Absolute Software Corp (ABST) 2008 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Absolute Software Corporation third-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 is conference call is being recorded today, Tuesday, April 29, 2008, at 9.30AM 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 third-quarter and year-to-date fiscal 2008 results. If you have not already seen it, today's financial press release can be found on our website at absolute.com, along with our MD&A and financial statements.

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

Third-quarter and year-to-date results -- our computer security service business continues to grow and generate cash at rapid rates. As you know, over 90% of our services are sold in the United States, and in U.S. dollars, third-quarter sales contracts were up 65% over the same quarter last year, and year-to-date sales contracts were up 85% over last year. Third-quarter operating cash flow increased 92% over the same period last year, and year-to-date cash flow has increased 98%, almost doubling over the same period last year.

Year-to-date operating cash margins increased to 48% compared to 40% last year. As a result of this strong performance, we're raising our cash margin target for fiscal 2008 to a range between 40% to 43% of sales contracts, up from 35% to 40% previously.

So far in fiscal 2008, our gross subscription unit sales were C$1.6 million. This puts our tax rates at about 7% of the estimated number of laptops sold in the U.S. market during that period. We finished the quarter with 2.9 million subscriptions under contract, up 142% from March 31, 2007.

Business update -- the evolution towards mass adoption of antitheft services for computers and data continues. As you know, incidents of computer theft, data theft and identity theft are occurring at an alarming pace. This, combined with the requirement for mobility of information devices, further intensifies the problem.

Together with our partners, here is how we are tackling this computer and data theft problem head-on. We're currently recovering approximately 1000 stolen computers per quarter. We're performing emergency post-theft data deletion services, and we're providing valuable forensic reporting to confirm whether or not the data was accessed post-theft. We are providing customers with real theft deterrence that is backed by law enforcement, which only our services provide.

On the personnel front, in Q3 we welcomed Carter McCrary, a 20-year computer industry veteran, as our Senior Vice President of Corporate Strategy. Carter spent the past 11 years at Dell, where he led a sales, marketing and operations team of 1200 across seven sites in five countries. Carter is responsible for driving operational strategy, structure and effectiveness at Absolute, and we're very pleased to have him on board.

Partner ecosystem and programs -- we're pleased with the expansion of our partner ecosystem, having recently announced initiatives with QUALCOMM and Intel. On April 2, Intel announced its antitheft technology initiative, which includes Absolute as a collaborative partner. This is Intel's initiative to provide antitheft support at the chipset level. From both an asset and data perspective, Intel clearly understands that the device and data loss issue has reached critical mass, and we expect we will be helping raise awareness of and demand for antitheft technology and services worldwide.

As the world's leading antitheft service provider, Absolute expects this to significantly increase our growth opportunities. We are now working with our OEM partners and Intel on integration and go-to-market strategies for this initiative in line with Intel's launch later this calendar year.

On April 1, we announced our partnership with QUALCOMM from the CTIA Wireless Conference in Las Vegas. This landmark collaboration enables Absolute to deliver our antitheft services in real time, which we demonstrated at QUALCOMM's partner booth. Absolute and QUALCOMM will work together with PC OEMs on their 2008 roadmaps to provide integrated real-time antitheft solutions that can be deploy globally and that are carrier-agnostic. In addition to the real-time capability, we'll also be able to leverage the GPS information with our location and recovery solutions.

Our other partner initiatives in Q3 included Assurant Solutions, where we were working to bundle LoJack for laptops with their extended service programs, and we will have some announcements in the near future. With McAfee in Q3, we became a founding member of their Security Innovation Alliance, bringing us closer to one of the leaders in the computer security industry. Finally, we've also made solid progress with the development of Windows mobile handset offerings, and we're expected to go to market very shortly.

Market verticals -- Absolute has delivered a robust, proven and trusted antitheft solution that is embedded and supported by most major computer manufacturers, is easy to deploy and manage, and is valued by the consumer and commercial market segments.

Consumer segment -- while consumer sales have increased significantly this year and represent 26% of sales year to date, our third-quarter consumer sales have not grown as quickly as we had expected, as a result of two issues that we expect to be temporary.

In retail, our best retail partner to date, CompUSA, closed their stores. And during last quarter, Dell began significantly restructuring their consumer business, which has temporarily led to a reduction in bundle sales. We expected both of these issues to be short-lived, and then we will return to a more rapidly growing consumer business in the first quarter of fiscal year 2009 as we expand our retail presence, increase our OEM programs, enhance our online sales capability and expand our bundling business, all of which are expected to be in place in time for the upcoming and busy back-to-school season.

Commercial segment -- our commercial segment -- education, government, corporate and healthcare -- has generated 74% of our sales year to date and is tracking to 100% of our yearly target. As we head into our two seasonally strongest quarters, we have a number of initiatives in the pipeline for this segment.

For example, Fujitsu recently announced an education customer bundle program, where each notebook sold will automatically include three years of our Computrace Complete service. In addition, HP recently announced a soft launch of their mini PC or ultramobile PC, which is specifically targeted for education customers. The soft launch includes Computrace Plus as a recommended option.

Absolute and Computrace are recognized by partners and customers as a must-have in this education vertical, and we estimate our K-12 attach rates to be in the range of 20%.

International expansion -- on the international front, a couple of weeks ago we received some terrific press in the UK regarding a number of local laptop recoveries. Year-to-date European sales have grown 235% over the same period last year, accounting for approximately 3% of our total year-to-date sales. The development of the European market is still early, but we believe that our international business can evolve to be a significant part of total sales within the next few years.

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. As mentioned by John, year-to-date sales contracts increased 85% in U.S. dollars, which translated to a 64% increase in Canadian dollar terms to C$51 million. For the year-to-date period, we generated 57% 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 recurring nature of our business model and the high level of service we provide.

On a unit basis, we have sold 1.6 million subscriptions so far in fiscal 2008, an increase of 158% over the first nine months of last fiscal year. Of these subscriptions, 646,000 were to existing commercial customers, which is made up of renewals from 244,000 subscriptions that expired in the period combined with the expansion of our existing customer installed base.

In the remaining quarter of fiscal 2008, we have an additional 277,000 subscriptions expiring that will help us to maintain this solid baseline of sales to existing customers. In fiscal 2009, we anticipate around 1 million subscriptions will expire, which we expect to translate into approximately 1.5 million subscriptions from existing customers.

Turning to our financial results, I would like to comment on the year-on-year and sequential sales contracts performance. Compared to last year, the U.S. dollar relative to the Canadian dollar declined by 14% for the quarter and 11% year to date. This has resulted in lower than expected Canadian dollar sales contract growth rates. Excluding the currency impact, third-quarter 2008 growth rates and sales compared to last year were 65% in the quarter, 85% for the year to date, and sequentially sales were flat with our second quarter.

As John mentioned, the flat sequential sales is primarily due to two specific partner issues in our consumer business. But importantly, we view this as a short-term issue that we expect to get rectified for the back-to-school season in our first quarter of fiscal 2009. Conversely, our commercial sales continue to be strong, growing at U.S. dollar rates in excess of 50% for the quarter and year to date.

Looking forward, we expect sequential growth to resume as we launch several new sales and marketing initiatives heading into our seasonally strong Q1 '09. We also expect our traditional commercial segment seasonal strength in Q4 fiscal 2008. However, we expect Q4 consumer sales to be below Q4 2007 levels as our new consumer programs and initiatives will not go into effect until Q1 '09.

Turning now to operating expenses, excluding stock-based compensation, we continue to invest to expand our distribution channels, drive subscriber growth, enhance our support infrastructure and develop new products and services. Total operating expenses as a percent of sales was consistent with last year at 57% for the year to date and an increase of 70% in Q3 versus 60% in Q3 last year. This reflects an increase in spend during Q3 fiscal '08 in preparation for our fiscal 2009 growth plan, which is a quarter in advance of when we started such increases last year.

For the quarter and year-to-date period, we have made significant progress in reducing our operating loss before stock-based compensation. For the year-to-date period, this has decreased 40% to C$2.4 million, and for the quarter it dropped 54% to C$473,000. This improving performance is a result of the growth in sales contracts during the past three years, which has resulted in revenue outpacing growth in expenses. This has led to a third-quarter net profit of C$106,000, excluding stock-based compensation, our first quarter of profitability.

As a software-as-a-service business, cash flow is our key valuation metric. As such, we are pleased to report a 92% increase in cash from operations to C$6.6 million or C$0.13 per fully diluted share, and 98% increase to C$24.7 million for the year-to-date period or C$0.49 per fully diluted share. As a percentage of sales, our cash margin increased to 48% for the year-to-date period compared to 40% last year.

From a balance sheet perspective, we have ample resources to support our growth plans. At March 31, 2008, our cash, cash equivalents and investments grew to C$59.4 million compared to C$52.9 million at December 31 and C$34.9 million at June 30, 2007.

In closing, we remain excited with the growth prospects of the business and look forward to reporting on our progress in the coming quarters. At this point, I will turn it back over to you, John.

Thanks, Rob. Absolute's strategy is to maintain rapid sales growth and cash flow generation. Data security remains a critical issue for business, governments and consumers. The growing need for computer and data protection services has created new partner opportunities for Absolute such as those with Intel and QUALCOMM.

With the growing partner ecosystem and a long history of delivering successful computer and mobile data security services, we are well positioned to continue to lead this growing and exciting market. We have built a substantial and sustainable competitive advantage through our strategic partnerships, growing customer base, scalable software-as-a-service infrastructure, international operations, patented and proven technology and credible track record. We will leverage this competitive position and the ongoing investment in our business as we drive toward our 6 million subscriber objective and beyond.

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

(OPERATOR INSTRUCTIONS). Glenn Jamieson, Macquarie Canada.

John, when you look at 6 million subscribers for the end of fiscal '09, can you give me a bit of a feel for what you think the consumer segment will contribute? And the reason I'm asking is I'm just trying to gauge how important some of the initiatives that you were talking about relative to getting consumer growth kick-started again -- not that it is not growing, but accelerated -- how important are those initiatives, that you get them in place in the next little while so that that 6 million subscriber number is achievable?

This is Rob here. Currently, the consumer business has been generating 40% to 50% of our unit sales. We would expect that to continue as we go for our 6 million subscriber target, something in that range. And we do have a number of high-volume programs that we are working toward here, and those actually would cross not only into consumer, but into commercial segments as well. So that will come to play somewhat in there. It may change that ratio from what it has been in the past to maybe a little bit lower on the consumer as we go. But overall, it is really the high-volume programs bundled across the board which are inherent in our business plan that are reflected in that 6 million subs.

We do have a number of opportunities, including consumer, but outside of consumer as well, as Rob mentioned, not just for the U.S. market but for international markets as well, where we can bundle large volumes of the Computrace LoJack service with the computers that are going to market.

Okay. Can we talk about Europe, then, a little bit? You've been active trying to build that market incrementally for the last several quarters. It there the ability to have a breakthrough quarter in Europe on the back of a bundling deal that may be looming?

Definitely. In fact, I would suggest that is the best way, actually, to really open up that market for us, is on the back of a strong bundling arrangement that may, for example, be a one-year service term that is going out to, as an example, medium-size customers. And then it gives our sales organization an opportunity, obviously, to follow up with those customers and have them convert their entire populations over to Computrace, as well as be serviced by the bundled units that they are receiving from their manufacturer. So yes, that is a wonderful way of penetrating the European market and other new markets that we go to.

And is that something, as it relates to Europe, something that you would like to accomplish in the near term?

Most definitely. Most definitely.

And then one last question. Can you just give us your thoughts in terms of how you plan to balance the ongoing investment you need to make in your business, which is largely headcount-driven, relative to maintaining margins, fiscal '09 and fiscal 2010?

Our margins going forward, we believe this year has been a great year for margins. We've been able to adjust to our expectations for sales, yet still we are investing for the growth opportunities that we have. And we do expect that to bring it back to the range where we were before this last increase, which is in that 35% to 40% range for fiscal '09.

And maintaining margins in those ranges still gives you ample opportunity to invest in headcount in Europe and Asia as you see fit and as you see the sales opportunity unfolding?

Certainly.

Tom Liston, Versant Partners.

The first question, just with regard to both Intel and QUALCOMM, and you can split them up if you wish, but with some of the newer technologies, the monitoring obviously becomes much more real time, or for the most part. Do you have a view on, A., just overall the rollout? I know a lot of these are end of Q2 or early calendar Q3 type rollouts, but do you have a view on what that does to your attach rates, and while the units shipped with those technologies might be a little low, do you feel the attach rates should be much higher, given the real-time capabilities?

Tom, we are very excited about the QUALCOMM initiative. That does give us the real-time capability. And as we know, both HP and Dell have announced relationships with QUALCOMM and will be rolling out the Gobi platform. We intend of course to be rolled out with the Gobi platform at that time, likely in September.

And it is hard to estimate what the attach rates will be, but we feel that now you are able to price -- Absolute is able to provide data protection services in real time, which should have a material impact on our commercials customer base and actually will give us the opportunity, I think, of increasing our attach rates significantly to commercial customers. What that ultimately end up being, we will have to wait and see, because it is a new product and service. But it should impact very positively on all our current services for commercial customers -- healthcare, government, education and corporate.

Okay. And the Windows mobile handset market, obviously, it is in beta right now, but what do you envision the key driver there -- do you think it is going to be largely data delete, or do you think there is a fair bit of demand for other services as well?

I think that data deletion is the natural first service, and also helping institutional customers just track their handsets better and tie them into one console, where they can see all of the computers that have been deployed, plus the handset that have been deployed and are in operation -- the tracking benefit first, the data deletion second, and then we have some other services that we will be bringing to market shortly afterwards that will bring our number of services up to probably four services for handsets. So we think we're going to have a very nice offering there.

Okay. And Rob, just a clarification. In 2009, 1 million customers are coming up for renewal, and I believe you said you plan on selling 1.5 million into that base. In other words, do you feel that most of that 1 million will renew, and plus you're going to have 50% expansion into that base?

Yes, and you will note that that is below what our traditional multiple has been on renewing subs, if you will. And that's because we have a much bigger portion now coming from the consumer. So in the commercial customer segment, of course you have a multiple effect, while in the consumer you have a reduction as you don't get 100% renewals, right?

And just finally, on R&D, obviously it's been pretty robust year over year and sequentially. I could imagine some of the projects, obviously, you're focused on, but can you outline what the main area of growth there and what the main key projects are within R&D?

Sure. Obviously, probably the number one project in terms of new service and new technology is our wireless initiative. So that is both the QUALCOMM support, and that is also the Windows mobile handset support. So that is a big piece of what we're driving towards today. We are always upgrading our customer center, our console, if you will, so that is all of the asset tracking capability we provide, the software licensing capability that we provide, always adding new features and functionality in that product and service. And then we have a number of other products on the roadmap that I can't disclose, but which we are very excited about that will continue in the theme of data protection and asset management.

Okay. Thank you. I will pass the line.

Thanos Moschopoulos, BMO Capital Markets.

I was wondering if you could provide some more color as to why you are confident that the slowdown in consumer is transitory. Is that just a function of the deals you are working on from expanding distribution perspective, the things that your partners like Assurant have in the pipe -- is that what gives you that level of confidence that growth will start to pick up again in consumer?

Yes. We're seeing demand for the services at the consumer level continue on track. What we were not anticipating, of course, was Dell reorganizing their business to the extent that they have. That is getting squared away, and we anticipate that that will be back on track.

Of course, unfortunately, the one retail operation that we really had success with and that was committed to the program was CompUSA, and we did a good piece of business with CompUSA. Unfortunately, CompUSA is no longer with us, so that affected our retail business significantly. However, we have a lot of irons in the fire there and feel confident that we will land something fairly significant in that retail segment. So that will be back on track as well.

So we've got a lot of visibility into the consumer market. And this is just a little speed bump we're going over. But we will be back on track. We have also hired a very seasoned executive that has got 12 years -- in addition to Carter McCrary -- has 12 years of consumer-related experience in the computer industry. And he is now at the helm of our consumer business and will do a fantastic job for us there. And you will see that business grow and multiply.

Okay. Also on the consumer business, as we have the expiries coming up in '09, can you refresh us as to some of the initiatives you're going to undertake to try to ensure high renewals, what ASPs might look like upon renewal, anything you can share on that front?

Certainly. So what we're doing on the renewal side is we are actually moving our entire e-commerce site over to Digital River. And this has been a project we've been working on for several months, which should be completed very shortly. That gives us some excellent opportunities to use their engine and all the promotions and features and functionality that they have to go out after and get those renewals.

In addition, we are coming out, what we have, just starting to deliver a good, better and best strategy for customers. So when they get a year of basic service, they can upgrade to a second tier of service which gives them an additional amount of functionality, and then of course our best solution, which gives them even more functionality.

So we've got a tiered service level and we've got a very confident electronic commerce engine in Digital River to help the upgrade path. So we feel good that we will get a significant number of those customers renewing and that our relationship with Digital River will allow us to expand our overall online business, not only in the United States but actually worldwide.

Okay. Turning to the economic environment, obviously the U.S. seems poised for a slowdown. But looking at the latest Gartner and IDC numbers, the actual notebook unit shipments seem to be strong, but it seems like we have an ongoing decline in notebook ASPs. Are you seeing any pressure on your ASPs, just given that the value of the machines themselves keeps going down, or do you think you can maintain that, just given the value of the solution and the value of the data protection and so forth?

We currently don't see any pressure on our ASPs. And you can see that in the commercial segment. There is very strong demand in our commercial segment. We are on track, the internal team or the commercial team is on track with our internal goals for the year. And what is our average selling price, Rob, about C$31, I think, for the Q3, was it?

Well, our sole commercial business is -- traditional business is 2% down in terms of ASP, and our consumer sole business is actually up slightly. So it is really the bundling-type deals that are driving the price -- continue to drive the price down, and that is more where we would see pricing pressure than we would on what the customers are paying.

Okay. What would your expectation be on the ultra-mobile market? I know that you are being recommended by HP for their ultra-mobile PC, and there will be a lot more of these devices coming out, with the Intel Atom processor, presumably. Do you expect that you would be getting your typical ASP on those, or because we're talking about much lower-priced units, would it be fair to assume that those will be lower-priced as well?

Well, those will likely be lower-priced, but that is special arrangement. I would call that a quasi-bundle. The way that's structured, as you know, is the customer automatically gets our service built in the configuration of the machine. And unless they actually actively decline the service, they end up having a year worth of the Computrace recovery service at a very attractive price point.

So we have put in place a special arrangement with HP on that particular program, and that's why you will see that reduced ASP. And you would likely see a reduced ASP on those kinds of units that are priced at the C$500 price range. But typically, customers are willing to pay the kinds of, I think, reasonable prices that we are asking for our products and services when you think about not only the value of the physical machine, but the value of the data that is on the machine.

Okay, I will pass the line. Thank you.

Scott Penner, TD Newcrest.

Just, Rob, just to clarify on the quarter, if you had modeled the seasonality that you talked about on the last conference call, you would have gotten to about C$17 million. And with about a flat exchange rate since then, is that gap, that C$2 million, are you attributing that basically solely to the trouble in the consumer market?

Yes, primarily that is consumer. The commercial segment was up, like it was last year, was actually up just over 5%. Last year it was up more around the nearing 9% range, so slightly off, but nothing material there, less than 5% off. So certainly the consumer is what drove that. You actually had consumer dropping 12% or 13% in U.S. dollars quarter on quarter, whereas last year you had a 40% lift in consumer Q2 to Q3. So that is really the headwinds that we're fighting here in this third quarter.

And just looking out into Q4 now, would you expect the -- let's take the institutional business -- would that be sequential growth in line with last year, and then we'd tack on the comments that you made about the consumer business?

Correct. Yes, you've got the -- the commercial business still looked strong last year. I think it grow 41% quarter on quarter sequentially there. And last year, the consumer business was up 103% in Q4 over Q3, and this year it will be down from Q3.

Okay, so it will be down from this quarter's level and also year over year?

On consumer side, yes.

Okay. And just again, on the whole idea of the mini PC, when you talk to your education customers, do they view this segment of the notebook market as incremental to what they are currently using, or is it going to cannibalize some of the notebook presence that you have there?

I think it depends on the customer, Scott. Typically, it is a program that allows the education institutions to expand their notebook programs to additional students that hadn't been involved in the student computing initiative. So I think overall what you're going to see is just more computers being sold in the educational market in addition to the ones that are already being sold in. But it may cannibalize some over time.

But we are really a key piece of mobility for education, and we are perceived like that in the customer base and at the OEM level. We are in that close to 20% attach rates in education now in the United States, and that is continuing to grow. We have had incredible success in the education market. We have done some amazing services, and well outside of actually theft recovery, but assisting schools with a number of security issues.

So I think we are an integral part of educational mobile computing, and we will continue to do so, along with this lower-priced unit. It is a smaller unit, so the opportunity for theft and loss actually increases, and the schools are very vigilant. They really want to make sure their investments in these programs are secure and repeatable. And we are actually a very small part of the cost to make sure that they can justify the funds and the tracking of those funds back to the committee at the end of the year. So we are a really important piece of the puzzle in education and we will continue to be in this ultra-mobile PC market as well.

And just again, on the Dell bundle with I guess the restructured arrangement in place, I assume it's now a factory install. If that is true, can you comment at least qualitatively on what that does to the ASPs versus where they were before, and then I guess confirm that on an annual basis you are still looking at that 10 million or slightly north of 10 million out of that bundle?

This is Rob here. On the Dell bundle, yes, first of all, the factory integration is actually just going into effect this week. So the transition is taking longer than we had anticipated when we spoke last at the end of Q2, which was part of the reason why we have not seen the volume on that program uptick yet. And part of the go-forward with the factory integration is really required to help us get access to the higher volume numbers. It will have a decrease in the ASP out of that program as a result of the changes, which we have not said what those are, but it is a fairly solid reduction. However, between the volume produced directly out of the program increasing and the renewals from the program as well and upsells from those units, in the coming year we do still expect to exceed that 10 million.

Okay, great. Thank you.

Paul Steep, Scotia Capital.

Actually, just continue on the Dell bundle question -- I wanted to actually ask, just relating to the increase in volume that you were going to attach to -- you've been across a lot of the product lines. Beyond the factory install, is there anything else sort of I guess geographically or in another dimension that would materially move up the volume number that you were going to be attached to under the new deal beyond the ASPs that we just talked about?

Yes, Paul, good question. There are many programs -- Canada, for example, is adopting it in a bigger way. We have opportunities to take it international now as well, if we are so inclined to do so. And also at the price points that we've provided, it really enables Dell to adopt us across more of their channels. So as you know, they are going more retail. We can hopefully get it included in a lot more of those retail offerings, as well as their online. So primarily, to this point, it's been only the configurator sales, which they are basically moving their model towards -- most of their business, I believe, will be done through retail in the future as opposed to a configurator like it has been in the past.

Just unclear here -- on the deal before, I guess if we were going to categorize it, it was really a very U.S.-specific deal. Has this moved to more being sort of a global master agreement, or are we still working along that path, and you can incrementally add countries, or it is the scope has expanded and other deals will be attached to that underneath the terms of it?

Yes, it is a global agreement, but with restrictions on where they can apply that price point, if you will, in the bundle program. So we basically have to agree on each jurisdiction before we release it.

As an example, Canada did launch [some wide] with the program in the fall of '07, and so we have seen them kind of increase their use of that bundle program. And we expect -- we do have opportunities to do that internationally, if we can all agree on where we want to set the parameters. But in terms of the contractual requirement, it is merely just an addendum to add that arrangement to the program.

Okay. And sorry to belabor this, but given how key bundling is going to be as we go forward, I'd take one more sec on it, which just sort of goes to the question becoming, if we now move forward with Dell and you need to agree on a jurisdiction, what does that look like, I guess, in terms of their commitments to you in terms of volume, or is it still fairly vague and it is likely going to be situation-specific for other OEMs?

It's situation-specific for an OEM like Dell as well, Paul. So as we all know, these OEMs are very large organizations. They've got a lot of countries involved, selling to a lot of countries. They've got many, many different business segments that they are targeting. So the opportunity for us to bundle is wonderful. There's many opportunities. And in terms of Dell, look for us to do more bundling agreements with Dell that are facilitated in part by this factory integration capability, but may not always be tied to the factory integration pricing, if you will. If it's an international market, we may, because of additional costs in those international markets, we have the ability of increasing the ASP in the international market, whereas it is more difficult to increase the ASP, for example, in the U.S. market.

Just quickly to hit one last thing on Dell, what's the experience so far on consumer renewals, now that we are a year away? We all expected, I guess, that we were going to get sub-100%. It's still pretty early days, but what is the process looking like there in terms of getting that -- getting the word back out to people and getting them to re-up?

The process is really, today, is suboptimal in terms of our -- it's an email approach tied to our shopping cart. And as John mentioned, that will be improving as we bring Digital River on board here, who really are expert at assisting in the renewal process. As you know, many of the larger ISPs out there do depend upon them for their renewals in consumer business online.

So we're looking forward to getting that going, plus the good, better, best strategy. And really, those things are all going into place. Fiscal '09 is where we really have the large numbers coming in of consumer renewals, likely averaging -- well, in excess of 500,000 subs coming up for renewal next year. So at this point, we don't have a huge amount of data on it. Q4, we will get some data, and then of course Q1 will be the litmus test.

Okay. Last one from me, just back to John, I guess. You guys did a great job in the last education tough spot we hit. Sounds like you're pretty confident and the stability is there, but state budgets look tight yet again in the U.S. How is the team lining up to just, I guess, get the renewals? Because I don't view it as a big growth area, but it looks like somewhere you just need to defend. How does it look with the funding out there?

We're not seeing any softening in our education business, that we feel confident that we've got our two strongest education quarters coming up here and that we will be performing as we usually do in the education market for this Q4 and Q1 of '09.

Great. Thanks, guys.

Robert Breza, RBC Capital Markets.

Just quickly, Rob, as you talk about the renewal process and working with Digital River, could you talk about -- do you expect to put in an autorenewal feature where the consumer gives you a credit card and that works through an autorenewal process, or how are you just thinking about the renewal?

We haven't gone there as yet. That is something that we do bandy around from time to time. And at this stage, we are not approaching it in that manner. But certainly, we may look to do that in the future. Digital River does give us the opportunity to consider that and put it into place.

Great. And John, maybe a question for you. As you look at rolling out the wireless feature set, can you talk to a couple of things? One is if an educational customer buys the product today in its current form, is there an upgrade path for them. And if so, or if not, I guess, then, how do you think about rolling that out? Would you expect some customer segments to possibly delay and wait for the new wireless product, or how are you looking at kind of transitioning people from the current product to the new wireless product?

So the wireless service capability that we are building in with QUALCOMM and anybody that has a wireless card is really able to just adopt the current service that a customer has paid for and purchased to connect wirelessly. So there's no real additional purchase required. It is an automatic upgrade path. And so the customer is going to get the recovery service today that they are going to purchase. And as soon as they have a wireless capability in their computer, we are able to connect with that computer in more of a real-time basis and deliver the service in a real-time context.

So there is no reason why a customer should delay. They should purchase now, get protected, because theft can happen at any time, when you least expect it -- Murphy's Law, of course -- and get protected now. And then as soon as they have the wireless capability upgrade on their physical machine, we take advantage of that and are able then to connect in real time to the device and provide the services that we provide.

Great, thank you.

Troy Crandall, MacDougall, MacDougall & MacTier.

I had a question on the litigation. Has there been any updates? I think we are expecting a Markman report soon?

As you know, the special master has produced their draft report for the court and did so, I believe, about a month ago. And now -- I think Rob is mentioning February 11. So we are waiting for the court now to have reviewed the report and make their final recommendations on acceptance. And we feel that that will happen shortly, most definitely within -- well, we'd feel confident that it will happen in the next 30 days. So we hope to have that officially accepted by the court and then we will be proceeding on our course.

And what is the course after that? It is accepted by the court, and then how long before things are finalized?

Upon acceptance by the court, we would then proceed with our summary judgment strategy and continue down that path.

Is there a timeline for that, or--?

It's hard to put timelines on these things because you just don't know how quickly things are going to move through the court system. And we will proceed with our paperwork as quickly as possible upon the court's acceptance of the special master's documents. And we will have that turned around quickly, and hopefully the court will be able to move quickly, but it is really out of our hands.

Okay. I had another question, just on the consumer, on what you're doing just to strengthen it from the retail side. I know you earlier you had mentioned you're looking at alternatives to replace CompUSA. Can you give us any more detail on that side?

Well, we have a host of initiatives underway for the retail segment, we really do, some very exciting initiatives there. I feel confident that we will have many of them in place during calendar 2008. So these are initiatives that are mature initiatives that we have been working for quite a while that are very likely to come together in the near future.

And conceptually, there's a lot of excitement and interest in the service within the traditional large retail system in the United States. They see a lot of value in the service. We're coming at it from multiple avenues, to be parts of tech benches, to be parts of extended warranties, to be parts of the software on the shelves, and also mixed in and displayed within the notebooks themselves.

So there's a lot of ways to go to market. We're talking to all of the typical leaders in that space that you would know the brands of. We're having success in Canada with certain retailers that have a large presence in the U.S. So you will see us -- we are very close to expanding our retail business and you'll see that happening shortly.

Okay, thanks, John.

Howard Lis, JMP Securities.

A lot of my questions have already been asked. I just had two quick ones. Just again, on the operating cash margin, you have increased it for, essentially for the rest of this year, but you expect it to come down in '09, I guess. Is that tied to the investment related to the Intel deal, and do you expect it to come back down to that prior range of 35% to 40%?

It's Rob here. Yes, definitely, it is investing for continued growth, and Intel is part of it. QUALCOMM is part of it. Our international expansion is part of it. So we really are expanding our entire team based on what we see in the pipeline and opportunities before us. So it is an exciting time for us, but it also means that this 35% to 40% margin is more the range we will be targeting as opposed to trying to maintain it at current levels.

Okay, great. And I know it was brought up earlier on the call, but just with respect to the Windows mobile opportunity that you guys are looking at, can you just sort of give us an idea of how you're going to approach this market, sort of what channels? Is it also going to be embedded type of deals, or will there be other ways you are going at it?

I think, Howard, it is very similar distribution channel strategy to the one we have for computers. So, typically, what we will do, we will launch the service, and we've already got a number of our customers that are grappling with how to inventory these Windows mobile devices and how to track them. So we will be providing that service right out of the gate. And then we're also working closely with some of the handset manufacturers to do a very similar play as we have got today with the computer manufacturers. So, similar strategy, and we feel it is a good first product and we'll add some additional functionality later in the year. And we will be bringing new services to market on the Windows mobile platform later in calendar 2008, but releasing the first two features fairly shortly.

Great, thanks a lot.

Dushan Batrovic, Canaccord Adams.

A question around the cash flow also. It was a little higher than we were expecting, especially given that deferred revenue growth was a bit weaker. Wondering if you could just elaborate on that, whether there were any disfavorable timing impacts on working capital items, or was it a conscious decision to reduce spending in certain areas in light of what you're seeing on the near-term demand front?

Rob here. Yes, it is a combination of factors. One of them, yes, we are tempering our investment with where we see the opportunities aligning there. So, yes, part of it is managing to ensure we're going to meet the expectations or beat them on the year as a whole. Part of it also just depends on the timing of collection on our receivables. We had 76% of sales tied up in receivables at the end of the quarter, of quarterly sales, versus 80% last quarter. So we did collect a little bit extra out of that receivable bucket, if you will. But in any event, we do expect it to be down in absolute dollars in Q4 as we continue to increase our investment here in anticipation of '09. So in absolute dollars, down from the C$6.6 million.

Can you give us a ballpark as to what portion of your spending you would classify as discretionary?

Well, traditionally, about 60% of our costs are payroll related. Then you've got some things that you kind of can't get out of in terms of rent and all that sort of stuff. But really, it is around the timing of new hires for the next year and also around marketing initiatives that we undertake and online advertising and things like that.

So we just have to be more creative in those things, and we are fortunate in that we do have a service that does attract a lot of attention. We do some very high-profile theft recoveries and break up some very interesting crime rings and do a lot of neat stuff on the investigation side that is quite newsworthy. So we do have a little bit of luck there as well helping. So even though we reduced our spend, you don't see us withering, if you will, from a marketing perspective.

Okay. Last question for me, around Best Buy. You're working with Best Buy Canada. Presumably, that would lead us to believe that you are also talking to or approaching Best Buy U.S. Can you give us a sense on how that is moving along?

We can't talk to that specifically, but I think we have said that we feel very confident that we are going to be adding several key retailers in this calendar year. So that would obviously address that question.

All right, thanks very much.

[Ted Spade, Canold] Capital.

I was just hoping you could provide me with the average contract term for the quarter.

It's 27 months.

Scott Penner, TD Newcrest.

John, what have your attach rates been like such that you have any experience at Best Buy Canada so far?

That is a great question, Scott.

From an attach rate perspective, we really don't get a lot of insight from that, into that, from them. But the program certainly has performed as we anticipated it would. We're tied in with the tech bench there, and that has been a great place to be tied in.

I will get back to you on that.

Okay. And then just lastly, the common quarterly question about cash, and are you any closer on some possible acquisitions or anything meaningful to update there?

You know, we are looking at some very small things that obviously tie in very well with our data protection and asset management services strategy. But there is nothing meaningful. But we are looking a little bit more than we were in the past for something small that would tuck into our strategy.

Okay, thank you.

Shao Wang, Lotus.

A couple of questions. I'm wondering if you have an end-of-quarter headcount number. Also, I missed what you said about international as a percentage of revenues. Go ahead and I'll --

Do you have another one?

I've got two more, but I will do one at a time. That's fine.

Okay, so on your first two, then, headcount is at 236, so we are up -- Q3 '07, we were 149, and 215 at the end of Q2. We have added a bunch more people here. In terms of international, it is 3% of sales year to date and up 235% over last year.

Got it. Any comments on P-tec or any further embellishment on the ASP pressures on the bundling side, anything from the competitive front?

We're not really seeing much from P-tec. They have not launched their product yet, so we haven't seen it. We've heard a lot from them in terms of they continue to put press releases out intimating that they are in this business, but we haven't seen anything yet. So as far as I know, they have no customers to date, and we have not seen a product in the market so far.

Lastly, on the litigation side, my recollection is that after the Markman report, Stealth Signal filed a rebuttal. I think it was like 15 pages or so. Do you have any comment on that?

Yes, both sides filed comments to the court and then both sides have an opportunity to file comments to the opposing party's comments. We don't have any comment on Stealth's filings other than we feel confident in our filings, and we think that the special master really understood the technologies and did a good job on the report that was submitted to the court.

Got it. Thank you.

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