Absolute Software Corp (ABST) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Absolute Software Corporation second quarter 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 the future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in those forward-looking statements. For more information on the Company's risks and uncertainties relating to these forward-looking statements, please refer to the section of its annual MD&A. (Operator instructions). I would like to remind everyone that this conference call is being recorded today, Monday, February 1, 2010, at 5 PM Eastern Standard Time. I would now like to turn the conference over to Mr. John Livingston, Chairman and Chief Executive Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thanks for joining us to discuss our second-quarter fiscal 2010 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'll 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 up the call for your questions.

Q2 strategic overview -- as you know, we have been investing in our sales and marketing and research and development capabilities over the last few years. While the return on this investment has been slowed by the economic conditions over the past two years, it has enabled us to generate positive momentum and constant currency sales growth. In December 2009 laptop shipments grew 22% worldwide, driven by consumer demand, but commercial spending remained weak. Looking forward, we believe there will be an increase in commercial computer refresh cycles worldwide and an increase in US education stimulus dollars spending in calendar 2010, both of which will create opportunities for Absolute.

As a result, we believe we have now reached a turning point in both the market and in our business that will enable us to realize the potential of investment strategies which include, first, acquiring LANrev to expand and diversify our product portfolio, continuing and expanding our many sales, marketing and promotional programs with our computer manufacturer partners, offering our wireless real-time data delete log and location capability with industry leaders such as Intel and QUALCOMM, expanding our team infrastructure and global capacity for mid- and long-term growth and growing our customer base to 5 million subscribers, which in turn has created a significant renewal opportunity for the coming year.

Q2 results overview -- sales contracts for Q2 were CAD16.1 million, down 3% compared to CAD16.5 million in Q2 last year, but in constant dollars they were up by 12%. Cash from operations was CAD1.6 million for the second quarter, down from CAD3.1 million in the second quarter last year, reflecting our investment strategy and the impact of the foreign exchange losses from the declining US dollar. Our contracted subscriber base increased to 5 million from 4.3 million subscribers at September 30, 2009.

We continued to work toward our fiscal 2010 guidance, but it is important to point out when we set the guidance we stated that it was based on an average US dollar exchange rate of CAD1.10. Given the continued devaluation of the US dollar, we are adjusting our guidance assuming an average exchange rate of CAD1.05. At this exchange rate the guidance translates to sales contracts at a range between CAD76 million and CAD82 million and cash from operating activities at a range of CAD8 million to CAD11 million.

Given that commercial spending has yet to pick up, we are more likely to be at the lower end of this guidance range. However, the lower end of the range still reflects a constant currency increase in sales contracts of over 17% compared to last year.

LANrev acquisition update -- a key achievement in the quarter was the acquisition of LANrev computer lifecycle management product suite, which is now branded Absolute Manage. We had been looking to acquire a business that had strong technology but needed sales, marketing and distribution capabilities. LANrev fit our criteria perfectly and extends our current asset tracking capability into a more fully featured computer lifecycle and product management portfolio.

With new capabilities such as software distribution, automated patching, peer imaging, power management, software metering and configuration management combined with our robust best practice computer tracking, this gives Absolute a unique platform among the leading IT asset management and endpoint security vendors. We are very excited by the early signs of success of Absolute Manage. In the first month we generated sales that exceeded our expectations, and that includes several sales into our existing customer base. The integration is going very well and ahead of schedule. We believe this success is just the beginning and that we'll be able to fully realize on the many synergies.

These include the benefits of having greater resources and a larger distribution network to facilitate broader marketing and sales of LANrev; the natural cross-sell opportunities for asset management within the asset security space as the markets continue to converge; the competitive advantages of our persistent firmware technology and LANrev's best-of-breed cross-platform capability on both Mac and PC; increasing the leverage in our sales infrastructure and gaining pricing advantage that we can pass on to customers at the same time as we are increasing our ASPs.

At this time I'll turn it over to Rob to walk us through the financials.

As we head into the second half of fiscal 2010 we are encouraged by a number of favorable trends in our performance and the market in general. Sales contracts for the year to date were up 2% but down 3% in Q2 compared to last year. This is due to US dollar exchange rates as the dollar dropped from CAD1.21 in Q2 last year to CAD1.05 in Q2 this year. In constant currency year-to-date sales were up 6% and Q2 sales were up 12%, so the sales growth is trending higher despite the continued economic headwinds in the commercial market. Existing commercial customer sales continue to be the key driver of this performance, generating 67% of Q2 sales and 71% of year-to-date sales and growing 11% in Q2 and 15% year-to-date over last year in constant currency.

At the same time, our expiring subscription ratio has turned from a low of 1.4 in Q4 2009 to 1.7 in Q2 2010. As the commercial customer computer refresh cycle resumes, we expect to see this ratio trend back towards our traditional levels of 2-plus.

In the second half of fiscal 2010, we have 345,000 expiring subscriptions, up from 16% from the first half of the year. This aligns with the lower end of our guidance range and implies a 15% increase in second-half sales. We are optimistic that this ratio will continue to improve in 2011, where we already have 902,000 expiring commercial subscriptions, up 36% from fiscal 2010.

We believe this has us well positioned to accelerate growth in fiscal 2011. In addition, we have the potential to increase our average selling price on these sales, as we expect many of these customers will add Absolute Manage to their future purchases.

Cash from operating activities was CAD1.6 million in Q2 compared to CAD3.1 million last year, and for the year-to-date was CAD5.9 million compared to CAD12.2 million last year. The reduction reflects the impact of the economic downturn on sales performance combined with our continued investment in the business. It also reflects the weakened US dollar, which has resulted in a CAD1.9 million foreign exchange loss, largely due to losses on opening balances. Conversely, fiscal 2009 benefited from the foreign exchange gains.

This also explains why our currency-adjusted cash flow guidance reduced dollar for dollar with the sales contracts' adjustment. Further, while we don't provide quarterly guidance due to working capital timing differences, cash flow in Q3 will likely be around breakeven, plus or minus, before rebounding in Q4.

Total operating costs excluding stock-based compensation were CAD16.7 million in the second quarter of 2010, a 22% increase over the prior year, and were CAD32.4 million year-to-date or 16% higher than last year. We have continued our efforts to strategically build out global sales and marketing and research and development capability. However, we have slowed the rate of increase in our operating expenses compared to the 50%-plus rates of increase we did in fiscal 2008 and fiscal 2009.

While the returns on these investments have been slowed in this economy, we believe that they have positioned us well for accelerated sales growth in the future. As a result of the increased expenditure levels combined with the exchange impact and seasonality in Q2, our total operating expenses in Q2 were 104% of sales contracts and were 92% year-to-date. We expect this to be a seasonal high for this ratio as sales growth is expected to pick up in the second half of fiscal 2010.

From a balance sheet perspective we have sufficient resources to support our growth plans. At December 31, 2009, our cash, cash equivalents and investments were at CAD65 million compared to CAD73.9 million at September 30, 2009, and CAD68.9 million at June 30, 2009. The sequential decline primarily reflects the CAD10.3 million in cash that we used in the acquisition of LANrev.

In closing, with the acquisition of LANrev, upcoming computer refresh cycle and investment in the business beginning to pay dividends, we remain excited about the long-term growth opportunities for the business. At this point I'll turn it back over to you, John.

Thanks, Rob. To summarize, we are making significant investments to best service the endpoint security and asset management market and it's a challenging environment for IT professionals. Mobility is up with over 50% of computers now being mobile. Data breaches are up, data privacy regulations are increasing and budgets are tight. Managing, securing and supporting mobile devices is a constant effort, and we believe Absolute is very well positioned to serve and win in this growing market.

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

(Operator instructions) Tom Liston, Versant Partners.

Just a broad question on the guidance and then maybe if we could frame it in just calendar 2010 in general. Can you give us some expectations around a few different items? Certainly, international expansion with, I think it's 14 languages now you support. Lenovo has been running for a little bit here with their branded product. Intel Anti-Theft I think is this Thursday or Friday, they launched 2.0. And just another piece around the corporate upgrade cycle and what you're seeing. Are you seeing the start of that as people not only have longer assets, aged assets, but also Windows 7? Can you give us, on all those five broad topics, a little bit of when you see the timing and if there's any early evidence of recovery?

Sure. So, Tom, all of those pieces are starting to take effect, but I think we're seeing the beginning. So Windows 7 -- obviously, Microsoft came out very, very recently and said it's a slow uptake in the commercial market. But obviously, consumer is going well. But it's not so much a case of if people are going to upgrade. Of course, people are going to upgrade to Windows 7, and you've got a lot of older computers out there now, people who have been delaying refreshing and delaying refreshing. And you can't delay it forever.

So we think very shortly that we are going to see a significant uptick in new commercial computers sold. But we haven't seen it -- we're still waiting for it, but I think it's just coming now.

Intel Anti-Theft -- we are working hard with Intel to take out Intel's Anti-Theft program out through our OEM customer base, and that is proceeding well. I think Intel has done a fair bit of marketing, but I don't think we've seen the full impact of their marketing materials yet. Capella has really only just launched, so we're going to get into a lot more marketing with Intel during the calendar year, which is exciting.

On the international front, we've been in Europe now for a couple of years, as you know. We've just hired a managing director for EMEA, a gentleman who has a lot of experience in the European market, and he is really going to help push the sales effort there.

Rob, did you have a comment on Lenovo?

Yes. On Lenovo, actually we have seen some improvement there. They're actually up 52% in constant dollars over Q2 last year and year-to-date up 22%. So, certainly, that partnership is coming along nicely and we'd expect to see that continue.

And in the MD&A I believe your goal is 12%. Is there a rough time line for that to happen?

Well, certainly we figured we were around the 4% mark heading into this. So being up 52% in the quarter certainly puts a big dent in there as well. I think they might have been losing a little bit of market share, so I'd say we're up better than just the percentage growth implies.

A bit of a broad question, but obviously netbooks were one of the key drivers for the increase in shipments, especially in Q4. You have some success there. But just overall, as your pricing strategy, you started to tier it some. You've obviously added QUALCOMM, which adds some more real-time protection, which maybe enhances the value proposition. How are you going to start slicing those product offerings along with the LANrev acquisition to hit some of those key target markets?

We've already done a fair bit of that. We do have a specific netbook offering, primarily for education. And that's been quite successful for us. You know about the New South Wales opportunity in Australia. And also we've got a few other ones that we're doing here in the US and some other international markets. So that's going well for us. And then the Absolute Manage product is another add-on. You can buy it modular or you can buy it as a stand-alone product and service, and that should also add -- that adds to our capability.

So I think when you think about Absolute as a company, we've really added a whole new pillar to our opportunity, if you will. We've added this whole lifecycle management capability, this patching capability, imaging capability, software distribution capability. So this really puts us in a much broader playing field. So I think when you look at this quarter, it was a real transitional quarter for the Company as we've really grown our footprint as an organization. So we're not only an anti-theft company, which is an important, and I believe will be growing market, but now we're also a PC lifecycle management Company. So we have a much broader footprint, a much broader offering. And we think it's quite synergistic as we move forward.

Scott Penner, TD Newcrest.

Rob, just first, can you describe any of the impact of LANrev, both sales contracts and cash flow for the quarter, and what the embedded effect is on the guidance?

Well, certainly it was a cash drain on the quarter as the sales that we did get in the month of December we won't collect on those until this quarter. In terms of embedded in the guidance, indeed, we expect to drive additional sales out of that segment. But of course, on the flip side, there's additional investment from hiring the people. So we've kind of, overall, not overly material on the overall business. So we've just blended it all in as one. We really haven't chopped it out separately in that way, Scott.

And the sales in December were not significant?

Well, they are not significant in terms of the threshold for reporting them. Indeed, we're not going to be reporting them as a separate segment, if you will. But they were -- from our perspective, it certainly has the opportunity to be a large segment of the business. Our asset tracking on its own is generally around 5% of the business, and we expect this to overtake that as well. So over time, it will be. But right now it's not a material component.

I think it's still early to tell exactly what the impact is going to be. But we do see very positive signs, and we have about a third of our existing customer base looking at LANrev already, or Absolute Manage. So we've got a very significant piece of our existing customer base looking at LANrev. And it's also bringing us into discussion with new customers.

So it's just the beginning. We've only had the product for 60 days. And we did do a pretty good job in December and the LANrev guys have a decent quarter to go off and chase after for this current quarter that we are in, and I believe that over time it's going to be a very significant piece of the overall equation for Absolute.

Rob, you mentioned during your comments -- you glossed over the FX loss versus the gain and mentioned something about dollar for dollar in the guidance. Can you repeat what you were saying?

Yes. Obviously, you will note that in adjusting for FX we brought both sales and cash flow down by the exact same dollar amount, right, CAD4 million each?

Right.

And the reason for that is that, while we do have a savings, if you will, because half of our expenses are denominated in US dollars, which should reduce the amount the cash flow comes down versus sales, we have to also take into account the effect of any opening cash balances denominated in US dollars that would have been valued at -- opening balance is valued at CAD1.16, and now we are converting them at CAD1.05. So that hit which shows up basically as a CAD1.9 million loss on the P&L, is absorbed in the cash flow.

Okay, well, that's fine. Next question is just on the existing customer base renewals, the ASP, at least on the reported numbers, seems to go from between 53 and 54 sequentially, down to about -- to just over 42. I understand a big part of that is currency, but it does seem like a pretty big drop.

Yes, the Q2 FX rate went from CAD1.21 last year to CAD1.05 this year, so that's what you're seeing. In reality, on US terms, the ASP is actually flat on that existing commercial customer business. So that was one of the things, actually, that we do see as a positive, that the ratio is starting to turn around and the ASP has remained steady, which we believe indicates that we should have the ability to try and increase those ASPs as customers, with our existing customers, start adopting LANrev or Absolute Manage in their next round of purchases.

What exactly gave rise, or what changed to give rise to the big increase in the bundled units that you mentioned in the MD&A?

Well, we're doing a promotion with Dell, Scott, as you know. And they had a very successful holiday season, and we were a part of that.

And where are you as far as taking the sales team that you mentioned, the number of sales teams that you talked about last quarter, from 22 to 26? Are you all the way there?

We're taking them to 24. But we do have the 24 teams. Some of them have newer people in place, so they're certainly not operating at full capacity as yet, as they are ramping still. But we do have the 24 teams in place and mapped out.

We just came back from the national -- our national sales meeting, Scott, and I think that the sales organization is really starting to fire on all cylinders, so that's exciting for us. We do have some new -- we had some turnover last quarter. We've filled most of those spots. So we've got pretty much everybody up and running and trained and producing. So we're just starting to see things come back a little bit now. And as we mentioned, the Absolute Manage addition is really expanding our sets of conversations with existing and new customers. So I think good things are happening in terms of the sales team, the sales infrastructure that we have in place both here in North America and also in Europe.

And just lastly for me on the consumer business, it does look like another sequential uptick in the quarter. Where is, I guess, some of the larger initiatives within there, something like Best Buy in the US? When do you expect that to be running at its normal annualized rates, and what are some of the dynamics within there that could see things trending positively?

Well, we still haven't got Best Buy running at its maximum potential, but we have been making some good progress there. I know there's another couple of initiatives underway with some promotions that we are doing there with Best Buy and working with them to get included in some of their warranty programs. So those are ongoing.

I would say that retail -- certainly, it will take longer than a year, and you would expect it to. Apple certainly took longer than a year to get really heading towards more 5% plus attach rates. And Best Buy is coming along; it's where we would expect it to be, and our retail sales were actually up significantly over Q2 last year as well, somewhere around 60% up sort of range. So we are seeing good things happen there, but it will take some time before that's running on full cylinders. Certainly on path, and so hopefully for back to school we'll see it there.

Glenn Jamieson, Macquarie Financial.

You had mentioned that you have maybe one third of your existing customer base looking at your new Absolute Manage product. Do you have a feel for what the selling cycle of that particular service might be? And what I'm wondering is, if your existing service in the commercial market, you had the greatest pull-through on the purchase of a new device, is that LANrev product something similar to that? Or do you envision customers buying that product outside of a repurchase cycle?

That's a great point. The LANrev Absolute Manage product also applies, as you know, to desktops and to existing installed base. So, as you point out, it's not necessarily like our current business, where we go after the design wins for new devices coming into the organization. The Absolute Manage product allows us to go after existing devices, and not only notebook computers but desktops as well.

I think that there's a lot of customers right now with Windows 7 coming along that are trying to assess the type of software environments that they have, the number of devices that they have, which devices are ready for upgrades, which devices need to be replaced. All those issues are coming to a head with Windows 7 coming into play here. So we're finding that a lot of folks are looking at their asset management or PC lifecycle management functionality that they currently have, and they're looking at how they're going to get the right products in there to be able to get what they need done, done, before they go ahead and acquire the Windows 7.

So that's where we're at. We've got a lot of people in that pipeline. It's a sales cycle between six to 12 months and I'm going to pass it over to Rob, who had a comment.

Yes. That sales cycle -- a lot of large deals might be six or 12 months, but a lot of these are going to happen extremely quickly. And we've seen ones turn around in a week. And as we've mentioned in the MD&A in the first month of operations, surprisingly, we actually did do some sales into existing customers that were nowhere on anybody's forecast prior to us acquiring Absolute Manage. So I think that it really depends on the circumstances.

And unlike our anti-theft space, a lot of these customers already have an asset management system in place that isn't doing the job, especially since they decided to take on Macs or whatever. So you don't have to go educate them on why they need the solution. They are already looking for it, and we can come in and get something done really quickly, especially if they are an existing customer. So I think you will see some fast things happening.

The nice thing about the Absolute Manage product is we really do have a distinct advantage in terms of managing Macs. I think it's the best product out there for managing Macs. And anyone who's got -- a lot of our education customers that have Mac and PC populations, they are woefully underserved on the Mac side. So they're really looking -- we have a solution that people are really looking for. And the fact that you can manage it from a Mac, you can manage both your Macs and your PCs, that appeals to the Mac users. And it's a very nice product, so we are very pleased to be a part of it.

Just to follow up there, is your customers' ability in some cases to make a quick purchase decision tied to your ability to actually roll out that service very quickly because it's tied to infrastructure that you would already be running for that customer?

Well, it is actually capable of being rolled out extremely fast because of how it's architected itself. So, like Absolute, a customer can get almost instant ROI because, as soon as they adopt the solution, it starts calling our monitoring center, and they can do all the reporting and everything immediately. The LANrev solution is slightly different. It does have a tie-in or we've made a tie-in with our system in our persistent, so there is some of that. But also, on its own, it actually is on SQL Light, so there's no servers to buy, server licenses, SQL Light licenses, SQL license, etc., for a customer to buy and roll out. So it's extremely quick to roll out as well. That was one of the criteria that we looked at when we acquired it. And we've seen them do significant rollouts in a matter of a week.

Just a couple more questions. John, I'm wondering if you can just contrast the environment that you are seeing now subsequent to quarter end in the commercial market, particularly in the US, with what you saw, say, back in October or November?

As we said, we're definitely seeing interest pick up and a lot of that has to do with the fact that Intel just released Capella, so people are looking at Capella and the new capability that that brings. People are obviously -- obviously, Windows 7 is here. And it's time for folks to upgrade from XP to Windows 7. So I think it's just starting to be a more bullish environment for folks that are in our space. But we're hesitant to hit that drum too hard because we know sometimes these things do take a little bit longer to actually come to fruition. But it feels good, and we're getting -- there's an awful lot of things in the pipeline. And we are getting a lot of inquiries and I think just generally the fact that we have the Absolute Manage service now, along with all the great stuff that we do on the anti-theft and remote mobile data protection side -- really, we are seen as a bigger player today. And that's helping us generally in a lot of the conversations that we are having in the commercial space, both corporately and in the education space.

Can I ask just one last question?

Sure.

In terms of the guidance, Rob, you went into more detail on the FX impact. And when I saw that dollar-for-dollar adjustment down, the other thing I was wondering about was your plans in terms of investment dollars spent in fiscal '10. You had a pretty aggressive plan laid out. Does that change in guidance infer any change to your spending plans, or are those consistent with what you laid out earlier this year?

I think, if anything, we've held back from what we laid out earlier in the year. And of course, we continued to do that. We really wanted to make sure that we stayed within the guidance that we issued earlier in the year. And minus FX, we are. So that is exactly the intent, to make sure we right-size those investments in order to meet those objectives.

Thanos Moschopoulos, BMO Capital.

Rob, you mentioned that cash flow for Q3 would be at about breakeven. Can you just provide some color as to why that would be the case?

Yes. It's largely to do with timing differences. If you look at, actually, Q2, we did close with receivables down once again, but payables were up. So, as those things, both of them are going the wrong direction for Q3, if you will. So very likely, with respect to those timing differences, they will net out to zero or thereabouts for cash flow. However, sales contracts we are expecting to kick around and pick up here. So I think you will see the delta between sales contracts and operating costs grow in the favor of sales contracts will exceed operating expenses by a fair bit in Q3.

So I guess, as opposed to prior years, where we had Q3 sales contracts roughly flat from Q2, we should see a pickup just given that you have channel issue that's ramping, given the improving environment? I guess that's the case?

Yes, and Absolute Manage as well.

Right, right. You gave us an update on Lenovo and Dell. Any update on HP and how the rollout of the Care Pack ProtectTools is going?

HP continues to grow and do well. It's up 20% in Q2 and 57% year-to-date. So they weren't quite as strong in Q2, but indeed -- as they were in Q1. But indeed, they are still growing. And those initiatives continue to roll out phase still, but continuing to produce.

And any color as to the various verticals -- government, health care and education? Any particular strength in any of those this quarter?

Education continues to be real strong. It's up 52% in the quarter and 45% year-to-date. And that's in advance of the stimulus spending that we expect to be released here in early 2010. So that's a fantastic trend. (inaudible) we saw our corporate sales increase 7% in Q2, which was nice, given they are overall 13% down for the year. So hopefully we are seeing the start of a rebound in some of the corporate spending. The smaller government and health care buckets for us are roughly flat for the year to date, but continue to hold a lot of opportunity. They are a small part of the business, obviously. But that would be as granular, I guess, as you need for the vertical there.

With Phoenix looking to dispose of their FailSafe product, has that helped you guys as far as maybe opening the door to speaking to some of their partners, given the uncertain outlook for that offering?

I think we're always talking to the majority of the OEMs on a regular basis. So I wouldn't say that that's changed anything dramatically. It's just business as usual for Absolute.

Rob, going back to your comments about the renewal ratio likely to trend up in the second half, any specific visibility that would make you assume that, or is that just based on, again, an improving environment and the start of the refresh cycle?

Yes. It's based on the current trend that we've been able to increase each quarter here since the low in Q4 of last year. And it is on the expectation that we will see an increase in the refresh cycles. As John mentioned, there has been some of that already. The question is how much and when will it really accelerate. But we have seen some so far. So yes, it is on those two assumptions. One is the efforts that we've been doing have increased it in advance of the market improving. And two is the refresh cycles really are expected to start coming very soon.

Robert Breza, RBC Capital.

John, I just wanted to go back to one of your comments you made about the sales force turnover. Was most of that voluntary or involuntary, or how do you look at that? And then I think you (technical difficulty) the vertical space. As you are putting in some of the newer sales teams, can you talk about maybe specialized focused areas, whether that's education, government, etc.? That would be helpful.

Those are great questions. Most of that was not voluntary on the salespersons' behalf, so we've made a number of cuts to the team and rehires. So we're actually going after a slightly better-caliber salesperson in the field. So we're spending a little bit more than we were in the past, and aiming our sights a little bit higher in terms of the quality of a person that we can get in the field. So that's what we're doing there.

In terms of the verticals, we have a federal team that's unique that is vertical -- has a vertical focus. And we are actually bringing in -- we have a specialist in the education area that runs the programs for our education market. We're actually hiring a specialist for state and local and health care as well. So that will be a hire that we conduct this quarter. And we're also going to bring in someone who does nothing but focus on corporate sales.

So we are starting to dive a little bit deeper into special verticals, and we're also naming accounts in regions so we'll have a list of named accounts for each of our 23 territories, and do it that way. So all of those things are helping to uncover opportunities for our sales organization and we are pleased with how things are starting to shape up here. I know it's taken a while, but things are starting to shape up here.

Blair Abernethy, Thomas Weisel Partners.

A couple things. John, I wonder if you can expand a bit on what you are seeing coming on the stimulus spending front and whether it's just in the education market for you, or where do you see the opportunities?

From primarily education and then health care. So, as Rob said, most of the education organizations are just receiving their funds now or have not received them yet. And some of them are obviously being very selective in what they spend the funds on. So some of our organizations are hanging on to the funds because they've had some difficulties with state funding, etc. But we think it's going to have a very positive impact for us, particularly in Q4. As you know, our Q4 and our fiscal Q1 are our two education quarters. So that's when we'll see, I think, some of the impact of those monies.

And then the other area is in health care. Our health care business has been steadily increasing, and we are hiring someone to focus specifically and generate programs for health care and state and local government. So I think we'll be able to access some of those funds over time as well.

Moving back to an earlier question, you gave us a status update on Best Buy. Can you walk through some of the other retail-facing partners and also CDW?

Sure. CDW is a great partner. We've done pretty good business with CDW every quarter, and that continues to grow. In fact, we're looking a little bit more closely -- much more closely on creating a very targeted VAR program with folks like CDW being targeted, and some of those -- really, the top 15 best VARs out there that serve HP and Lenovo, as an example, and some of the other OEMs that use the channel. So CDW has been good for us, and we want to expand that type of program.

And then in the retail side, the LoJack for Laptops offering is moving forward, and we are still weaning ourself off of, of course, that one contract that we had a couple years ago with Dell. And now we've really had to diversify our business there away from that contract. And so, Rob, I don't know if you've got any other insight into some of the retail programs at Apple or Best Buy.

Yes. Of course, CDW is not retail; right. That's all the commercial side of the house. And the main ones that we've got going with Apple stores have been fantastic for us. We've really seen a good uptick there. The Best Buy is coming along. We've launched with OfficeMax as well, and we've got Future Shop and a little bit here in Costco, a little bit there in Wal-Mart, that sort of thing, but nothing major. The big ones are really Apple and Best Buy. And also along the lines of that consumer front, we've seen online sales increasing nicely as well year on year. A lot of that has to do with our renewal opportunity. We had 532,000 subscriptions up for renewal in the year. And that has translated to growth in our online business. Plus we've -- of course, now, with the increase in bundled units and things we've had, we actually have about a 1.3 million subscription renewal base coming for consumer next year already. So that should continue to prime the pump for nice growth in online next year.

We're also excited to announce the Intel bundle, bundling Intel Anti-Theft with LoJack for Laptops a couple of weeks ago. And we think that will have positive implications for us in the distribution channel and in the retail environment.

Pardeep Sangha, PI Financial.

In terms of headcount, what is your total headcount now? And what are you expecting in terms of adding bodies, looking forward a few quarters out?

Our total headcount right now is around 342. And we are really trying to hold steady at that number. There will be a couple of -- a few adds. But we are really holding steady in terms of the employee headcount right now. Rob, did you have any other comment on that? No.

And sorry; I missed your other question.

I haven't asked it yet.

Okay. That's probably why.

So I can appreciate that you have been increasing your expenses to do some of the other activity you've been doing with the global expansion and things of that nature. So with your headcount holding steady now, are you implying that your expenses are going to be holding steady here for the next little while?

Yes, for the next two quarters we would expect them to be at similar levels. There will be some slight increase for an odd add here and there, as John mentioned, but certainly not to the extent that we've seen increases in the past quarters, even between Q2 and Q1.

Any update on legal or litigation kind of update?

No. There's nothing really new there. We did do our mediation in San Francisco, I think, in November of last year. And we are still -- we're just waiting for the Houston court to hear our motion for summary judgment regarding the Stealth Signal XTool case that we're litigating. And there's no new litigation. We have three litigation exercises, and that's where we're at right now.

I was wondering if you could tell me anything about wireless carriers and partnerships and opportunity and that side of it and what you might be doing there?

Sure. There's some very exciting things happening there. We're working with QUALCOMM, as you know, and some other wireless vendors. And we hope to be able to give you a deeper update on that fairly soon. But I would say that just generally we are much closer to be able to deliver a real-time service. We have the technical capability; now it's the formal marketing and sales programs through the carriers that go along to support the wireless chipsets like QUALCOMM's Gobi chipset. So we are very, very close to being able to launch something on that level, and I think that will be exciting for everybody.

Something like that would be basically sold through the carriers?

Correct, sold through the carriers or enabled through the carriers.

Richard Tse, National Bank.

Just a quick one here. You obviously have a lot of sales guys in the field. I just want to get a sense here, what are the obstacles that they are coming against when they are making the pitch here? Is it -- obviously, you talked about the refresh cycle. So when they are out in the field, what are they giving back to you in terms of timing? Is this something that they expect to see come through in the pipeline in Q2, Q3, Q4, like -- I just want to get a sense of where that stands today.

Sure. A big challenge for us was in the corporate vertical, where we're up against encryption. So when our sales folks are going into a large account or talking to the CIO about data privacy regulations and governance, the quick answer for a CIO is, well, my data is protected because I use encryption.

Well, we know for a fact that that's part of the solution. Encryption is a very important piece of the puzzle, but that it's not the entire solution because about 50% of the time that encryption is not working, not rolled out properly, or the internal -- the person that's stealing the computer is internal to the organization, they know the password. So actually, they've got all the data.

But you need a CIO that's really willing to be -- and to be thinking real-world outcomes. And when we have those types of CIOs that are thinking outside the box and really understand their population and the risks involved, then they are willing to get that second layer of security. So I think, in the corporate space, we are seen as that next layer of data security. However, I truly believe that our products must have -- just to keep account of all your devices, but sometimes that's a struggle to get that point across.

Really, CIOs should be buying it just because, if they're managing 10,000 mobile computers, we know without our solution they only have visibility into probably 8000 of the 10,000. With our solution they're getting a full 10,000 out of 10,000 visibility. They are able to see everything. And just for that reason alone, to make sure none of those devices go missing, that's why we are a must-have solution.

I'd just add to that, in addition to making sure you close that sales cycle properly with the corporate customer, as John mentioned, we have swapped out a lot of our sales people in the last year or so, and it does take time to build up a territory. When you think that a lot of our business is tied to new shipments, these people are creating design win customers who keep buying every quarter, it takes a while before that person really has a sustainable base in their territory of these customers continuing to buy every quarter. So that does take time to build up, and we are certainly well along the path. But that cycle, in a time when there's fewer refresh units going out the door in these customers, is kind of a compounding effect.

So I didn't get the number, and I don't know if you provided it, but what percentage of your sales force now is less than a year old?

We didn't provide it, and I will get that for you.

Rob Owens, Pacific Crest.

Can you help me understand what kind of impact on pricing the LANrev offering could have?

Well, it's going to be a positive impact on pricing, obviously. We're selling it as a module. Rob Chase, do you want --

Yes, there's two components. And as a stand-alone product it's a higher price than our AbsoluteTrack product. So we do 5% of our business today in that AbsoluteTrack offering. I would hope that we do much more than 5% in the Absolute -- management space now with the addition of Absolute Manage. So if it was only sold as a stand-alone, it would have some downward effect because it is more expensive than AbsoluteTrack but not as expensive as our ComputraceComplete product, for example.

However, we would expect a majority of the sales to be modular add-on sales to either -- one of our other Computrace solutions. And from that perspective, I think it can really impact ASPs, potentially, $5 or greater on the ASP for our existing customer business plus our overall Computrace business, as add-on new modules, depending on what percent adoption we get.

Can you talk a little bit about what corporate renewal rates have looked like throughout the year? I know you give us a sense of new subscriptions to existing customers and the ratio of 1.7 there. But can you give us any color on what the renewal rate itself has looked like on a per-customer basis?

On a per customer, as I said, it's very difficult to track that. But I think we go back -- again, we very rarely, if ever, lose customers. And that happens from time to time, but I think what we are seeing is that the customers are continuing to renew. So the renewal rate is near 100%, still, but they're just not having as many PCs that they are renewing at any given time. So it's more a function of the refresh cycle.

And, finally, one housekeeping question. If I look at sales to commercial customers in the quarter, I think it was CAD13.2 million, and that was a function of commercial sales to new of CAD2.5 million and sales to existing of CAD10.9 million. Is the difference there rounding?

Yes, difference is rounding. And, also, bear in mind as well that you're looking at the Canadian dollars, and if you get that back to US, of course, relative to the prior period, it would show growth.

Chris Lee, GMP Securities.

It's Chris Lee for Sera Kim here. Just on the Intel front, does Intel or any of the OEMs provide you with any visibility on the extent of the rollout that would use Intel's new chipset or that has the anti-theft technology? And if so, when do you foresee that the [takeover] will really start to happen?

That's really slated for June, when you really see the uptick. Certainly, it's been exciting with Intel. They've won a number of the OEM accounts that have agreed to go and roll out their new Capella chipset with the anti-theft capability on board. And those systems, they've been in the works for some time, so those systems are now starting to come out. But it won't be until June until they are out with the normal cycle that Intel is on, before you see most of the market turning over to these Capella chipsets.

So Capella has been launched, but each OEM has to do a little bit of configuration to be able to activate the anti-theft capability that's in Capella. So that's what Rob is talking about in terms of -- so look for that, really, in our new fiscal year, beginning July.

If that's the case, do you see some of your customers delaying their purchases for the time being until they're able to get that compliance solution in, say, the SKU that they want? In other words, is there some pent-up demand building up here?

I think there might be some pent-up demand building up. Intel has been a great partner and is a great partner. They're taking us into a lot of accounts. So we are going in together to talk about the Intel Anti-Theft offering and to roll it out to who plays in that offering, supporting the Intel Anti-Theft chipset and helping activate customers and providing that solution for them. So we are in the sales cycle, and we've already sold some units already, obviously. And that's continuing to grow, and we are seeing the demand come. But really, it's on an OEM-by-OEM basis. Today Lenovo is the OEM that's out with Intel Anti-Theft in the marketplace. But by July, you should see most of the major vendors supporting Intel Anti-Theft.

And how do the ASPs of a combined Intel solution compare to your stand-alone Computrace ASPs?

Very similar. There should be negligible impact on our ASP.

In terms of the computer refreshes you're seeing right now, are you seeing any sign that in the early stage of these IT budget recoveries, IT departments are getting the money to upgrade their computers but maybe not enough to purchase add-ons, such as Computrace?

I think there is a constraint on IT budgets, just in general. Hopefully, the fact that computers have come down to the price levels they are at now will free up some budget for add-ons like anti-virus and anti-theft and asset management and a lot of the must-haves that you need for managing these mobile environments.

And last question, just housekeeping. Last quarter you provided the percentage of your sales contracts that are international. Do you have that number handy for this quarter?

Yes, it's 6%. As we said, the international sales are up 149% over Q2 last year. So excited to see that, and they are up 67% year-to-date. So it's good to see that trend. And they have now finally reached, actually, 7% -- my bad -- for the quarter and 6% for the year to date.

7% for the quarter?

Yes.

And where do you see that heading, say at the end of this fiscal year and maybe next year as well?

Well, I think this fiscal year, looking at the 5% to 7% range is probably where it stays. But going into the next fiscal year, certainly there is a chance -- significant opportunity to grow from there. It should be a significant portion of our business over time, and that's what we've set out to do, in theory, with most of the growth in mobile PCs coming outside of North America and with the same type of privacy regulations in places like EMEA, where there's no reason why we can't see this business grow and become a significant portion of what we do.

[Ron Smith], [Transline] Capital.

Could you give me the stolen notebook versus the covered notebook ratio, please?

I don't know exactly what you're asking. Can you say that again?

We want the items that are reported versus the amounts that are actually recovered, the ratio, in percent.

That varies between segment to segment. But I think, on the whole, we are operating around three out of four recovered for devices that have called into the data center.

And when you talk about the mobile, you know about mobile (inaudible) with Apple; correct (inaudible)?

I'm sorry; can you repeat the question? Sorry, operator we couldn't hear that gentlemen.

I do apologize. He has disconnected. And there are currently no further questions at this time.

Well, thank you, everybody, for attending the Q2 fiscal 2010 conference call. We appreciate your participation and look forward to updating you on the next call. Thank you, operator.

This concludes today's conference call. You may now disconnect.