Absolute Software Corp (ABST) 2009 Q1 法說會逐字稿

Good morning, ladies and gentleman and thank you for standing by. Welcome to the Absolute Software Corporation first 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 portion 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 this section of its annual MD&A. (Operator Instructions).

I would like to remind everyone that this conference call is being recorded today, Tuesday, November 4, 2008 at 8:30 AM Eastern time. I will now turn the conference over to Mr. John Livingston, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. Good morning, everyone and thank you for joining us to discuss our first quarter fiscal 2009 results. If you have not already seen it, today's Q1 press release can be found on our website at absolute.com along with our financial statements and MD&A.

With me today is Rob Chase, Absolute's Chief Financial Officer. I will begin today's call with a review of our quarterly activity. Rob will then review our financial results, after which I will provide some closing comments before opening the call to questions.

First quarter results. As discussed on October 9, our conference call, Q1 was a difficult quarter. After several years of substantial year-over-year growth, Q1 sales contract levels declined and fell below our expectations and those of the market. We believe Q1 performance was impacted by the economic uncertainty at the end of the quarter. This uncertainty delayed and froze several key client purchasing decisions and led to a sudden and material impact on our business at the end of Q1.

The resulting sales contracts for Q1 were CAD18.2 million compared to CAD21 million in Q1 last year. Cash from operations was in line with our expectations at CAD9.1 million in Q1 compared to CAD8.9 million in Q1 last year. This is in part due to a higher receivables balance exiting Q4. However, given the sales performance in Q1 we're expecting Q2 cash flow to be below last quarter.

In terms of expanding our partner network and laying the foundation for a return to growth, several achievements in the quarter stand out. We announced our first private label program with one of the world's largest PC OEMs. This OEM is now actively selling anti-theft solutions that are serviced by Absolute in their small- and medium-size business channel.

We extended the number of PC OEMs providing embedded firmware support for our Computrace solutions to over 10 with the addition of Gamma Tech, and shortly thereafter the quarter end, ASUS.

We expanded our consumer distribution channel by adding Digital River, Costco.com, CDW and Future Shop to our retail platform.

On the product development side we have been busy adding new features and services to support both our pre-theft and post-theft applications. We added geolocation tracking for Computrace which uses GPS and Google Maps to give the customer a real-time view of where their laptop population is. If a computer goes missing, GPS tracking information along with our proven theft recovery tools can help provide additional information to aid in the recovery process.

Q1 market segment update -- as discussed on October 9, our corporate vertical performed well in Q1 on a sequential and a year-over-year basis. Consumer was down for the year -- down year-over-year for Q1 but up on a sequential basis from Q4 2008. The education and government markets performed weaker than expected in part due to budget and delay issues encountered at the end of the quarter and in part due to complications in the procurement process. However, we remain encouraged by three underlying growth drivers -- the increase in mobile computing, the increased data privacy regulatory environment, and Absolute's growing list of OEMs providing Computrace embedded BIOS support.

On the international front, Absolute is supporting global rollouts of both our OEM white label program and Intel's anti-theft protection initiative. Both help evangelize Absolute's proven anti-theft service in domestic and international markets.

Our international sales were up 28% from Q1 last year and our Canadian sales were up 58%. We're encouraged by this growth, granted it is only at 7% of total sales. Accordingly, we are continuing to invest in our international expansion efforts.

As noted today in our press release, we reversed a CAD2.1 million sales contract relating to a Q4 reseller order for a government sector customer. This was a significant and unexpected disappointment for us, especially since we were expecting an additional large order from this customer this year. However, based on events and findings after October 9, 2008, we no longer have confidence whether or not this customer will complete their purchase. As a channel organization, there is inherent risk from relying on our partners' procurement process with the end customer which is covered in the risk section of our MD&A.

We have not had an issue of this magnitude in the past and at present we do not expect any further significant balance sheet risk this regard. We are reviewing our procedures with help from external advisors to ensure we mitigate the risk of any such occurrence in the future.

At this point, I will turn it over to Rob for a closer look at the numbers. Rob?

Thanks, John, and good morning everyone. As a software-as-a-service business, cash flow is our key valuation metric while the non-GAAP measure of sales contracts gives an indication of our growth trends. On our last conference call we introduced guidance for sales contracts of CAD82 million to CAD90 million and cash from operations of CAD27 million to CAD33 million.

Regarding subscriptions, total subscriptions under contract are approximately CAD3.8 million, up 84% from CAD2.1 million a year ago. We believe our subscription base to be an important factor in our growth plan as we continue to generate a significant portion of our sales from existing commercial customers.

In Q1 we generated 64% of total sales contracts from existing commercial customers, up from 60% in fiscal 2008. However, on a dollar basis, existing commercial customer sales contracts of CAD11.5 million were down from CAD12.8 million in Q1 last year. This is in part due to purchasing delays experienced at the end of Q1.

A significant driver for this existing commercial customer business is the number of subscriptions up for renewal in the period. In Q1 we had 105,000 commercial customer subscriptions come up for renewal and we generated 233,000 subscriptions from existing customers for a ratio of 2.2. This ratio is down from 2.6 in fiscal 2008 perhaps due to delays in refresh cycles in the current economic climate. For the remainder of the year we have an additional 396,000 commercial subscriptions coming up for renewal.

On the expense side, we will continue to invest in marketing and product development during the year. However, in light of the current economic climate we will invest at a much more cautious level. Along these lines, on October 22 we let 14 people go in a small reduction in force. Some of the savings will be redeployed to add personnel in the high growth areas of the business. Severance charge related to this reduction is expected to be approximately $500,000 in Q2.

For fiscal 2008, we reduced our net loss before stock-based compensation and this continued in Q1. For Q1 the loss decreased 69% to CAD600,000 from CAD2 million in Q1 last year. This is in part due to the growth in sales contracts during the past three years which resulted in revenue of CAD12.1 million, up 58% from CAD7.7 million in Q1 last year. Conversely, total operating expense increased at 54% over Q1 last year.

It is also in part due to the strengthening US dollar relative to June 30, 2008 which generated significant foreign exchange gains in the quarter compared to last year. For those of you who have read our Q1 MD&A, you may have noticed a subsequent event note regarding a short term loan on October 10 to a Board member who was subject to margin selling of 276,000 of his shares. We viewed the loan as a prudent use of funds as it was done to avoid further distressed sales of shares in an already troubled market. The loan is secured by his remaining 979,000 shares, bears interest at the rate of prime plus 5% and is due in full by November 30.

From a balance sheet perspective, we have ample resources to support our growth plans and manage through this difficult economic period. At September 30, 2008 our cash, cash equivalents and investments grew to CAD72.8 million compared to CAD64 million at June 30, 2008 and CAD44 million at September 30, 2007. Accordingly, to underscore our belief in the business prospects for Absolute and our ability to execute on the strategic plan, we have implemented a normal course issuer bid to acquire and retire up to 10% of Absolute's free trading shares on the open market. Subject to Company trading restrictions we're pleased to report that we now have TSX approval to commence the bid on November 6, 2008.

In closing, despite the recent disappointments for us all, we remain resolute in our returning the business to growth and in executing against our plan. We believe we have the products, infrastructure and business models to support widespread adoption of mobile device and data protection services and we 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. In summary, we are focused on and sticking with our key strategies to grow the business and restore our growth trajectory. We have built a fantastic team at Absolute that has rallied behind the cause and is more than capable of executing our strategic plan.

Our entire team is committed to Absolute leading the anti-theft market and Absolute's Computrace and LoJack laptops brands and technologies remaining a de facto anti-theft standard for many years to come.

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) Tom Liston, Versant Partners.

John, the first question -- some of the large deals that you talked about in the last call that slipped -- what are not coming back, and have any of those closed to date?

Tom, we have had a few of those close. And we have a couple of those as well that are delayed and we're not exactly sure when they are coming in or if they are coming in at this point.

And the government reversal -- is that something that still may be up for grabs, or is that lost business now?

I think we're at the point now of just -- of really just waiting until further time where we can actually announce something, if and when that time comes.

Okay, But it's not off the table as of now?

No, it's not.

Okay. And just your comments on Phoenix announcing Lenovo, I think it was Singapore, and I think they were announcing Samsung as well -- they said they haven't quite got the product out there, but they plan to soon. What is your view on their progression and is there any update at all with the ongoing patent lawsuit there?

No update yet with the patent lawsuit, other than the previous update that we had a few months ago.

In terms of Phoenix, again they don't have a product on the market today. So it's difficult to really talk too much about Phoenix. But that's all we know.

And just with use of your cash position, obviously the buyback is a good thing, but any other uses? And as well, comment on the purchase of investment line. There has been a fairly material amount over the last two quarters. Obviously investing in a company potentially to be acquired, I assume. Can you comment on that?

It's Rob here. So I think first of all the cash position, of course we will undertake our normal course issuer bid and that will use up some of our proceeds -- or our cash balances. In terms of the investing, we have certainly ratcheted down on that. As you know, we did get caught with some of the asset-backed commercial paper and you see continuing writedowns on that.

Also, yes, we did invest in a company that we thought might be a good acquisition target. Of course with the market meltdowns that have happened in the last little while here, we have had to take another writedown on that investment. But that is where we're at, at this stage.

Okay, so no plan to go forward to date with that acquisition?

Not at this time.

Just finally and I will pass the line on -- sales and marketing, was the 14 people reduction in headcount, was that related to sales and marketing? And just comment -- that number has been pretty aggressively growing over the last little bit. So where should we look at -- look forward to seeing where that number shakes out over the next few quarters?

Certainly it was across the board. There was people from pretty much every department in the organization that were included in that. In terms of continuing to add headcount on top of that now, we will of course -- I would expect to be back to Q1 levels here very shortly. As we continue our international expansion, some specific sales and marketing initiatives as well. And of course on the development side of the house, we have been expanding fairly rapidly in order to be able to support our international programs, in particular with the private label and Intel initiative that John spoke to.

Thanos Moschopoulos, BMO Capital Markets.

Can you provide some color as to the seasonality of the renewals that are remaining for the rest of the year? Is it pretty consistent with your regular seasonality, or is there something different as far as other weighted?

Normally, it's fairly consistent. If you look at last year, we did -- in Q1, as I mentioned, we did about CAD12.8 million in existing customer purchases out of CAD42 million for the -- CAD43 million for the year as a whole. So, indeed, Q1 was a little bit more weighted. However, this quarter of course, we had -- some of those delays at the end of the quarter were for existing customers. And hopefully, we will see some of those. As John said, some have closed, I'd hope we'll see some others (inaudible) here and start purchasing in the near-term as well. We may change it a little, I guess, is the long way of saying that.

Okay. And then just regarding the reversal, I know that your revenue recognition policies are outlined in the financials and MD&A, but just to give us a bit more color I guess as to the risk of this type of event recurring, typically how much of a delay does there tend to be between your sale to the reseller and then the reseller's sale to the end customer?

Well, typically, there shouldn't be very much delay. We can -- one of the problems is that we don't generally have full insight to that with most of our purchases. So it's actually an unknown, if you will. But we've not seen anything significant such as this in the past or as material as this has been. And what -- we have reviewed everything as well, and we are continuing to review it to make sure that we find ways to ratchet down even tighter. Certainly, we don't like to have undue risk there. So we will continue to do that process going forward.

In reviewing our current balance sheet position, our receivables, etc., we don't believe there's significant risk to this at this moment.

So, presumably, you have the same type of recognition policy, though, when you sell to, let's say the retail channel and they buy actual box products -- they have the right to return on that as well?

The box retail would be different because that's going into -- that's like a blister pack. It's consignment, if you will. So that is actually -- they do sales out reports after the fact in consumer, so (multiple speakers) different of a world in that regard. That is pretty commonplace there.

Okay. And regarding the bad debt with the Tier 2 OEM, is this a company that appears to be going out of business, or is there some possibility of recouping some of the amount?

We were recouping amounts right up to the end of September. And we feel pretty lucky about that by the looks of things here. But they have just been delisted and there has been -- at least I believe three parties have already submitted action and we are doing the same. So they are -- I don't think they are likely to recover at this point. And as I said, they had been making payments during the September quarter. These sales go back. They were quite significantly past due. And they had been making small payments towards it and waiting for a facility that would help them to actually get current. But as you can imagine, that never happened.

And I know you reaffirmed guidance and that you don't break out guidance by end market, but can you provide some color as to how your own internal projections for the end markets may have changed over the past month as things have evolved as far as -- are there markets that you are more optimistic or more pessimistic on over the past few weeks?

Well certainly we felt a lot more confident about the government sector a few weeks ago. And at this stage, as John mentioned, we just don't have enough to hang our hat on with the larger deal that we were expecting as to whether or not they will ultimately purchase. Their purchasing process has changed numerous times. So we will stay as close to that as possible, but at this stage that would indicate to us that the government sector likely wouldn't produce to the extent we would have hoped, and quite possibly will show less than it did in fiscal '08.

Okay, so if government is looking weaker, does that mean over the past month, then, that you become more optimistic on other segments?

I think our level of optimism on other segments is unchanged at this point. We think -- we've felt pretty good about all of them as we talked on October 9, and the other verticals, I think education -- that one is going to continue to be a strong vertical for us. All the indicators are. Corporate still has great momentum in it and continue to be a lot of good corporate opportunities in our pipeline. Consumer, we are expanding all of our programs. John had mentioned some of the ones that we have gotten out with recently and there should be more to come in the coming months. And I think we remain optimistic on our ability to go and hit our objectives in those other verticals.

Scott Penner, TD Newcrest.

Just to the extent you can comment, what was the experience with renewals on the consumer side, both during and subsequent to quarter end? And then, if you just remind me what the timing is on the bulk of the consumer renewals this year.

Scott, it's Rob here. The Q1, we're still trying to get accurate consumer renewal data. What we can say is that our online sales have increased roughly 24% over Q1 last year at this stage. So despite the economic headwind I suppose that we're happy to see that, and for the online business, which is where most of those renewals go through. Coming up for Q2 here, we start seeing renewal opportunities in the 170,000-unit range compared to 93,000 in Q1. And then it stays pretty consistent through Q3 and Q4 after that. So, in terms of splitting up the remaining 456,000 or so, it's [good] to go.

And Rob, again, can you just repeat what I believe you commented about the existing commercial customers, the (inaudible) versus what came up for renewal in the quarter? I'm just looking at the MD&A -- you seem to have some different numbers than some of the multipliers you were talking about.

The MD&A is talking about it as a whole, so it's taking it with respect to the entire subscriber base, which would include consumer. So that's not an apples-to-apples per se. So there's 233,000 subs that came up for renewal -- or, sorry -- that were subs generated in the commercial segment, which 105,000 were expiring in the period. So you'll see -- if you look in that paragraph, there's both the 198,000 number and the 93,000 consumer number, so the net of those is the 105,000 that you compare to the 232,000 to get the 2.2 ration. And that ratio in fiscal '08 was 2.6, so it's down slightly. Does that make sense?

Yes, okay, so the existing commercial customer purchase ratio is 2.2?

That's right.

And just -- I want also just to come back on your policies I guess on the resellers. Do you typically have a PO, an end customer or a purchase order in hand, or does that reseller have to produce some sort of paper that you use to rely on for your revenue recognition?

No, that's not normally the course, because as you can well imagine, with most of our larger partners, they're not going to submit the PO that they received from the customer. So what we have is a relationship with the customer and confirmation from the customer that they are indeed proceeding with the purchase process. And we have the reseller who gets their processes to the stage where they are ready to issue their PO. And those POs are -- that is what we use to give us evidence that they've completed their process to a level where they are comfortable because of course those are binding agreements, to issue a PO, right.

Okay, so your relationship in most cases is with -- as you would expect, is with the end customer?

Yes, it's with both. So we help the partner bring the customer to the table for the purchase, but we can't actually intervene in the customers' and partners' purchasing process.

Some of the initiatives that you guys have talked about in the past on the retail channel, you have mentioned negotiations with Best Buy USA and other. Are those talks still ongoing, or is there any update publicly that you can provide?

It's John. Just to say that we have a very strong consumer team run by a very experienced executive in this consumer segment. And there's a lot of initiatives underway. And I think if you just hold tight, you will see some additional announcements coming out to that effect over the next quarter or two. And we certainly I think are in good shape there in the consumer business to really start making much more of an impact. And yes, get included in some significant retail opportunities and other opportunities on the consumer side. And more -- now, when we go into retail to a larger chain it will be much more integrated into that process with the type of marketing and promotional material that you need to really have an impact in front of the consumer.

So we are very pleased with the consumer team and their ability to grow this business. So stay tuned for some positive announcements around the consumer market.

And then Rob, maybe I missed it, but did you provide in the MD&A not only the ASP but the total number of subscriptions sold?

No, I did not. But if you go through the numbers in there, there should be a trail for you to follow.

Glenn Jamieson, Macquarie Capital Markets.

John, you had said earlier that you have seen some of the deals that would have slipped and that you guys highlighted a month or so ago close in this quarter. Can you give us a feel for how much or what percentage of the CAD5 million that was highlighted has actually closed, and if those deals are more in the education sector or more to the government side of the house?

Yes. While we have had -- a couple of them have been government customers, so we've gotten those ones in. We have also had a larger government order delay as well. But there's a good chance that that will come around during the year, during this new fiscal year. And I would say where less than half of the orders have closed and the other half have gone away, likely temporarily.

So you would have seen some closure on deals in the education market that had slipped as well -- is that true?

There was some education and some government that have closed since quarter end that were in that bucket. There is a large government one that we stated would likely be delayed for an entire year. That is approximately CAD1.7 million of the total. And then there is the state of California, which is where there's a bunch of existing education customers as well. And that has not yet thawed. So we haven't seen those purchases yet come in October. And of course, we are still working with them and hoping to see those before too long. But it's really outside of our and the customers' control at this point.

Is there any visibility from those customers or any thoughts that thawing process could occur before the end of this calendar year?

We just really don't have any basis to say at this point.

Okay. And an earlier question about your outlook by end market. You said that, given what has happened recently you're a little less enthusiastic about government. If we are looking at the low end of your sales range for the year, the $82 million, does that contemplate a decline in your government business year-over-year? Or, would you need another segment to make up slowing government sales to reach that $82 million?

Yes, I would say that, first of all, that does imply a decline likely in our government vertical over last year. I would also say that that does mean, in order to hit the lower end of our guidance range, that some in the other verticals, if you will, need to be above the bottom end of their range. So certainly with the change in the US dollar valuation, that does give us some buoyancy there as well to help with that mission, if you will. But we are, as I mentioned earlier on the call, we are pretty confident in our ability to execute in the other verticals. We haven't seen anything that -- like we have seen in the government vertical that would suggest that things might go below their range, for example.

And in terms of the market that you are most optimistic in, not asking you to quantify it, but would the corporate market be the segment that you have the most momentum in currently, and you would be most optimistic in terms of the contribution it will make to fiscal '09 sales?

I would say, corporate, Glenn, and education, and health care. I think all of these markets are still very valid for us. We have got programs, sales programs and marketing programs aimed at each one of them. And things -- momentum can come back in a market very quickly. So we are certainly still working very hard on the government market, as an example, growing the government team, adding resources there. We are moving that forward and moving -- the corporate market, there's a lot of business there as well in the pipeline. So we are still pushing that one forward too.

From my perspective, these are all viable markets. And there's a little bit of an ebb and flow with each of them during the course of the year. But you need to invest throughout the year, so that's what we are doing.

But certainly last quarter, this Q1, and we saw corporate grow over the same quarter last year, and sequentially. So that was positive for us.

And two more quick questions. The first one, Rob, is there any reason to think that the current quarter will be more or less back end loaded than your first quarter?

And then for John, given where the stock is trading and your cash position, what is your appetite for being active with your share buyback immediately?

I will take the first bit here. I don't really see any reason for a significant change in the timing of our Q2 sales contracts at this stage. I would expect October to be similar to what it has been in prior quarters, which has been anywhere between 22% and 29% of the total sales we do in the quarter if you look back over history. So I don't see any reason for that to change. And I will let John handle the normal course.

In terms of the normal course issuer bid, Glenn, we'll be in the market buying when we are not blacked out, likely.

Robert Breza, RBC Capital Markets.

Good morning, John, quick question around the private label. Can you talk about where do you expect that to show up in terms of the end market? And then, how big can the private label business become for you guys as you look to expand that?

Sure. So, today, the private label business is really aimed at small and medium size business. And it's an international product that we are servicing for one of the larger OEMs. And the good piece of it is it has really given us a platform to go and deliver on the entire -- on our business internationally. So we've got a good foundational marketing and sales program being driven by this partner worldwide. And then, that is the basis for us expanding our EMEA presence and now putting in place some presence for the APAC region as well.

So really we look that as a launching pad for our international program that dovetails as well with what we're doing with Intel on Intel's anti-theft initiative, which is also a worldwide program. So those two programs are really a platform for us to get our international business up to speed to where we want it to be.

Todd Raker, Deutsche Bank.

Just a quick question. If you guys look at your sales contract forecast for the year and you look at what you just saw in the current quarter, on the commercial side, 2.6 going to 2.2 in terms of renewal upsell. Can you give us a sense in terms of -- are you guys looking at what happened this quarter and kind of forecasting that forward? Are you expecting a little bit of a recovery, a little bit of a deceleration? Just give us a sense in terms of what you're baking in.

Sorry, Todd, you faded out right at the critical moment there.

I'm trying to get a sense for your sales contract value that you're forecasting for the fiscal year. If you look at what you saw in September in terms of the performance of the business, the commercial renewal upsell going from 2.6 down to 2.2 and then the consumer side, I am just trying to get a sense for what you guys have baked into expectations for this year. Are you expecting the September data points to hold going forward? Are you expecting those to recover to some extent? Anything you can provide on that issue.

It's Rob here. Certainly we would hope to see it recover, to some extent. Now there has obviously been concerns in the market in general that customers or companies, etc., are going to start delaying some of their refresh cycles. So it's hard to tell if there is any of that mix in there at this stage. Certainly some of it, some of the reason for the reduction was definitely due to delays in purchasing cycles at the end of the quarter there, particularly, as I mentioned, in the state of California. So hopefully as those thaw or as they start being able to purchase again, we will see that recover through the year. But that is the best we can give at this stage.

And are you guys updating your target subscriber base at the end of this coming fiscal year?

No, we are basically thinking -- right now, we are going to continue to give the updated subscriber base numbers that are at 3.8 currently, and we are still driving to the levels we talked about previously.

Rob Owens, Pacific Crest.

As we look at the canceled -- I'm sorry -- the reversal in the deferred and the bad debt, did you adjust your subscriber number for that? Or, do we need to go in and think about that and what that number is going to look like?

That subscriber number is post that adjustment.

It is post that adjustment, okay. And then, any color you can give us on ASP trends on the corporate side of the business?

The corporate side is, because of our private label program and also some other shared product bundling programs and things we've done with other OEMs as well, we have seen that commercial side come down a little bit. But overall, it has held fairly steady. And in fact, you can look at the renewal information that I gave in the MD&A and it will give you an idea of the ASP on that side of the business, which is obviously a very important side of the business. So do look at that, that will give you an indication there.

Sure, but you're seeing it down a little bit year-over-year, Rob?

Yes.

Okay. And then last question -- any color you can give us on the churn rate? Should we assume, given the macroeconomic environment, that actually got worse sequentially?

Churn rate, and you are suggesting on the consumer side then, or are you talking in general?

On the total business, if I look at total subscribers.

Yes, so that was really what I was getting at, was the 2.6 versus the 2.2. I'm not sure if it's -- the reason we talk about that metric is because we don't have the exact one-to-one relationship on the commercial side of the house with an expiring sub to a renewing sub. So we look at that ratio of expiring subs to total subs sold into the existing population. I haven't heard of any significant loss renewals in that business. So most of that declined to 2.2 from 2.6. It should be from deeper penetration or just delayed renewals.

Madhu Kodali, Fertilemind Capital.

John, I was wondering if you could elaborate a little bit on the education and government, what you guys are seeing in terms of budgets and renewals. Do these organizations mostly have to go and get budget approvals every year? And what you're hearing.

I think on government, the federal side of things, we have an election, obviously here at our doorstep. So depending on what happens there, that's going to have an impact on federal budgeting cycles. And then with the state budgets, the state that we've had some trouble in has been California on the education side.

Other than that, in our education business it has been fairly much business as usual for us in the education market. And state and local, the budgets differ, of course, between each state that we're dealing with.

Do you normally see these people buying PCs or leasing and adding the Computrace along with the lease program and making it more of a standard in the organization?

Well, yes, we go after what we call a design win which is to be built into the image of the computer across all of the devices that a particular organization might roll out so we can provide our data protection and device protection services and inventorying across the organization. So we're always moving toward that design win, if you will, and getting in the image.

Whether it's a lease or a purchase to us doesn't really matter. We are there to help the organization whether they're leasing or whether they are buying their PCs. So we will do both.

And what percentage of sales to these two groups do you think is design wins versus after sales?

Most of our larger customers are design wins. So educational customers for example will be purchasing on each notebook they are rolling out to either internally for administration purposes or out to their student population.

Right. And could you update, I think you did talk about the private label program. Part of that is a replacement of the relationship you had. How is that progressing today? And given that some of that sales and marketing costs are actually now supposed to be lower, but I see that your actual sales and marketing costs are going up. Could you talk a little bit about that, please?

Sure. The private label program is obviously a small piece of the business we do today. So that is one program amongst many, many programs that we're funding. We're not paying for sales and marketing program costs on the private label, obviously. But we have a lot more programs we're doing with OEM partners and that we're doing ourselves as well to generate awareness and traction in the marketplace. So yes, the sales and marketing costs are up and will likely continue to grow.

And, John, what is a typical contract or term duration with most of these OEMs? Do you have a specified contract term that you guys are getting to at the start of the program? And do you have to renew it after the expiration?

In terms of actual sales and marketing programs, those are typically done on a quarterly basis with an OEM. So, we are funding a quarterly program. It may be aimed in a government segment, it may be aimed in the education market, it could be a corporate market program, it could be a consumer program. So there's programs for each segment, each quarter across each OEM -- opportunities there. In terms of our contract with the OEMs as distributors, those are ongoing.

So when you say ongoing, it's like there's no specific contract term or length?

No, it's just an evergreen contract to do business going forward.

And coming back to the quarterly programs, that is something your sales managers typically go and work with the OEMs to figure out what is this quarter going to be, who are we going to focus and what we are trying to do, that kind of thing?

Yes, our sales managers and our channel management team, marketing team, they all work together to develop programs with the OEMs that are focused on specific target customers.

Okay. Rob, one question on the ForEx. In the past I think you indicated about 50% of the costs I think are US dollar cost, right?

Yes.

So that still remains?

Yes, that still remains.

(Operator Instructions). Pardeep Sangha, PI Financial.

Most of my questions are actually answered. Just a little bit more depth on a couple of previously asked questions.

On the sales and marketing expenses, you mentioned that you are likely to see them continue to grow, but I'm just trying to get a better sense of a ramp rate here. The last couple of quarters you have been pretty aggressive in terms of ramping up your sales and marketing expenses. Are we to assume that, even though they will be growing, they will be less aggressive in terms of ramping up in the next few quarters, just given the little bit of weakness?

Yes, Q1 and Q4 are always big ramp quarters for us. Usually Q4 we start adding a bunch of people on the sales and marketing side in anticipation of our new fiscal year. And we did that again and continued that process into Q1. So in terms of the magnitude of increase, the lion's share should have been done in those two quarters. So while we still expect to carry out some more marketing-related endeavors, a lot of the costs that drive any increase from this point on would be direct media buys or marketing-related type expenditures as opposed to headcount -- a lesser focus on headcount, more on the actual discretionary spend side.

And the other question I have is just around on the corporate side, you have mentioned that you're still expecting good momentum going forward. I'm just wondering if you could give me a bit more color there in terms of some of your reasons, the drivers, why? In this next few six to nine months I guess we can expect corporate IT spending to be reduced with (inaudible) people in the corporate environment being tight as well. So give me a bit more better sense of why you are expecting still good momentum on the corporate side?

Sure. We obviously play a key role in helping organizations with the many data privacy regulations that are in place. So the data privacy regulations -- just the sheer number of people moving towards more mobile computing environments and the fact now that we've got embedded support from almost all of the major OEM vendors, technology support as well as marketing and sales support. So anti-theft as a category is certainly getting momentum out in the marketplace. We're hearing a lot more about it. Intel is driving the anti-theft message and others are incorporating anti-theft into their messaging as well.

So we do something very unique in terms of the tracking component, the recovery component, the remote data deletion component. And the accurate asset tracking component for customers, there's -- really we are unique in this space. So when a corporate organization has got 10,000 notebook computers there's a lot of compelling reasons why they would want to know where they all are at a given point in time and be able to have that digital security tether if you will, to the device so that even if it reformatted the hard drive or reinstallation of the OS, they still can see 100% or close to 100% visibility in all of their mobile devices.

So we have a very compelling value proposition for corporate America that is trying to stay current with this regulatory environment that we're in. And we will continue to be selling to them.

So with tightening IT spending budgets, you view this as being an item which will stay on their IT budget and won't be cut?

Well, each company is different, obviously. But generally speaking, we feel this is a very compelling solution for companies that want to reduce their risk to loss and theft of computers and the information that may be on those computers. And we have seen the very, very high cost that just one computer can be to an organization when they lose the wrong computer. So we are there to help. We are a great complement to encryption, protecting the organization from internal theft scenarios and have done -- we are recovering over 100 computers now a week and breaking internal theft rings and doing all kinds of helpful work for our customer base.

And Pardeep, in times like these, in this economic climate, these companies cannot afford to have a breach. So that is some of the leverage that we use. We also look to our pipeline that we have built, worked hard to build and are continuing to bring through that pipe to closure. And there's a lot of those that are in the corporate vertical. And then as we saw in Q1, the corporate was -- had a strong showing for us.

And then we also look to -- the specific programs that we're running. So the private label program is aimed at small and medium business that will go in our corporate bucket. And that is just getting ramped up. And in Q1, it was a very small part of our business. But it's growing and the OEM is putting more and more commitment behind it. So that has some great potential for us.

And also, we have a similar bundled type program with another OEM as well that again has really been seeing an increase in traction, again focused in small and medium business. So I think we have a lot of programs that are going to help us drive that small and medium business and corporate market.

Plus, as John mentioned, there really is a compelling need for this and security spending is somewhere where people still need to be focused, especially in times of an economic downturn because you just can't afford anything to happen on the breach side or otherwise. You need to be protected. So those are the things that we look to.

Aram Fuchs, Fertilemind Capital.

I was wondering, I tend to be bullish on the net book low-end laptops, specifically in the educational vertical, and that bullishness is reinforced by this budget crisis. I was wondering how you're adapting the product and the pricing to take advantage of that category.

Well, we have done a program with one of our OEM partners to the mini-notebook audience and we will continue to do those types of programs as that device becomes more prevalent.

Really, we are looking to our partners and following their lead on this as well and working with them to develop programs that suit the need. And that can entail lower features, less price point, right? So still capturing some of the goodness on the recovery capability and the other unique things we offer.

So we are working with our partners in that area. And I think we can -- we haven't yet seen a significant change in our educational vertical as a result. In fact, on some of those mini-computers that had come out we were surprised to see that they weren't adopted to the extent we were expecting because once the customers got in using them and trying them, they realized, we need a little bit more for this.

So they did tend to go right back into just a lower-priced notebook. So we will see what happens over time in the trend, but definitely we are watching it close and we have plenty of ability to change feature sets to match the needs, so looking there.

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

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

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