters of fiscal 2008, we have an additional 393 subscriptions expiring that will help us to maintain this solid baseline of sales to existing customers. However, an increasing number of these are consumer and asset tracking customers, which will likely reduce the existing customer renewal ratio below the 4-to-1 we achieved in the first half of this year.

Turning to fiscal 2009, we are expecting around 1 million subscriptions to expire, which should be taken into account when assessing our 6 million subscriber target for June 2009. Also in this respect, you should take into account our average selling prices, which have declined to $33.41 for the year-to-date period. In US dollar terms, the ASP for our traditional business remains steady, down only 1% from the prior-year period. The overall current decline is an expected result of our partner bundling strategies.

Turning to our financial results, I would like to comment on the seasonality in Q2 sales contracts, which declined 28% from our first quarter this year, compared to a 16% second-quarter decline last year. This increased seasonality was in part due to a decline in the US dollar in our December quarter. The US dollar declined 5% from Q1 and 14% from Q2 last year. This has increased our seasonality level and has reduced our Q2 growth rate over last year from 86% to 61%, as mentioned earlier.

The remaining increase in seasonality reflects our growing government business, which, like our education and consumer sales, has a spending concentration in the September quarter. Excluding government sales, our second-quarter seasonality was in line with last year. In general, the level of second-quarter seasonality inherent in the business is now expected to be in the range of 20 to 25%, rather than the 15 to 20% range last year.

Looking forward, we expect Q3 and Q4 fiscal 2008 seasonal trends to be in the range of those reported in the last half of fiscal 2007. Specifically, last year's third-quarter sales were up 14% from Q2, and fourth-quarter sales were up 53% from Q3.

Turning now to our investment levels, we continue to increase operating expenses to build our distribution channels, generate sales and subscriber growth, expand our support infrastructure, and to develop new technology services and platforms. For Q2 2008, total operating expenses, which include cost of sales, sales and marketing, R&D and G&A expenses, but excludes stock-based compensation, were 9.5 million, representing a reduction of 63% of sales contracts from 65% last year. And for the year-to-date, total expenses were 18.4 million, reducing to 51% of sales contracts from 56% last year. We consider the year-over-year decline as a percentage of sales to be a positive indicator of our performance and the scalability of the business.

As a software as a service business, cash flow is our key valuation metric. As such, we are pleased to report a 111% increase in cash from operations to 9.1 million, or $0.19 per basic share, for Q2. And for the year-to-date, an increase of 101% to 18 million, or 39% per basic share. As a percentage of sales, our cash margins increased to 61% in Q2, compared to 46% Q2 last year, and increased to 50% for the year-to-date period, compared to 44% last year.

As a result of this performance, we have increased our annual cash margin guidance to a range of 35 to 40%, up from 30 to 35%. This reflects our planned operating expense increases in the second half of this fiscal year in support of our fiscal 2009 growth strategies.

Turning quickly to our balance sheet, we have ample resources to support our growth plans. At December 31, 2007, our cash, cash equivalents and short-term investments were 52.9 million, compared to 34.9 million at June 30, 2007.

In closing, we remain excited with both the near and long-term growth prospects of the business, and look forward to reporting our progress in the coming quarters. At this point, I'll turn it back over to you, John.

Thanks, Rob. Absolute's strategy is to maintain rapid growth and cash flow generation. Data security remains a front-burner issue as organizations grapple with laptop theft and data breaches that attract negative publicity and extract a significant financial cost. Combined with the growing popularity and requirement for mobile computing, data protection and computer theft recovery have emerged as must-have solutions to protect computers and data. We see no sign of demand slowing for these types of products and services.

We will remain well-positioned to dominate this market, and have built a substantial and sustainable competitive advantage leveraging our unique combination of strategic partnerships, growing customer base, scalable software as a service infrastructure, patented and proven technology, and credible track record.

To maintain this position, achieve our 6 million subscriber objective, and drive higher attach rates, we will focus on our traditional five primary growth strategies.

One, continue to embed and leverage Computrace into firmware.

Two, continue to launch sales and marketing initiatives with our computer manufacturing partners.

Three, continue to deepen our sales and marketing activities in our current market segments.

Four, continue to license, grow and protect our IP and patent portfolio.

Five, continue to invest in new products and services, leveraging our core technology platform, and to secure new devices.

As noted in our press release today, we're also making headway on our wireless broadband initiatives and expect to have product announcements in this area during calendar 2008.

Thank you again for your support and for attending today's call. Operator, at this time we'd like to open the call up for questions.

(OPERATOR INSTRUCTIONS). Scott Penner, TD Newcrest.

Rob, can you help us understand first why there's seasonal uptick, I guess, in cash flow from operations, especially given the more dramatic seasonality in the sales contract number?

Q2 usually remains very strong in cash flow as a result of our strong Q1 sales. And also, we do tend to get our sales in fairly early in the quarter. That said, receivables did end up at 80% of sales for the quarter. So it's a little bit higher than normal. So a large part of this is due to that $21 million quarter we had in Q1. Q1 -- a lot of its strength was due to the $16.5 million quarter we had in Q4. So now, heading into Q3 is where you would expect to see a little bit of a dip in the actual cash flow numbers, if you will, as a result of the Q2 sales seasonality, and coupled with the increasing investment as we prepare for fiscal '09.

Is it useful at all to try to break down the cash flow margins by segments of your business, now that you've had basically a full year of the Dell bundle? Is there a meaningful discrepancy, let's say, in the all-in margins of the consumer side, the bundling programs versus the institutional business?

I would say the bundling programs have a contribution to margin, but that the overall margins in the business are being driven by the street price product, if you will, [or our sold] product. So think of the bundling strategy as a way to acquire, in a sense, customers, with a positive contribution to margin, but still being able to maintain our street price. So they're solely OEM prices. And on that regard, our overall sold product pricing remains very consistent with the prior year, down only 1% in US dollar terms.

Given that, do you have any basis for expectations on street price renewals of some of the consumer business that may be dropping off over the next couple of quarters?

That will be a wait-and-see on that. John might want to comment some more on it. But in general, just so you're aware, there are not any renewals this quarter coming up from that program. And in fact, in Q4 I think we'll start to see our first bit of those coming in. But there's probably -- there's less than 70,000 of those subs relating to the bundle program, on one-year basis. We'll have some data points, but it's largely coming in the next -- in the subsequent quarters when we'll get better data points.

Rob, you mentioned the seasonality. Is that -- was the higher concentration of sales at the end of Q4 -- was that a function of the Christmas season for the consumer side?

Definitely. Consumer (inaudible) it was down a bit, too, consistent with traditional trends. But overall, the bundled portion of the business became a higher proportion of the business in Q2 as a result of that seasonality.

Lastly, just to try to understand some of your expectations in what effectively is 3.5 million net subscribers over the next 18 months, and I guess (technical difficulty) your comments, well over 4 million on a gross basis -- what have you assumed for new products like the wireless that you've talked about, those products, and additional bundling opportunities? Just trying to get some sense of what expectations you have built into those.

There will be some additional bundling opportunities that we're seeing coming into view. But we're not actually depending on any unit -- any significant unit generation from our wireless initiative in those subscriber numbers that are targeted now.

So you do have some expectations as to further bundling that's built into what you've said, but there's not much on the wireless side?

That's right. We'll be releasing the wireless products this year, this calendar year, but they always take a little while to get into the system and into customers' hands. So we're not anticipating a lot of that subscriber growth to come from the wireless initiative.

I'll pass it on. Thanks.

Before we part there, Scott, you mentioned the gross adds coming to the 6 million. I just want to point out in the call I mentioned 393 subs expiring over the next six months, and another approximately 1 million in fiscal '09. So you'd add those to your 3.5, basically, right? (multiple speakers) the net delta. So it's more than 4.

Thank you.

Robert Breza, RBC Capital Markets.

First let me apologize; I'm in the airport. So if there's some background noise, I apologize. Obviously, you guys had a very strong fundamental quarter here. John, maybe looking a little bit longer-term, can you kind of comment on where you think the consumer/commercial split maybe winds up, maybe on that June '09 target? And also, what are your expectations for June '09 for kind of international revenue growth? Obviously, making investments there that are starting to show up a little bit this quarter as well. So some color around those longer-range targets would be great.

I think in terms of the sales contracts, the split hat we're seeing today, 27% for consumer and the balance for commercial is probably about right. It may grow a little bit more. In terms of subscriptions, we may see a little bit larger portion of the new subscribers coming in from the consumer plays on bundles that we're doing with the OEMs.

And then in regards to international, we are very excited about the international opportunity. We see a very, very healthy pipeline of business there. I think the European customer has a slightly longer sales cycle than possibly the North American customer. However, there are just -- there are so many pockets of business to do in Europe, and there are many, many large companies there, as we all know, with significant mobile populations that are operating worldwide that need protection. So we see international business picking up significantly, and I would say within two to three years responsible for somewhere between 30 to 40% of our overall sales contracts number.

Maybe as a follow-up, John -- has there been much of a change from the competitive landscape, in your opinion? Or is this truly just a greenfield opportunity for you guys here and you have to go execute on that?

We see it as a greenfield opportunity. It took us many years to build the infrastructure, the services capability, the technology, etcetera, the relationships with the OEMs, and a sales organization that really understands how to sell our products and services in North America and internationally. So we feel we're very well-positioned going forward, and I think we'll stand the test of time.

Thanks for taking my questions. Nice quarter.

Paul Steep, Scotia Capital.

To actually quickly follow-up on the international piece, John, what do you think would actually accelerate the growth over there? Are there any targets this year for a partnership agreement that would, hopefully, help sort of break that market open, or is it just more street fighting hand to hand to get deals done?

I think the fact that theft protection is really becoming a must-have, not only in North America but now in Europe as well, and the kind of awareness that we've managed to generate with this new category, that we are seeing these wonderful opportunities come in from large partners that do want to take out our message and our products and services to a very broad customer base by including it into the sale of their device. So, yes; there are those kinds of multi-million-dollar opportunities in Europe with partners. And I think it's fair to say that we have a number of those in view now. So we're, obviously, working hard to bring those to fruition. And I think that we're in good shape there internationally, as well as opportunities here domestically. That's really the primary reason why we raised the subscription target number.

Actually, on that sort of transition here, just in terms of investment in the business, obviously, you're not calling out for a big CapEx bump. But either of you, I guess, would be able to hopefully tell a little bit more about what investment's needing to go into the field to support these people. I guess the question is, how close are we to actually being ready to support a new product in Europe and a new partner program? Or are we going to see a big ramp in costs as you get ready for it?

We've just doubled the European team from five to 10 in the last few months. So we've doubled it. We'll likely double it again within the next, I would say, year. Our North American monitoring center, or centers, can take -- they handle all of the European connections and communications requirements. So there's not really a requirement at this point to additionally scale data centers, because we already have three in operation and they're handling communications worldwide. But there's no question that it's a people -- it's a scaling of people, and of recovery personnel to a degree, and recovery partnerships, technical support personnel, and then of course sales marketing personnel and customer service personnel. So we are building a global customer service group here in Vancouver, and we have a very experienced person leading that who's handled worldwide customer service for other companies. And we may also have a team that we operate in Europe as well. But we'll have a global approach, and we're not anticipating CapEx increases of any significant nature, but there will be people increases over time.

Just to add, our CapEx has sort of tracked around 2 to 2.5% of sales traditionally, Paul. And I wouldn't expect the international equation to change that at all.

The other, I guess, big piece of infrastructure investment likely relates to renewals. Basically sounds like you're calling out -- hey, we're going to see a larger level than we've ever seen before, really in '09, of renewals. I guess first to John, it would be the question about what are you changing for the process to get ready to, hopefully, better capture more of these renewals as you face that? And then secondly to Rob, just if you could give us a spread on how that 1 million breaks out over '09, just roughly. And that's it for me.

We've been very fortunate. We have an extremely loyal customer base. We are providing real tangible security value in terms of recoveries and data deletions, and the persistent tracking. So we are very fortunate with the renewal rates. As we pointed out, the renewal and expansions are very strong for Absolute Software's products and services. So, just maintaining a good strong level of customer support and customer service and the renewals there. So that's not an issue for us at all. In fact it's a great growth opportunity on that side of it.

I guess I was thinking more -- sorry -- on the bundling side. With Dell stepping in there and more bundling programs to come, you're somewhat -- you're a little bit more removed on those deals -- not totally -- than you would have been traditionally. And shorter term, and I'm thinking what do you have to do to keep those customers, and maybe sort of ramp up some marketing to get them at the end of the renewal process?

That's a great question. We have electronic e-mail programs in place to continue to communicate with customers on a regular basis, consumers that have signed up with our program. And obviously, as their contract starts to come to its final phase, we are communicating with that customer electronically to get them to continue the renewal, understanding they're -- making sure that they understand the different security issues with mobile computing, and hopefully getting them to renew and actually upgrade the level of service. That's another thing I think you'll see here very shortly is a good, better, best strategy. So we'll have several layers of consumer offering. Not just the standard theft recovery offering, but we'll have multiple grades of offerings. So customers will not only be able to renew their recovery subscription, but they'll be able to get additional services from Absolute and additional value from Absolute at additional price points.

Thanks, guys.

You wanted the breakdown approximately. What I can give you is, for expiring subs, we have 200,000 in Q1, 261,000 in Q2, and then in Q3 and Q4 we have currently 222,000 and 308,000. But that will be incremented by the one-year unit sales in Q3/Q4 this year. So somewhere sprinkled throughout there gets you to the 1 million approximately.

Troy Crandall, MacDougall, MacDougall & MacTier.

Good quarter. First question I had was, given that you have roughly about 95% of your sales coming from the US and a growing proportion coming from the international market, have you put more consideration into maybe reporting in US dollars? I know it's been a headache in the past. Any further thoughts on that?

We think about it -- we consider it from time to time, but we're sort of sitting hopefully at the floor here of the US dollar as well. You've seen it turn around a little bit since the doldrums of Q2. But it remains a question. You're always going to have currency risk, especially as we go international and diversify our portfolio of currency more. Hopefully that US dollar reliance will become less.

Also, have you heard anything further on the Stealth Signal litigation? I know it was originally expected to have something coming out around October of last year, but there has been nothing as far as I know, right?

That's correct. We still have not heard back from the special master. He's putting together a report for the court to help the court construe the patent claims that we have against Stealth Signal. So we will just continue to monitor that, and I'm sure that that will be forthcoming within the next few months.

And further to Scott's question up at the front of the queue, could you give us more detail on the wireless product that was mentioned that is upcoming?

There's two wireless initiatives that are ongoing at Absolute. One, of course, is to have our persistent agent built into the handsets for Windows mobile handsets. We're actually at the World Mobile Congress show in Spain next week, and we'll be working with a number of the handset providers there to start to roll out the embedded strategy for handsets. So that's very exciting for us. And of course we're also going to be following on with the other most popular handsets as well. So there's that piece of it.

And then the second piece of it is we have built relationships with the majority of -- the majority of the cellular module providers, and are working very closely with the OEMs and the [cellular] module providers to have our technology included and shaped for real-time -- all of our services delivered in a real-time context. And that's something that also will see the market this calendar year. So we're super-excited about both the initiatives, and we'll be rolling them out shortly.

Could you give us an example of who these cellular providers or module providers would be?

I would rather not name names. It's the folks that you would think were in that business. It's the traditional cellular module manufacturers.

Thanks a lot.

Thanos Moschopoulos, BMO.

I was wondering if you could provide some color around the Dell relationship. I noticed that the Dell sales contracts were down sequentially, more than currency would warrant it looks like. Has there been any change in tax rates or pricing? Or does that reflect seasonality in Dell's own consumer business? I know they have been having challenges there.

It actually reflects more of a turn towards the more one-year units, Thanos. So that's really the main aspect of it. So it's -- traditionally leading up to this quarter, it had been more the 30-plus-month average for that business, and now it's sort of down towards the 24 or 20-month sort of average. You're getting more one-year units in the mix.

Aside from that, though, any significant change in the tax rates or pricing, or not really?

In terms of the Dell relationship, the way we're viewing Dell is we're continuing on with the second year of our consumer bundle, if you're talking about just the consumer business, which we're very pleased about. And as you know, Dell is changing their models slightly on the consumer side of business. Of course now they're aggressively marketing through Best Buy and possibly some other retailers in the future. And we're excited to be part of those plans. So you'll see our business with Dell continuing to the same degree in terms of sales contracts as it was last year, and that's basically the comments that we're giving on the Dell relationship on the consumer side.

Again, more increase to the one-year type subscriptions, though, in that mix.

So same dollars, more subscriptions.

Dushan Batrovic, Canaccord Adams.

Just a little more color on the ASP would be helpful, the decline this quarter, partially explained by FX. What else contributed to that? And also, how do we look at ASP in Q3 and Q4?

The average price in Q3, you can look at it as there was a larger proportion of bundled business, and also some of our lower-cost asset tracking sales in the mix this quarter. And from time to time, those will happen as well. But of course our focus continues to be on our traditional sold product. So for this quarter, for example, our traditional sold products are down 1% over prior year in terms of ASP in US dollars. And in fact, our consumer stand-alone product, sold product, is actually up over last year about 19%. So people have been taking a little bit longer of a term on that. So our street prices are remaining very healthy, if you will, or the price that we normally get for sold product. It's strictly the bundle that's really driving the average selling price down, which for us, we believe that's a good strategy. It's part of one of -- as John mentioned earlier -- the strategies that we're pursuing as part of our growth strategies, so I would expect it to continue being a large portion going forward. And as a result, I really can't see any reason to venture much off the current ASP that we have year-to-date when you're considering that.

As far as the status of the Dell contract, still an exclusive contract? Has anything changed from that standpoint?

There's some good news there, Dushan. I'm glad you brought that up. It's likely that the exclusive piece of that contract is going to be removed as part of us servicing some additional units for Dell during the consumer bundle for next year.

Okay. Last question, just on the large deal side. There was a big deal on the government side last quarter. How's that pipeline shaping up? Any other qualitative comments you could put around that?

We're extremely excited about both the federal market, and that's civilian and non-civilian types of organizations, and also the state and local markets. So we see a tremendous opportunity in the government segment, very much a greenfield opportunity, and we have an extremely healthy pipeline there. We're anticipating seeing a lot of business coming from government over the next 12-month period.

Thanks very much.

Glenn Jamieson, Macquarie Capital.

John, you're increasing your subscriber target, that 50% bump. Can you give us an idea of how much of that increase is reflective of large volume deals that you would have been working on, say, over the past six months that maybe we're not aware of yet but you would hope to close on in the next quarter or two in order for those volumes to hit by fiscal '09?

I would say the majority of that, Glenn. So we can see where a lot of these new subscribers are coming from, and we have some view into where those units are going to come from.

And the types of deals that you would be working on; those would be a mixture of deals that maybe we have seen you sign in the past, kind of like Dell; maybe it's with Dell; maybe another PC OEM. Those deals could potentially also include other distribution or selling partners for you. Is that correct?

That's correct. I think you'll see the business continue to grow along the lines it's growing now. So you'll see a big piece of that come in from consumer and consumer bundles. But you'll also see an equal proportion coming in from our traditional business that we're seeing today. So that's all of the segments -- the education segment, corporate segment, government segment, and we have added healthcare as a specific focus now as well. And we're seeing a lot of healthcare customers come into the fold. So it really will be a continuation of what the mix is currently. And of course, that's a nice mix between our steady high-margin business and these bundled arrangements with the OEMs, where it's partly a seeding strategy to get it on millions and millions of consumer machines, with the opportunity to do the upgrades, the upsells and the renewals later in the term.

As you became aware internally that your subscriber base could be significantly larger than what you would have thought at one time, what does that do in terms of your planning for headcount? You talked earlier a little bit about what you need to do for Europe specifically. But if you look at it company-wide, where do you expect headcount is going to go over the next little while? And are there any real bottlenecks that give you concern, whether or not it's on the monitoring side, the product development? Do you have enough salespeople? Those areas.

That's a great question. We feel very confident in our data centers and their ability to scale to tens of millions of customers. So we have that in place. To add capacity there is fairly straightforward for us; it's just additional hardware capability, because we spent a fair bit of time on the software side building our whole infrastructure to support mass scale. So that is in place.

We've seen tremendous growth in our theft recovery officers -- now over 30 theft recovery officers in North America alone. I think that part of the business will continue to scale in terms of people. We're also putting in place some administrative functions as well to help streamline that and make it as efficient as possible. We're getting great return in terms of our theft recovery officers; they're just doing a super job out there for customers. We're really doing some amazing things in terms of breaking theft rings, going out to a location and not just getting one computer, but bringing 22 computers back for a space agency and things like that. So some very, very exciting recoveries and internal thefts that we're breaking up.

I think the scalability will just continue to happen in the way that it's already happened. I think at the end of 2005, Rob, we had, what, 70 people, 79 people? Now we have 215. I think we've shown the market that we can scale the business, and that we can provide the right levels of support and people to the equation. So we've had a fair bit of experience with that. You'll see that just continuing forward.

You may see Europe grow a little bit more in terms of infrastructure and people on a percentage basis than North America, just because we've only got 10 people there right now. But that team will [expand] significantly. And then of course, fairly shortly, within the next six to 12 months, we're also going to have to start looking at Asia and supporting Asia as well. So there will be a worldwide effort very shortly.

But just to summarize, as you more than double your subscriber base over the next 18 months, we would not expect to see your headcount double from the 215 that you're at currently. Could it increase by 50, 75%, something like that?

I think 50 -- I think that's about right, 50 to 70% increase expectation there in headcount. Rob, would you have a comment there?

It really kind of tracks in line with your expectations for sales growth. And you'll see it's kind of -- there's been a bit of a direct relationship there as well. Our headcount is up 60% this year, I think, and we're up in sales 86% in Canadian dollars. So I think you've got a similar ratio there as we go forward. So a lot of the investment that we're doing is investing in our salespeople at the front-end, for example, to expand the teams, and make sure we can continue the momentum within those verticals and keep moving the ball forward, albeit at an increasing leverage level. But you still need to make that investment.

John, one last question. You've got well over $50 million of cash today. What do you plan to do with it? Because it's going to keep piling up.

It is, Glenn, and we're certainly looking at a number of different initiatives there in terms of some ideas that we have. So for right now, we're just safely tucked away where it should be. And we'll continue to add to it over time. And we'll let you guys know what we're up to here as we roll out those initiatives.

Thanks, John.

Scott Penner, TD Newcrest.

Rob, just -- you'd made the comment, I believe, last quarter that taxes in fiscal '09 were expected to be about 3 to 5% of sales contracts, and that that was -- you were able to withstand that within the 30 to 35% cash flow margin guidance at the time. Is that still your expectation for taxes, and are you able to again buffer that within the 35 to 40?

I would say the 3 to 5 is still approximately where we're thinking things will go. As I said on the call, it may actually be that the cash components of those that are actually being paid out may not actually happen until fiscal 2010. So in actual fact, it shouldn't really impact 2009 margins at all, and really come down to 2010 when that is paid. Of course it would be less than 3 to 5% at that point, assuming we're still growing as we are, right? So I think the impact at this point is still fairly negligible on margins.

Let me clarify that. So there is no -- there should be no recognition of income taxes on the income statement in fiscal '09?

We're likely going to have to accrue those taxes in fiscal '09.

Okay.

They won't be cash out the door. Whether or not they end up on the income statement is a function of deferred taxes as well, because we have a bunch of deferred assets, tax assets. So there may or may not be any P&L impact. But the most important thing, of course, is it would be disclosed, and there would be likely no or very, very little cash impact in fiscal '09.

To the 10 million in US in the Dell business on a trailing basis, did you make the 1 million units such that we can, obviously, get back into a price on that per unit?

That's a confidential number that we're going to keep confidential because we don't want folks backing into prices.

Did you make the million units?

That's something that we're just keeping confidential. But we're very pleased with the -- we met and it actually exceeded our expectation of the 10 million in sales contracts for the trailing 12.

That's fine. Just on the renewals of those one-year deals, is it fair to say that if you were to turn that, what you were receiving on the revenue on the ASP side from the bundle into a street price renewal, that you only really need to renew a fraction -- be it a third, a fourth, a fifth, or whatever -- of those one-year deals to stay flat on revenue?

I think that's a very good point. And what you'll see shortly is, as I mentioned, we do have a good, better, best three levels of tiers of service coming out here very shortly for consumers really to dovetail into this renewal opportunity. So not only will they be able to renew their basic recovery service, but they'll actually be able to upgrade to additional services, additional -- some great value points for customers. So I think that's going to help, not only with the attach rates, but also help with the sales contracts coming in from those renewal customers.

Appreciate it. Thank you.

Tom Liston, Versant Partners.

Just relating to Glenn's question on the cash position, is there anything that might be a nice tuck-in acquisition that you're looking at? Or would you prefer just to make the investment in R&D to continue to grow the functionality of the products?

Right now it's been a pure organic growth story, as you know. We have come across a couple little things that we're taking a bit of a look at. They're very small, less than $20 million in terms of financial commitment. And really, before we'd pull the trigger on anything like that, obviously, we've got a lot more work to do in terms of cultural fits and the right security fit with our products and services, etcetera. So we're just really -- if we do anything it will be very small to start with, and we'll really make sure that we get the first one right, understanding that a lot of acquisitions don't work. And then of course, because of our technology platform being able to download and execute code and services on computers, we have a great opportunity of just licensing either source code or object code from existing companies, and building the features that way as opposed to acquisition. So we're taking a look at that, but we're going to be careful.

[There was] comments around the headcount increases, and largely around sales and marketing. But on the actual cost side, R&D and G&A were up, I think, 15 to 18% type of range year-over-year. Do you expect that type of increase to continue, or is that a bit of an anomaly in terms of being maybe perhaps a low growth in those numbers?

On the G&A side, of course, as the business expands, G&A is really tied to our sales contract volumes, so you've got more headcount to support the pure volume that is running through the tens of thousands of invoices we're processing every quarter, and all those fun things. So there's a lot more -- there is, obviously, overhead to add there, especially as you grow internationally. And at the same time, of course, there's been increases in our rent. We've moved to a new location, and the market rates in Vancouver are astronomical for leasing. So you can imagine the impact that has. But in any event -- so that's kind of the G&A side. It will continue to increase, but at lower rates than some of the other categories. I would expect R&D to increase a bit more on some of the sort of exciting initiatives we have with our product enhancements in the wireless aspects John spoke to and the international expansion. I expect the headcount in R&D to be a faster increaser than G&A.

And on the wireless side, it's probably very early days, but do you anticipate any changes to the pricing model? Would pricing potentially become more on a monthly pay-type subscription in context with some of the service providers-type model? Or do you still anticipate similar-type upfront payments on that side?

I think for the first rollout of these wireless initiatives, you're going to see them through our conventional partners. So they're going to go out through the OEM providers. And they may or may not -- we may or may not get distributed by the telco side of the business. So I think the monthly billing is unlikely in the near future. But in a couple of years it may end up that way if we end up doing something big with one of the wireless carriers.

Finally, it's probably a very small impact, but on the Dell bundle, the one-year -- [if I remember], I believe that when they go to sign up, they have the option of extending to two or three years, and you give them that option. I think you get the full freight of that. Is that anything material? Are you doing a reasonable job of getting some uptake on that?

Yes. We're definitely getting some uptake. That's one of our focuses is to get more uptake there, and to offer more when customers come to the site, and actually to leverage existing folks, like Digital River or others, to really understand how to improve that [side of the business]. I think we do a reasonable job on our own, but we can get better at it. And there's a lot we can do on that side of things. So we are -- we have a project today that is ongoing, that's well underway, that will help us enhance not only the renewal rates, but the upgrades and upsells as well, not only domestically, but also internationally.

That's it for me. Thanks.

(OPERATOR INSTRUCTIONS). Howard Lis, GMP Securities.

Congratulations on a solid quarter. Most of my questions have been answered, but I just have two quick follow-ons. One with respect to Dell. Can you just describe when a customer goes and decides to activate, what sort of techniques are you using to upsell them to more than a one-year subscription? And what percentage would you say of the new subs being acquired through the Dell bundle are opting for the one-year package?

All of the -- we're either included or we're not included in certain units. So it's, obviously, 100% of the units that we're included on opt for the one-year package. They get the one-year package, and then the majority of those people register for the service. In terms of upgrades and upsells, there's -- as I talked about with Tom, there's a number of things we're doing there. We don't have a percentage that is public at the moment that we're sharing, but it's a reasonable uptake, and that's great. And there's an opportunity to improve it, which we're working on.

So if I understood you correctly, the folks that do get it and sign up for the one year -- I know you were always going to try to upsell them at that point in time, but you're saying most of them still opt for the one-year program?

Yes. I would say most of them opt for the one-year program, but we do have a decent percentage that upgrade to a three-year contract, or they come in over the three-year term and they upgrade to a four-year term. Again, we're really in the infancy of that type of program, because there's only the opportunity to lengthen the year. So it's not that exciting for customers. But I think what you're going to see here shortly is the ability not only for them to extend the term, but actually to improve their service level, which is very exciting. And we're going to be rolling out two levels of upgrades for customers to participate in. And I think that's really going to help our overall program. Plus we're going to move from -- today we have our own cart -- electronic commerce part functionality, and we're going to be moving that over to a very sophisticated system with someone who knows how to really make sure that customers get the opportunities to upgrade that they would like.

With respect to your cash balance, are you at all considering becoming more aggressive in a stock buyback?

As we mentioned earlier, we are considering our options there, and we'll let the market know when we've come up with a decision.

Thanks a lot.

Madi Kodali, (inaudible) Capital.

I was wondering if you can elaborate a little bit on the McAfee relationship, how it's going to [develop] and what is the timeframe on expectations and so on?

Sure. We're very pleased to be a part of the ePO program with McAfee, and we see a lot of synergies with McAfee in terms of they've got a great commercial customer base. Their console is a good console. It really helps people manage their mobile and desktop units, and make sure their antivirus and firewalls are in place, and other security items. Now we're going to be popping right up in that console, which is tremendous. McAfee's sales organization will be able to sell our products and services. We just recently went to their national sales meeting here a couple of weeks ago. So it's really the beginning, I think, of a strong and growing relationship with McAfee. And not only with this particular product, but there's other opportunities within McAfee. And we think that -- we're excited about that relationship. So we'll continue to work together and see what we can do.

How does this work in an existing customer relationship? For example, if you have a corporate client that's maybe a few thousand seeds who already has one of your products, and they want to go with McAfee, would they be able to use the new policy framework?

Certainly. They can just deploy our agent now from the ePolicy framework. So they've already purchased it, but now they can deploy it from that framework. So that's where the advantage for them will come in, and they can manage it under their console, and also actually take information from our console, and transport it into the McAfee console as well.

That's all for me. Nice quarter. Thank you.

Mr. Livingston, there are no further questions at this time. Please continue.

Thanks, operator. Once again, thank you for taking time to participate in today's call, and we look forward to updating you in the coming quarters. That's it, operator. Thank you.

This concludes the conference call for today. Thank you for participating. You may now disconnect your lines.