Absolute Software Corp (ABST) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Absolute Software Corporation's fourth-quarter and year-end results conference call. (Operator Instructions).

Before beginning its formal remarks, Absolute would like to remind listeners that certain portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. For more information on the Company's risks and uncertainties relating to these forward-looking statements, please refer to the section of its annual MD&A. If anyone has any difficulties hearing the conference, please press the star followed by zero for operator assistance at any time.

I would like to remind everyone that this conference call is being recorded today, Tuesday, August 25, 2009 at 8:30 AM Eastern time. I would now like to 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 fourth-quarter and year-end fiscal 2009 results. If you have not already seen it, today's 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 will begin today's call with a review of our quarterly and year-to-date activity. Rob will then review our financial results, after which I will provide some closing comments before opening up the call for your questions.

Just before I speak about our results, I want to emphasize that we believe the addressable market for our solutions is very large and growing with every computer sold worldwide being a potential customer. Worldwide computer shipments are expected to grow from approximately 280 million in 2009 to approximately 429 million by 2013 with portable computers increasing their share from approximately 50% today to 70% by 2013.

So our key market, portables, will almost double to 300 million device opportunities by 2013. It is under this premise that we continue to reinvest in the business and execute against our midterm strategic plan, which is simply to scale our current business towards the tens of millions of global subscribers we believe are Absolute's future opportunity. Therefore, we are making a significant investment today and will be in the coming fiscal year to properly position the business for future growth.

Fourth-quarter and year-end to date results. As you all know, the economic environment during fiscal 2009 was a challenging one, and against that backdrop, we were pleased to have delivered financial results within our revised guidance range. Sales contracts for the fourth quarter were CAD20.2 million, resulting in a fiscal '09 total of CAD71.9 million near the middle of our target range. The fiscal '09 numbers compared to CAD21.5 million in Q4 2008 and CAD72.5 million for the fiscal '08 year. Cash from operations was CAD2.1 million for the fourth quarter compared to CAD5.4 million for the fourth quarter last year. For fiscal '09 cash from operations was in our revised target range at CAD17.4 million compared to CAD30 million last year.

In addition, our contracted subscriber base was up 26% to 4.1 million subscribers from 3.3 million subscribers a year ago.

Vertical market update. Consumer market sales were down $6.8 million or 42% in US dollars. We phased our biggest headwind this year in the consumer market. This was primarily due to bundled consumer sales with a PC OEM that reduced significantly as the OEM shifted its consumer distribution strategy. Outside of this program, the consumer sales were down 12% in US dollars due to the poor economy and CompUSA going into bankruptcy last year.

At the same time, we have significantly diversified our consumer business, including a launch in EMEA in June and Best Buy in February. In addition, we saw consumer sales improve 27% sequentially from the third quarter. Via retail expansion, our Intel antitheft collaboration, other partner programs and our international initiatives, we expect to see added traction with the consumer vertical in broader global markets during 2010.

Commercial. For the year commercial sales were down 5% in US dollars. We generally break the commercial vertical into four verticals -- education, corporate, government and healthcare -- with the first two representing about two-thirds of our total sales. I will speak to each of these separately.

Education was up 7% in US dollars. This continues to be a strong vertical for us and is also showing opportunity worldwide. Corporate was down 9% in US dollars. This vertical seemed to be heavily impacted by the economy in our December and March quarters but rebounded somewhat in Q4. Government was our biggest commercial decline, dropping 2.8 million from last year. However, the decline was due in part to a large deal lumpiness as in fiscal 2008 that included three deals that totaled 4.4 million. Excluding these, the government vertical grew 67%, which suggests we have a more diversified government business this year. This is in part due to complete revamp of our government team and strategy during fiscal 2009. Healthcare, while our smallest commercial vertical, it was up 10% in US dollars this year. We believe this is a promising vertical for us, especially when combined with our encryption bundling and Intel antitheft initiatives. These customers are under a significant amount of regulatory pressure to automate and at the same time possibly have more private and personal information at risk than any other customer type.

International, this was a significant area of investment for us in fiscal 2009, and we will continue the strategy in fiscal 2010. The focus to date has been primarily setting the foundation to support the commercial vertical in all major global markets. We now have product and service capability in more than 20 languages and have completed computer recoveries in many regions of the world. While international expansion costs have outpaced international sales to date, based on portable computer volumes, we believe international can grow to nearly half our business in the next five years from just 4% of sales today. Getting there will take the right investments to build a platform to support and generate that growth.

Today we have seen signs that the strategy is working with international sales growing 17% in US dollars over fiscal 2008. In addition, in the current quarter, we expect to see sales begin for the 250,000 unit opportunity for the international customer deployment we announced in June.

On the consumer side, with the recent launch of our international LoJack for laptops offering, we expect to make greater headway into the global consumer markets in 2010 and beyond.

Product and partner update. It was a busy year with a number of exciting products and partnerships being developed as follows. First, we added WiFi geolocation capabilities to Computrace, which further supports our IP tracking, GPS and both Google and Microsoft mapping capability, giving customers an accurate real-time view of their laptop populations.

Second, we launched Computrace Mobile for BlackBerry platform, which delivers asset management, data protection and geolocation tracking for the BlackBerry.

Third, we introduced our asset management and Theft Recovery Solutions for netbooks and launched the international version of LoJack for laptops.

Fourth, we expanded our consumer retail presence with distribution at over 1000 Best Buy stores online at bestbuy.com, as well as Apple stores, McAfee online, TDW, Costco, Future Shop and Digital River.

Fifth, we made significant enhancements to the asset customer center relating to the security management and usability features, including addition of multilanguage support.

Sixth, we increased the number of OEMs providing firmware support for Computrace from eight to 11, including embedded support in select notebook lines. But, most importantly, we deepened our existing sales marketing and technical relationships with our most valued OEM partners.

And seven, we furthered a number of initiatives with Intel in support of their antitheft protection program. Amongst other things, this relationship has been instrumental in gaining embedded support from new OEMs.

In addition, this past June we completed our first sale for the implementation of the combined ComputraceOne Intel antitheft solution. With the growing availability of Intel's antitheft chipsets in the market, we expect to see awareness in sales adoption accelerate during fiscal 2010.

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

Thanks, John, and good morning, everyone, and thank you all for joining us today.

As John noted, we met our revised fiscal 2009 guidance targets for sales contracts and cash from operating activities. As a software as a service business, we consider these to be our key performance metrics.

Relative to last year, sales contracts were down 13% or $9.4 million in US dollar terms. John touched on consumer sales activity, which explains the majority of the decrease, but I would also like to highlight a few ways in which the economy impacted sales.

Large commercial customer sales of greater than $100,000 were down $4.4 million or 19% compared to last year. As expected, in an economic downturn, larger deals have been harder to close.

Likewise, new commercial customer sales were down 41% or $5.7 million as new projects became harder for customers to get off the mark. And finally, while our existing commercial customer sales were up 7%, the expiring subscription ratio dropped from 2.6 last year to 2 this year. We believe this reflects customer efforts to stretch refresh cycles combined with bankruptcies and reductions in headcount. Given the economic climate, we are pleased with our overall sales performance this year.

Turning to our second key performance metric, cash from operating activities was down 42% compared to fiscal 2008. This reflects the impact of the economic downturn on sales performance combined with our decision to increase our cost base throughout the business to position the Company for future growth. I will try to shed some light on our investment levels.

Total operating costs were 57 million in fiscal 2009, a 39% increase over the prior year. Sales and marketing was the primary area of investment, increasing 61% to 29 million from 18.1 million last year. During fiscal 2009 we expanded our team from 102 to 125 people, which accounted for 50% of the cost to increase. This has enabled us to expand our global sales capability with 16 of those people focused in the rest of world markets, 39 focused on worldwide channel, marketing and business development, and 70 focused on North American sales.

The remaining 5.4 million of cost increase relates to worldwide marketing to drive awareness and adoption, including support for our Intel antitheft collaboration, including participation at the Intel developer forums and other major worldwide events. Primary research such as with the Ponemon studies that have helped to emphasize the market need for our solutions. Industry analyst relations through which we are now close to obtaining coverage with these influential organizations. PC OEM partner marketing programs to build go to market strategies aimed at driving overall attach rates and on boarding initiatives in support of new PC OEM and global partners that we added in the year.

The other major area of investment this year was research and development, which increased 52% to 7.3 million. The result was a number of new product and feature launches combined with the complete Unicode conversion of our agent and backend technology and localization into multiple languages. This effort was required both in support of our international expansion and to enable us to build out additional features for endpoint management, theft protection and data security. We believe our embedded position, persistence and cloud computing infrastructure provides us a unique competitive advantage in the larger asset management and securities spaces.

While the return on these investments has yet to be realized, largely due to the current economy, we believe they are necessary if we are going to capitalize on our long-term growth opportunities.

From a balance sheet perspective, we have sufficient resources to support our growth plans. At June 30, 2009, our cash, cash equivalents and investments were at 68.9 million compared to 64 million at June 30, 2008. This is after the repurchase of shares during the year under our share buyback plan totaling 10.6 million where through the repurchase of 3.3 million shares.

Turning to our fiscal 2010 sales contracts and cash flow guidance, we are calling for sales contract growth and have balanced our cash flow expectations against our view of the opportunity ahead. Based on current US dollar exchange rates of $1.10 in our fiscal -- our fiscal 2010 outlook is sales contracts of $80 million to $86 million and cash from operating activities of $12 million to $15 million.

A few points I would like to highlight regarding this guidance. With 73% of our fiscal 2009 sales coming from existing commercial customers and a 2:1 return on expiring subscriptions, the annuity underpinning our SASS model is proving to be a valuable asset. In fiscal 2010 we had 661,000 subscriptions up for renewal, a 32% increase over last year, and in fiscal 2011 we already had 800,000 expiring commercial subscriptions. This provides us with good downside coverage while we invest to acquire new customers and expand this annuity globally.

At our top performing PC OEM, we are achieving attach rates of over 12% to their North American sales. We believe we can repeat this at other PC OEMs and expand it globally, and we are well down the investment path toward this goal.

Our recent international announcement about a 250,000 unit netbook customer suggests that our international expansion and new product efforts are beginning to show returns.

In closing, we view fiscal 2009 and 2010 as important years of investment and planning for strong future growth. We continue to believe that the long-term opportunity for Absolute is significant and expanding and that our computer security management solutions are a must have in an increasingly mobile world.

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

Thanks, Rob. As Rob stated, we remain excited with the outlook and believe the market opportunity for our solutions is continuing to grow. Our investment in our products, people, patents, partners, customers and geographic reach has enhanced our positioning for future growth and, we believe, our ability to increase attach rates over time. With our extensive partnership network, we have one of software industry's broadest international footprints on desktop, notebook and netbooks computers. Our solutions provide clients with a permanent tether to their devices that allows them to deploy a variety of services to track, manage and protect their digital assets, both pre-theft and post-theft scenarios. In fiscal 2010 and beyond, we will continue to leverage our footprint and our unique technology capabilities to launch new services, expand our global presence and capitalize on our growing market opportunity.

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.

Rob, can you just touch base on a couple of things? The cost of sales changes and also the change in how you account for deferred contract costs?

First of all, on the cost of sales, business as usual for the most part with the exception that in this year we have had a culmination of a number of our contracts that include guaranteed come-ups for renewal, which has given us enough historical evidence now to start adjusting for some of the excess provisions that ended up being accrued on those contracts that have now expired.

So in net, what it means is we've had a net benefit because our payout rates on one warranty have been much better than what we thought they may be. So that has been a positive for us. We recognized it in this quarter for a lot of those expired contracts. Going forward now we will be able to do that on an annual basis and clear out expired contracts as they go.

But net impact, our overall accrual rate has decreased somewhat. I think we will see the warranty as a percentage of revenue basically that gets expensed dropped down to the 7% range, which is what you actually see in the note to financial statements as well with deferred revenue there where we have got the deferred portion of the warranty tells you what the approximate cost of sales is on that line item.

And then speaking to that deferred revenue, we did adopt 3064 this year, a new handbook section, and adopted it a little early. Basically what it states is that the deferred contract costs need to be offset against the deferred revenue. So we are grouping the two together on the balance sheet and amortizing them still as we did in the past.

And, John, just a broader question, overall unit shipments are certainly up, but as per Intel and others, the traditional type laptop market is weak, and it is really the netbooks that are driving any type of growth. How do you see that relationship of more traditional type laptops to netbooks in terms of your ultimate penetration rate?

Well, where we see netbooks is in the education market, and we have gotten -- there are several instances, examples today. Obviously the 250,000 unit deal that we closed, one international deal which was a pure netbook deal for education. So netbooks and education is a good combination for Absolute, and we are seeing that in the international markets as well as in the US market. I think our services are very applicable to netbooks. The customers seem to agree with us, so overall I think it is very positive for the Company as we move forward.

And just finally, more of a macro perspective on how you're thinking about your investment. A few years ago cash flow was in the 30 million range, down to 17 million and now down to 13 million if you take the midpoint. There is a lot of investment going on, which is good. But how do you view that incremental 30-ish million of investment, and then where do you think that payoff is going to be and the timing on that? Is there a bit of a big bang coming where you will get that cash flow back, or do you think it's more of a slow and steady return on investment? And how do you view that return on all that extra money you put in sales and marketing and so forth?

Well, you know, Tom, we think the time is now for Absolute to make the investment. It is an emerging market. It is a very exciting market. We have the leadership position. We have the technology building blocks in place. And with help from our partners, we have international programs driving our global expansion.

So we have Intel with their antitheft initiative. We have our other key OEMs that are driving us to go international, and really on their backs, if you will, we are making this global investment.

So we think it's a very good time. We can see the deals. They are in the pipeline. We can see when we make the investments in EMEA and Asia Pacific and the Americas that they are going to pay off for Absolute. So we feel that over the next year, year and a half it is the right time to make these kinds of investments. And, of course, we are making it, as Rob mentioned, sales, marketing and development really are the three, as well as operations to support the new customer base internationally. And then we're bringing some new services to market, which will also be global services. So it is a very exciting time for the Company that way, and I think we are doing the right thing there.

Glenn Jamieson, Macquarie Capital.

John, just back on the idea of the investment that you're making and timeframe that we can see some returns on that. Can you give us a little bit more detail on what you think headcount will look like for sales and marketing exiting fiscal 2010? You broke it down for fiscal '09. So I'm wondering if the incremental spending that you are going to incur this year, is it all headcount driven, or will some of it also include that other category of some of the marketing initiatives that you are doing with your PC OEMs?

And then the adjunct question is, that sales and marketing infrastructure, what level of sales do you think it can ultimately support once it matures?

Well, those are great questions. I mean in terms of -- we have done a fair bit of the hiring for sales and marketing for the year. We certainly will add some additional headcount, and we have budgeted more significantly for OEM programs than we have in the past for this year. But you are right, we do have I believe a valuable asset in our sales and marketing organization. We are very unique in the sense that we have a meaningful sales and marketing organization that can take a product or a service to market and really step it through the market and gain traction quickly. We think that is tremendously valuable. There's not a lot of other organizations like that that specializes in the security area like we do that have the kind of sales organization that we have, and we believe that the value of that organization, as you touch on, increases dramatically as you bring more services to market.

So this is a sales organization that can do hundreds of millions of dollars in sales. It is a matter of continuing to grow the feature set and continue to grow the new services that are coming as well as our existing services.

And then you said that this year you are budgeting more heavily for OEM programs and supporting those, which is unique for you to be doing. Is it safe to assume that in your guidance for fiscal 2010 for cash flow that there is probably some spend that you are anticipating for programs or deals with your major PC OEM partners that we are not aware of yet but you anticipate to come down the pike here this year?

Definitely. That is a very fair comment. These are worldwide programs that do take a fair bit of support and investment, and yet you'll be hearing more about those as they roll out during the year.

Just one last question. It looks like your international or your non-US sales, let's say, were in the 3 million range for fiscal '09. When we think about fiscal 2010, would it be reasonable to think of that level getting maybe to the 5 million or 6 million range, and it would be fiscal 2011 where you would start to expect to see that number really accelerate?

Yes, I think that sounds about right. Certainly the 3 million is around the mark, and, as we mentioned, we have increased our direct sales team to 16 people now. We have added people in places like Taiwan and Japan along the way also and support with partners in Australia and Latin America and also in EMEA where we are seeing some good traction at the moment.

So definitely we would be disappointed if we did not increase to that level or beyond. And the international opportunity, just to touch on that again, we really do need to be there. When you look at the growth in the PC shipments that John highlighted in the beginning of his speech, a majority of that growth is coming outside of North American markets. So in the coming year, a lot of that investment, increased investment, will be focused at building that international business.

Scott Penner, TD Newcrest.

First of all, on the consumer business, can you talk a little bit about to the extent you can the contribution of Best Buy USA in the quarter and whether and when those end cap programs were in place?

I think the end cap program, if I'm correct, have just begun for Best Buy. I know that we just signed a check there. So I believe that is just underway. But the Best Buy program is producing results for Absolute, and we think it is the beginning there and they can do -- we can continue to do more work there. And I believe that they have just rolled out the end cap opportunity.

(multiple speakers) If you look at Q4, Q3, Q4, it really was just in ramp phase. So we should see some more meaningful contributions from Best Buy this quarter. I guess the surprise for us actually on the retail side is you're covering it there was on the Apple side where in Q4 we actually saw one of our better performances this year out of retail at Apple. So it is a matter -- some of these programs it is just a matter of being consistently there and helping educate consistently their sales reps and getting people used to it and understanding that it works. It does take a bit of time to get the run-rate going. So I think we will see the same with Best Buy over time.

And relative to the consumer business in total for the past fiscal year, do you expect that number to be higher than the 10 million range this coming year?

I mean we believe we can return consumer to growth, but we are certainly cautious on that front as we build out new programs. I mean there was still a fairly significant portion of the consumer business in fiscal 2010 with our bundled sales. Hopefully we will repeat some of those, but, as you know, there is some risk on those. So we feel getting back to the same levels as this year would be a good result. We would like to grow beyond that, but we will have to wait and see.

Okay. What else can you say about the Stealth Signal litigation that perhaps is in the MD&A? Were there any changes made at all to the claims construction report?

Scott, no, I believe the judge adopted the special message report in full after the second reading of it. But we were very pleased with the same construction. We felt that it was a fair and equitable construction based on the patents that we filed.

And what is the timing for you now filing for summary judgment? And then after that, is there any mandated timing for a ruling, or is it completely in flux there again?

No, the judge has asked us to mediate, to go through mediation process, which we are going to do, of course. So we will be going through that process and seeing if we can come to some type of resolution. And if we are unable to reach a resolution, then we would file for a summary judgment, etc. So hopefully we will be able to have a resolution during mediation.

Okay. And Rob as well, if the top line, let's say, exceeds your expectations and your guidance for the upcoming year, to what extent in your mind is that additional money going to be rolled back into investment in the business?

We will definitely want to take a chunk of it and invest in the business. I think if you look for example in fiscal 2009, when we started out the year, we had said we would like to average our headcount level at 320 people for the year. We averaged at 280. A lot of investment that we would have liked to have done we did not do, and I think the same thing has gone this year. There's obviously constraints, and we want to make sure we are achieving a balance and investing only in those things that we think are absolutely necessary. But there is the next level of very good investment that we are not doing, that we would like to do if we can exceed those numbers. So we will definitely take some and put it back into the business in this timeframe.

And just -- I don't think you mentioned exactly what the closing headcount in total was in June and then what you expect it to be next year.

It was closing at 301, and expectations for the coming year we did not say. So I mean it will vary. Last year, as you know, we were quite a ways off with hoping to average 320, and we averaged 280. But I don't have a number for you right now, Scott.

Thanos Moschopoulos, BMO Capital Markets.

On the guidance, just to be clear, what exchange rate are you using as your assumption?

$1.10.

Okay. And how should we think about I guess linearity during the year? Should we expect to see normal seasonality in Q1 relative to this quarter?

I don't see any reason why our traditional seasonality would not continue here.

Okay. And then with a gradual ramp through the year as some of these new initiatives start to produce results presumably?

Definitely. I think like last year it was a bit of an anomaly, so I don't know that you can take that much out of it. But the trough was reduced if you will in the middle quarters. Yet there certainly are a number of initiatives we are doing that hopefully will start to see benefit in the year, and depending on the level of impact, they could alter the seasonality.

Okay. And then stepping back looking at guidance, if we talk about I believe you said it was 661,000 commercial renewals or subscriptions that come up for renewal next year?

Yes.

Okay. So if we use sort of the traditional I guess the two-time ratio that you experienced this year, apply that, add in, I guess, about 10 million for consumer, add in about 5 million for international, that gets us to about the low point of guidance. Does that make sense?

That sure does.

Okay. And --

I guess the one other data point that I gave on the call that was not in the MD&A, we do have 800,000 commercial subs coming up for renewal already in fiscal 2011 as well. So just to give you a little bit further insight there.

Okay. As far as the ASPs, it looks like they were up in the quarter, but that is primarily a mix issue I would assume with less asset tracking business. Is that what that is?

Yes, I did not think they were materially off, the rates for the rest of the year. It does fluctuate somewhat on a quarterly basis, and I don't think you really draw too much conclusion off of that. So year to date wise, it has held pretty steady. It is a bit up from last year, but I don't see any major swings or changes in mix, if you will.

Okay. Now as far as the accounts receivable balance, 18% is over 90 days. Can you provide a bit of color on that? Is that something we can be concerned about?

You know, the aging on receivables we have gone through receivables with a fine-toothed comb, and you will see an increase in our allowances for bad debts as a result. We feel pretty good about that. Hopefully we won't need to use some of those allowances. I mean some were -- earlier in the year they were related to some partners that went out of business, so we will get some of those back. But who knows how much on the dollar.

But for the most part, we just wanted to take a healthy provision there to make sure that we are covered, and the 18% we are not alarmed by that. Generally if you look for example at some of our OEM programs, the sales can be tied up in receivables for quite some time. We look more to the level of receivables as a percentage of the last quarter's sales, which was back in the 70% range, 77% I think it was. And that is more towards traditional levels, and we feel comfortable overall with the receivable exposure there.

Okay. And then finally, can you provide us with an update on the McAfee relationship? I guess it is relatively new, so is it still pretty much in the ramp phase, or are you starting to see results already from that?

We are working with McAfee on a couple of different levels. We have a reseller relationship with them where they are taking us in to their reseller channel. So that is the primary focus right now, as well as supporting the McAfee ePolicy Orchestrator management console that McAfee has been quite successful with and engaging partners with. So those are the two areas that we are working with McAfee primarily.

Okay. I guess, on the consumer side, it is still sort of in ramp phase right now?

Yes, that would be correct.

Paul Steep, Scotia Capital.

So just the first one would be, in understanding the investment levels, we sort of looked at your free cash margin or your cash flow margin guidance, what is implied there. How much of it is more or less a one-time investment? And you can comment the MD&A a little bit as well on the same point, which is that you're going to have to ramp R&D spend a little bit. I'm just trying to understand how much is sort of one time versus how much is sticking around beyond 2010?

I would say that a majority of that will be sticking around. It really -- what I would say is, in this economic climate, your returns on that investment are muted. So your revenue per head that you can drive you are not going to maximize the rate. So those investments will pay for themselves and will get back down to more traditional percentages of sales contracts over time. But I think the market itself needs to heal. In the meantime we really want to stay focused on getting the global infrastructure in place so we can focus on selling as the market heals, rather than worrying about infrastructure at the same time.

The second one just for John, and that will be it, on the education side, what is the market like in August? I know you don't want to comment too far forward, but given where it is at in PCs and how has the response been to date?

Well, last quarter we had a very, very positive education quarter, and I would not expect that to change for this Q1.

Yes, I think if you -- just to shed a little bit more light on that. The education quarter -- from Q3 to Q4, education was up 53%, and it had already started coming on in Q3 in the back half of the year. With Q1 last year where the sudden hit of the declining of the stimulus package I think is what really did it, on 29 September where a bunch of our education businesses went on hold. So I think we have seen a bit of that start to come back. As John mentioned earlier, a lot of them are looking at these netbooks, which has been great for us. We have been able to get engaged in those conversations and get some of those deals done. So education continues to be strong.

Pardeep Sangha, PI Financial.

A lot of my questions have been answered, so I've got just a couple here. The attached rates, you mentioned that with one of your OEMs, you are at 12%, whereas in general you are at 4% for North America. Can you just highlight a little bit, is this just general awareness, or what exactly are you doing in that one specific OEM that you are trying to increase attach rates across other OEMs as well? How do you duplicate that success across -- how do you see --?

It is overall awareness. That is a big factor that we are fighting against. This is a new category, and it obviously take time to continue to [evangelize] the space. We are very excited about Intel's participation in that, and we think that Intel will do a lot to really put antitheft on the map.

In terms of the OEMs, really the attach rate increase is all about very specific programs inside the verticals that the OEMs serve. So there's healthcare program opportunities, there is education, K-12 opportunities or high ed opportunities. There's corporate opportunities. So each of those verticals requires a fairly focused campaign with a number of the OEMs into the different markets that they serve. So obviously there's opportunities in America. There's opportunities in EMEA. There's opportunities in Asia Pacific. So there is no silver bullet. It is market by market, segment by segment, which is the focus.

I might add to that that the programs that we implemented during fiscal '09 and some of those will hit in 2010 as well with the second largest OEM that we have or performance-wise for us, resulted in a 26% growth year on year for sales to that particular partner, and I think that is just the beginning of it. There is no reason why they cannot be the same size as our premier partner, if you will. But even the one that had a 12% attach rate now with the programs we have been doing, they have also grown year on year.

So I think that our goal really is to try and get all the other OEMs to 12% or better. But the thing is that it takes -- each of them are a little different. So if you go to a Lenovo or an HP as an example, very reseller-centric in addition to some direct sales support, whereas Dell is more a direct model. So I think that those nuances also change your tact and strategy, and it takes time to learn those and get the right programs.

And then, of course, those nuances change depending on what global market you are going into as well.

Okay. Another question on the competition. Now that you are going heads up in terms of global strategy and really spending a lot of money there, what are you seeing in terms of global competition? Who are you seeing out there in terms of being out there in other geographic regions of the world?

Well, as we all know, this is a fairly unique business, theft management business. We are not really seeing a lot of competition out there internationally or domestically at this point in time. So that would be your answer.

Okay. Final question here. If you can just give me a bit more feeling for 2010, different segments in terms of where you are seeing potential growth opportunities in your different segments of the business such as in corporate, healthcare, government? You already commented on education. Would you just comment on the other three segments in terms of what you see for 2010 in those three segments?

You know, the verticals, all of them have potential for growth, and it really depends on how they respond in the current economic climate. So certainly I would not be surprised if all of them grew. But likely in this climate you don't get all of them growing, and it is hard to pick which one will or won't grow.

I mean some of the ones like government and healthcare are obviously smaller verticals for us. So a few major deals can swing those considerably. So I would not really just keep it to one vertical. I think our comments there are to say each of them had some different nuances to them this year and that they all have an opportunity for growth I think is probably the takeaway there.

(Operator Instructions). Dushan Batrovic, Canaccord Adams.

Just back to the guidance, I'm still trying to reconcile the difference in the growth projections top line versus bottom line. And I guess they are implying basically a roughly 15% topline growth. Given the investments that are being spent, I guess I am trying to understand how much -- why is it that we are not seeing more of that bottom-line investment translate into some topline growth, and how conservative are you being with the guidance? What type of assumptions are you making as far as general economic backdrop? If we do start to see improvements in the economy, how much of a swing factor could that represent?

I would say that relative to the economy I think we feel like it has at least for us stabilized a bit, but it certainly has not bounced back, if you will. There's lots of headwinds continuing out there. We are making sure that we are cognizant of that. I think you have also got a possible foreign exchange headwind. It is at $1.10 as we mentioned around there currently. Closed the year at June 30 at $1.16. So you got a 6% or 5% headwind there.

So we will wait and see if those things turn around. I mean we may surprise ourselves, as John mentioned. The infrastructure we built can support more sales and can generate more sales. But in this climate, again, your investments get muted a bit. So we are taking those things into consideration and offsetting those against the programs we have in play, plus that annuity opportunity, if you will, from the existing commercial customers.

On the cash side, is the intent to basically see your cash balance grow throughout the year, or are you going to offset any of that growth, potential other share buybacks or small acquisitions or any other investments? I guess how comfortable are you with roughly the run-rate of your cash balance right now?

I think we are comfortable with it, and we always like to see the cash balance grow.

Certainly at the level we are at now, we do have access cash if we wanted to put it to work. Then we showed that in fiscal 2009 when we spent 10.6 million on share buybacks. There is some more to go on that buyback program should we exercise it. But other than that, certainly watching for acquisitions is always interesting, but I would not say we are on a search or a hunt to go dip into that 68 million, if you will.

Rob Owens, Pacific Crest Securities.

A couple of things. On the cost of goods side, was there something unique in the quarter?

Yes, in the quarter we took the benefit of excess warranty provision on expired contracts. And so what that did is, in Q4 that drove up the gross margin to 91%, and for the year it drove up the margin to 78%. (multiple speakers). Had that adjustment not been done, gross margins would have been 75% and 74% respectively for the quarter and year. So it is still up from the prior year, which is what you would expect as revenue increases. But not quite as much up as we are showing in the statements if you took them at face value, if you will.

Great. And then on the G&A front, what should we think about for a normalized level going forward given the spike here in Q4?

I would say minus 1 million and then a slight increase off of that. And the minus 1 million is the increased bad debt provision.

Okay. Great. Looking at your total subscriber count, it has been flat here for about three quarters. Given your economic crystal ball, when do you expect that to recover, especially given your sales contract guidance for the year?

Well, you know, the subscriber count being flat is largely due to the consumer segment, and really that is a function of reduced bundled sales in the year. So we are seeing a higher ASP, but we are seeing fewer units. So I think we've got a bit more to go through there. I mean I would expect to see it increase this year. We do have, what, Jim, 1.1 million I think it is subs coming up for renewal in the year. And we're selling about -- this year we did 1.9 million subs in gross sales approximately. So 1.2 inspiring next year. So we will see it increase next year certainly.

Okay, great. And then last question, given some of the strength we have seen throughout the down turn in areas like DLP and encryption, why do you think your value proposition is different such that you are more tied to the PC cycle rather than the protection of data?

Well, we have just built our whole infrastructure based on new unit sales really. The fact that we are sold through the OEMs that were included in part of the build has been -- is a blessing when new units are rolling out off the line and growing, and if things are a little bit slower, obviously you feel a little bit of that pain. But we have just always been sold with the unit and that part of the function of how we are distributed and how we are built into the sale.

Gabriel Leung, Paradigm Capital.

Just one quick housekeeping question. Rob, what is the tax rate assumption underlying your 2010 cash flow guidance?

Well, overall we are expecting up to $2 million of tax to be paid in the year. That is the total potential liability. And, as a rate, it is -- obviously the tax rate is around 36% average between Canada and the US. But it is -- we are not -- we are taxed on a portion of our deferred revenue, so it is not like you used to apply a tax rate. So I will give you the gross figures. So around up to 2 million is our estimate of what the cost for liability could be in 2010 from a cash perspective.

Great. Sorry, just one last thing. You had said the Q4 gross margins would have been around 74% ex the accrued warranty change?

75% on the quarter and 74% on the year.

Mr. Livingston, we have no further questions at this time. Please continue.

Thank you, operator. Well, everybody, once again, thanks for taking the time to participate in today's call, and we look forward to updating you in coming quarters. Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect your lines.