Absolute Software Corp (ABST) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Absolute Software Corporation fourth-quarter and year-end conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session set. Instructions will be provided at that time for you to queue up for questions.

Before beginning its formal remarks, Absolute would like to remind listeners that certain portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements.

For more information on the Company's risks and uncertainties relating to these forward-looking statements, please refer to the section of its Annual MD&A. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Monday, August 23, 2010 at 5.00 p.m. Eastern time.

I would now like to turn the call over to Mr. John Livingston, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. Good afternoon, everyone, and thanks for joining us to discuss our fiscal 2010 year-end fourth-quarter results. If you've 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, our Chief Operating Officer, and Errol Olsen, our Chief Financial Officer. I'll begin today's call with the industry trends and business overview. Rob will then review our operational results, and finally, Errol will discuss our financial results, after which I will provide some closing comments before opening up the call for your questions.

Industry trends -- the commercial customers' IT needs are changing. Technology platforms, devices, and OS's are converging, and the result will bring exciting industry change and opportunity. This is most apparent with mobile devices. Notebooks, netbooks, iPads, smartphones, smartbooks are all growing in number and are fast converging in capability. With rapid user adoption, organizations are quickly losing manageability and control, which is accelerating data protection issues and eliminating some of the total cost of ownership savings customers once realized in more standard PC environments.

At the same time, the traditional endpoint data security and computer lifecycle management markets are also converging, bringing with it a wave of consolidation, including recent acquisitions by KACE, by Dell; BigFix by IBM; and most recently, McAfee by Intel. We believe this increases Absolute's strategic value and creates an opportunity for us to gain market share.

Business overview -- over the past two years, Absolute has been heavily investing to move from a niche player to a fully-featured leader in the broad and compelling computer endpoint security and lifecycle management market. At our Computrace core, we remain the best in the world at providing highly visible, accurate but reliable, persistent computer tracking data and services, and providing on-demand remote emergency services to secure computers and data, which may be at risk.

And now with Absolute Manage, we have integrated a robust easy-to-use platform for fully featured computer lifecycle management that customers speak highly of. These core competencies give us a unique competitive advantage in this multibillion device and data management and security market.

Our business strategy can be separated into in five key components. Strategy One -- further Absolute's core antitheft leadership. We have a strong, growing core business in Computrace with limited competition and significant existing renewable customer base to grow from. Computrace is the proven, undisputed leader in emergency device data protection services, and we believe is a must-have solution for best practices endpoint protection compliance.

Strategy Two -- aggressively grow Absolute's lifecycle management business. As announced in July, Absolute Manage is now the world's first persistent lifecycle management solution, and is also one of the best PC and Mac cross-platform solutions on the market. So far, sales have exceeded our expectations and we have already won contracts away from several of the perceived lifecycle management industry leaders. Industry analysts are expecting a major RFP cycle in this market in the next few years, and we believe Absolute Manage has the potential to be a key catalyst for our future growth.

Strategy Three -- enhance Absolute's data protection offering. Despite the host of encryption solutions available today, encryption continues to be a major management and deployment issue for organizations. For many, encryption just isn't working as well as expected and does not have a major -- not address a major security issue, internal theft. We have continued to evangelize our Computrace device and data protection message throughout what we have called a customer honeymoon period with encryption.

We believe organizations are slowly beginning to realize that encryption is not enough, and that a layered approach to device and data security is required for best practices compliance. However, given our close alignment with this encryption market, we believe that there's additional opportunity for us to expand adoption of Computrace through offering integrated encryption solutions for customers who want to augment their [full] encryption solutions or for those who are not adopting full [encryption]. With this in mind, we plan to incorporate our own encryption solutions into our offerings in this fiscal year.

Strategy four -- drive the above strategies in EMEA and Asia-Pacific markets. We have established a strong beachhead and core team in EMEA, and have put some of the foundational places in place for developing our presence in Asia-Pacific and Latin America. We will continue to invest internationally for the following reasons -- device and data protection is a worldwide customer requirement; our partners provide us with a worldwide go-to-market platform, and most already ship Computrace embedded in their firmware worldwide; furthermore, a majority of the growth in computer shipments is expected to come from markets outside of North America over the next few years.

Strategy five -- leverage Absolute's wireless expertise into a broader mobile device management play. Absolute has been busy building out Blackberry, Windows Mobile, Symbian, iPhone, and Android platform support with Computrace mobile. The wireless team is now focused on bridging the capabilities of Computrace mobile and Absolute Manage to provide customers with a broad mobile device security management capability.

In summary, we have built a meaningful customer base to grow from; a robust technology platform with a unique competitive advantage. We serve a large addressable market and have the team to deliver on our business plan, as outlined above. Simply put, we exited fiscal 2010 a much stronger company than we've ever been in the past, and now we are very well-positioned in a very exciting industry to begin to harvest our investments. While we are cautious about fiscal 2011 growth rates, due to the unpredictable economy and computer refresh cycles, we are excited by our long-term growth prospects.

At this time, I'll turn it over to Rob to walk us through the operational results. Rob?

Thanks, John, and good afternoon, everyone. I'd like to open by providing you with some color on our recent management changes. Having been part of our strategic and execution team over the last 10 years, I am very excited about taking the COO role, and have found a -- and that we have found a solid and experienced technology CFO in Errol Olsen.

With the strategic foundation and management team we have put in place, I believe this to be the right time for the move. We are now entering a harvesting stage that requires the tight alignment of our resources behind our mission, and I'm confident we will be able to deliver.

Over the past few years, we have strategically realigned our leadership team to build the breadth and strength needed to execute on our global outgrowth opportunity. We are excited about the team we have built, so I'd like to take a moment to call out a few of our go-to-market business unit leaders -- John Sarantakes is VP of North American sales. After 11 years with Dell, John joined us 2.5 years ago and has emerged as a strong leader for our sales team. Under John's leadership, we have built the largest and best-trained Absolute sales organization to date.

Mark Grace, VP of Consumer, Asia-Pacific and Latin America. Mark has been with us now for 2.5 years and comes to us with over 20 years of consumer sales and marketing experience. Mark is a well-respected team builder and has re-engineered our consumer team into a high-functioning organization with a diversified go-to-market strategy. Mark is now doing the same for the Asia-Pacific and Latin American markets.

Dave Everitt, GM of Absolute Software EMEA. While only with us since December 2009, Dave comes to us with 22 years of management experience at AMD and has already proven to be a strong leader for our EMEA sales team. Dave is our first senior leader in the EMEA region and we are confident in his ability.

Abigail Maines, VP of Channel. Abigail has been with us for a year and a half, and has proven to be a capable quick study who focuses on achieving meaningful results. She has over 10 years of experience in selling through the OEMs, and will help our channel team drive our attach rates and presence with our major OEM partners on a global scale.

These folks are supported by experienced and capable management, development, marketing and operations teams. Our employee base is now over 350 people and we believe we have the scale to deliver long-term growth and profitability.

I'll now provide some more detail on our operational sales metrics. As you know, sales contracts grew at 7% in constant currency, in large part due to our consistent investment strategy. As mentioned in our last conference call, our sales pipeline has continued to grow, as has our existing customer renewal opportunity, which gives us a good level of confidence in being able to continue our constant dollar growth trend.

In fiscal 2010, sales to existing commercial customers were up 7% in constant currency on a 32% increase in the number of expiring subscriptions. This reflects an expiring subscription ratio of 1.7 times versus 2 times last year and 2.6 times in fiscal 2008. While it is not easy to say precisely, we believe the expiring subscription decline is due in part to having already achieved a high penetration rate within many of our customers, diminishing returns as the expiring base grows, the economic downturn, and a sluggish PC refresh cycle.

Conversely, the ASP for sales to existing commercial customers was relatively stable, declining only 4% to $43.60. However, the ASP in Q4 was $40, down 15% compared to Q4 last year, primarily due to a shorter average contract term on the renewing base. Our new commercial sales increased 7% to [CAD9.9 million] compared to [CAD9.2 million] last year, and our consumer business was relatively stable at [CAD9 million] this year or down 3% in constant currency.

Looking to fiscal 2011, we have 1.2 million commercial subscriptions up for renewal compared to 660,000 in fiscal 2010. While the increase is exciting, I caution you to temper expectations as the expiring subscription ratio and average selling price trends just mentioned are likely to persist in fiscal 2011. In particular, the ASP will likely decline, as the product mix in the expiring subscriptions is weighted more toward our lower-priced, non-theft recovery products. This could drive our existing commercial customer ASP more towards the [CAD30] to [CAD35] range.

On the consumer side, we also have 1.8 million consumer subscriptions up for renewal compared to 533,000 in fiscal 2010. We expect this to drive growth in our consumer business, along with other retail and OEM strategies we've recently launched. However, we are expecting this growth to be offset by reduced bundle sales from the phase-out of our current bundled programs to produce flat overall sales for consumer.

As a result, we have a high degree of confidence in our ability to continue our growth trend into fiscal 2011, and have the scale and product and people to accelerate growth as the economy recovers.

At this point, I'll turn it over to Errol Olsen, our new CFO, to provide an update on the financial results for fiscal 2011 outlook. Errol?

Thanks, Rob, and good afternoon, everyone. I'll now provide some additional color to a few items in our financial statements.

We consider cash from operating activities to be our primary financial and valuation metric. At [CAD6.4 million] for the year, cash from operating activities was in line with our fiscal 2010 guidance of [CAD5 million] to [CAD7 million]. The reduction over prior years reflects three main factors -- one, our continued investment in the business; two, the impact of the economic downturn on sales performance; and three, the impact of the stronger Canadian dollar.

Our gross margin declined in fiscal 2010 to 75% from 78% last year. This is primarily due to the amortization of intangible assets from our LANrev and FailSafe acquisitions. Excluding the amortization charges, our gross margin actually increased to 80% in fiscal 2010. Total cash operating costs -- that is, cost of sales plus operating expenses, but excluding non-cash charges for stock-based compensation, investment tax credits, and amortization and depreciation, were [CAD63.5 million] in fiscal 2010, up 14% compared to [CAD55.6 million] in fiscal 2009.

For Q4, total cash operating costs were [CAD17.5 million], up 27% compared to [CAD13.8 million] in Q4 for last year. These increases reflect our continued efforts to strategically build out our global sales and marketing, and research and development capabilities.

Foreign exchange losses were [CAD1.8 million] in fiscal 2010 compared to gains of [CAD1.4 million] in fiscal 2009. This highlights the impact of changes in the US dollar value on our US dollar sales, receivables, and cash balances.

Income taxes are also worth noting. All taxes in our income statement are non-cash accruals for future tax assets or liabilities. In fiscal 2010, we acquired tax-deductible assets through the purchase of LANrev and FailSafe, both of which are deductible in the current and future years against income.

For fiscal 2010, we recorded current income tax expense of [CAD1.3 million] and a future income tax expense of [CAD1.5 million]. The current tax expense is offset by investment tax credits presented in the operating section of the income statement. The future tax expense is attributable to the impact of exchange rates and revised estimates on our US future tax assets. We are not expecting any cash income taxes to be paid during fiscal 2011.

From a balance sheet perspective, we have sufficient resources to support our growth plans. At June 30, 2010, our cash, cash equivalents, and investments totaled [CAD58 million] compared to [CAD68.9 million] at June 30, 2009. The decline from June 30 '09 primarily reflects the use of [CAD17.5 million] for our two acquisitions, which was offset in part by the cash generated from operations. Note that our non-operating uses of cash next year will include capital expenditures, the continuing share buybacks under our normal course issuer bid, and payment of our next installment of $833,000 under our LANrev acquisition agreements.

Turning now to our outlook for fiscal 2011. Due to the unpredictable economic climate, we believe that it is not practicable to provide precise guidance with an acceptable degree of reliability. We are, therefore, no longer providing specific sales contract and cash from operations forecasts. However, we can say that we expect to continue our sales contract growth trend in fiscal 2011, increasing beyond the [CAD69.7 million] achieved in fiscal 2010.

In addition, if our rate of sales growth remains around the levels achieved in fiscal 2010, then we expect that our cash operating costs will be relatively in line with our average expenditures in the second half of fiscal 2010. Accordingly, we expect to grow cash from operating activities in fiscal 2011 beyond the [CAD6.4 million] achieved in fiscal 2010.

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

Thanks, Errol. As we move into fiscal 2011, we are encouraged by the fact that the computer refresh cycle appears to be slowly gaining momentum, and that our sales pipeline for both Computrace and Absolute Manage is growing. In addition, we have a significant renewal opportunity in both our commercial and consumer markets.

We are focused on improving our operational effectiveness and have made significant investments in the business to help deliver our next wave of growth. We believe the computer management and security markets are rapidly consolidating, and that commercial customers require a comprehensive, broad set of functionality to enable world-class management security of remote mobile and distributed computing environments. This is a multibillion dollar market, and we believe that we are very well-positioned to serve our customers and continue to win business.

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

(Operator Instructions). Tom Liston, Versant Partners.

Just, first, for any one of you, just on receiving tons of data in terms of Dell and Microsoft and the rest talking finally about the corporate customer picking up. So, can you comment on the commercial side, where you're seeing pockets of strength? Whether it is corporate or maybe government and education starting to come on during the strong selling season? Can you just talk about what you're seeing in the channel and your conversations with some of these big corporate customers?

Sure. Sure, Tom. We are seeing pockets of strength, most definitely. And we're seeing that, obviously, in our education market, but we're also seeing it in our corporate and enterprise markets as well, especially with Absolute Manage, where we have a very compelling value proposition there compared to other lifecycle management products.

So we're excited about both our core business Computrace in the tried and true markets like education. We're also excited about the Absolute Manage business in markets like the corporate and government market.

Can you -- even a rough idea or stories about whether you lead with Manage -- how many times you lead with Manage or if it's largely a cross-sell into existing base? What would be, if there is such a thing, a ratio of leading with Manage and unique opportunities versus going to your current user base and then mining that?

Well, we certainly went directly to our current user base right out of the gate. And as a result, got some early wins and have a lot of -- some deals in the pipeline as a result of that.

But we're also leading with Absolute Manage in certain situations as well. Some territories -- we have, I think, 27 territories now -- is it 27 or 28, Rob? So we have 27 sales territories now. And some of those sales territories are moving -- you know, move -- they really like Absolute Manage, so they may be leading with the Absolute Manage products and services. And then others are sticking to Computrace.

I guess the point is that there's -- we have successfully moved the Company from a niche player into a much more of a broad player in lifecycle management and endpoint security. So that's very positive for Absolute as we go forward.

And is there any early data on the win ratios with the -- leading with the Manage product? Is it too early to say? Or do you have some rough data on that?

Well, I think we've done -- we did [CAD3.1 million] in sales contracts in the first seven months. And I think we're very pleased with that. The pipeline is a decent sized pipeline for Absolute Manage. And we're just continuing to get in that market. We've only been out for seven months.

But I think, Tom, the other thing that's really comforting for us is we are beating out some established players. So, you're probably familiar with the names -- BigFix, Altiris, LANDesk, and others. And we're taking business away from those players that have been in the market for a lot longer than we have. So we've got a very nice offering there. We've got a very loyal customer base who's willing to evangelize about how pleased they are with the product. And we're going to do some serious damage in that market over the next couple of years.

And finally, real quick, for Rob or Errol -- or maybe it's a longer discussion -- but how do we think of ASPs next year, given that you're tiering your -- even your core product but then you layer on Absolute Manage, which has some unique pricing models; and then, of course, you're getting into mobile more and more, and hopefully, that will become a more significant part, which certainly is going to be priced at different tiers as well. Is there a way to segment those market so we get a pure apples-to-apples ASP-type numbers? Or is the blended number the way you're going to go?

Yes, Tom, the only place, obviously, we disclose ASP is -- we don't even disclose it, but we give the data points to calculate it, is on that existing customer base, right? So what we'll see there -- definitely the mix percentage is changing. Roughly, on Q4, for example, there was about 10% of the expiring subscriptions related to our Absolute track type products as opposed to the theft recovery products.

And going into fiscal 2011, it's 40% in the non-theft recovery products. So, I mean, as you know, over time, we have been trying to diversify our base. So we have more -- a larger breadth of feature and capabilities that customers are interested in buying, some of which are going to have a lower ASP. So, again, that's why I gave that [CAD30] to [CAD35] range on the call was to give you some way of trying to get to that.

Okay. Great. I'll pass the line.

Glenn Jamieson, Macquarie.

Errol, you made some comments about what you thought your operating expense, your cash operating expense levels would be for fiscal 2011. I just wanted to go back to that to make sure I understood what you're saying, maybe think about it a bit differently.

You said about -- for fiscal '10, about [CAD64 million] of cash for consumed in the operations. If you do the kind of sales that you're projecting internally, can you give us a feel for what your cash expense level would be relative to that [CAD64 million]?

Well, the way that we look at it -- we're not providing specific guidance, so I can't tell you what we're projecting internally; but on cash expenditures, Q4 was a little bit higher than what we're projecting for fiscal 2011. It's really the average of Q3, Q4, which was about CAD17 million, would be a quarterly average. That's probably the best number to use for your modeling.

Okay. I guess the other way to ask the question is, I think, the Company has gone through two years of pretty heavy investment and that's been a concern with some shareholders. It sounds like it's reasonable to think about the heavy part of that investment cycle being behind us here.

And John, some of the things that you called out as ongoing investments -- maybe your international business, for example, you can continue to invest in those segments within the current spending envelope that you have. Is that a reasonable way to think about it?

Yes, that's exactly it -- is, we're doing a little bit of realignment within the current spending envelope, a little bit of a shift from some partner marketing, a little bit more on headcount, but it will all be within the existing envelope. That's right.

Okay. And then a question about the international business, then. Your notes say that that grew about 40% this year to just over [CAD40 million]. But your reach would have grown significantly through the year. Is it reasonable to think about a higher growth rate in international for fiscal '11? Or should we be thinking kind of more a consistent growth rate like we saw in fiscal '10?

Glenn, I think you can start with consistent over what we did in 2010, and we'll keep you guys posted on a quarterly basis on how that's growing specifically in the international market. But I think it's fair to say that we do now have a really decent team in place in EMEA, for example. So there's certainly more pipeline business than there has been in the past. I think we are making a lot of progress with EMEA's customer base.

We've got a really nice -- there was a really nice press story, I'm not sure if you saw it, that the BBC put forward about a lot of organizations, of course, missing laptops and not being compliant with local UK regulations. And we were mentioned in that story and it was carried right across EMEA.

So we're certainly -- the awareness of our solutions is expanding in Europe. We've been doing some evangelism work in South America, which is coming to fruition a little bit, and then also in Asia Pacific as well. So there's no question that we're going to continue to grow in the international space.

Okay. And just one last question, John. You mentioned that you've moved the Company away from being a very niche US-centric business a few years ago to one that's much more broadly diversified. I'm wondering, does that to start to show up for you in terms of easier sales cycle opportunities coming to you, as opposed to you having to work and evangelize for each sale that you were getting in the past?

I think that's somewhat true, Glenn, and I think it would be more true in a more resilient business environment. But it's still -- you know, this is why we're trying to say, we're excited, obviously, for the business, but at the same time, we're trying to caution everybody, because it is still tough out there and budgets still, of course, are not what they were at the 2007 levels.

So it's still -- it is still a tough market out there, right? And we have a larger pipeline than we've had and what-have-you, but actually dragging the deals across to a PO by quarter end is always -- it was always challenging. So, I think we're -- as we said, we're cautiously optimistic about going forward. We don't want anyone to get too far ahead of themselves.

Okay. Thanks, John.

Thanos Moschopoulos, BMO Capital.

As far as the corporate renewals in 2011, can you provide some color as to how they look by quarter? Are they sort of distributed according to typical seasonality? Are they front-end loaded or back-end loaded? Sorry -- could you provide some color just as far as how those break out?

Yes, they're actually -- of course, they do pretty much follow our normal trajectory of seasonality. I guess it gets interesting on a mix level, because in Q1, for example, we have a much higher mix of non-theft recovery product than we do sort of toward the back half of the year. So, I guess that's where it is fairly interesting. But -- so, basically, things is normal except I would say the ASP impact of that -- of the non-recovery product sort of comes more in the first quarter.

Okay. That's helpful. And then can you comment on the growth you're seeing from the Lenovo and HP channels, and your progress in driving penetration rates with those partners in particular?

Yes, HP and Lenovo, of course, we rolled out the Lost & Found for Lenovo, the synch pad version, and we also rolled out some additional issues with HP, obviously pushing on all of our OEM partners to try and grow all of them across the board. Both HP and Lenovo grew nicely. I believe we are at 28% growth for the year in Lenovo and 42% for HP. So, quite happy with the performance there.

Dell continued to be strong, although I suspect that -- we are down slightly year-on-year, but I suspect that's a little bit more to do with their experience in the year as opposed to any decline in our attach rate. So I think we've moved the attach rates forward in the other two and probably held -- treaded water this year at Dell.

Okay. That's helpful. The government sector was an area where we saw some weakness last quarter. Can you comment on how that did in Q4?

Again, it was definitely a drag on growth this whole entire fiscal year. It was down again in Q4 over the prior year. And we did mention in May that we've made some changes in that team about a new bunch of people on the street, new leadership, as well with [Phyllis Johnson], our AVP of Federal. And we're excited about that not being a drain on growth next year. It's kind of, as we mentioned in May, that this has been a tough year for it but it's at a level now where we can at least sustain or grow from, so.

Okay. And just to drill a bit further on the macro discussion, you stop providing guidance, which I think is understandable in the current climate, but as far as your own internal 90-day visibility, has that gotten any better or worse in recent weeks? Or I guess are we still in an environment where longer-term visibility is still challenging?

I think on a quarterly basis, our view is probably very similar to what it was. Where we get -- where the uncertainty plays in is when you start talking growth rates beyond the rates that we're already at. So, we can sort of see where we are historically, and certainly, on a week-to-week, we have good visibility. We're touching all of the deals, as we normally do; they're in our pipeline. And it's -- so I would say we feel confident in our ability to execute against the plan here, but as you get pushing the envelope on growth, it just gets a little fuzzier in these unpredictable times.

Okay. That's helpful. I'll pass the line. Thanks.

Scott Penner, TD Newcrest.

Thanks, just to -- Rob, first of all, on the ASP of the existing commercial in Q4, you mentioned it was down a bit due to shorter average contract. And you mentioned, I guess, some of the product mix. Is there any sense that part of this is companies renewing PCs or [more] laptops that may be on year four or five or later in their lifecycle?

You know, that's possible, Scott, but we don't have the level of granularity and the information to be able to give you that. We can have a look for it at a later date, but just, unfortunately, what we see is mainly that it's a shorter average term in the subscriber base there for the quarter.

Okay. And is there any way for you to discuss, I guess, the specific impact of some of the Absolute Manage maintenance type renewals on the ASP next year?

Yes, the 1.2 million subscribers is all -- is primarily Computrace customers, right? So I would say our traditional line of customers as opposed to the Absolute Manage customers. So I would say that the maintenance portion would be additive to the 1.2 million and, therefore, will have its own rate, but it's not significant enough of a base yet to really impact ASPs that much.

Okay. And then just on the, I guess, the subscribers coming up for renewal next year, is obviously a big tick-up from this year. Is 2012 -- are you looking for, again, more subscriptions in that year? Or is 2011 likely to be a peak?

Yes, good question, Scott. I would say that 2011 obviously is a bit benefactor of our step-up in sales levels that occurred in 2008, right? So that was the first year that we hit the [70] level.

So, yes, going forward to 2012 now, it's down currently at about 1.25 million. So it's up slightly at the moment. And of course, that will be increased throughout the year with one-year subscriptions that we sell. And on the commercial side, generally speaking, you're looking at 180,000 -- 200,000 -- about 200,000 a year that are added in one-year subscriptions. So you're basically [heading] in the [145] range.

Okay. No, that's helpful. And then just on the consumer business, if you know, is not a big part, but given the tripling or I guess of the renewal opportunities in next year, a bit surprised to hear you say that the consumer business is expected to be flat. I'm just wondering if you can provide a little bit more of the moving parts there.

Yes, I mean, basically, we are phasing out the paid bundle programs. And we are actually -- have gone a bit of a shift in the strategy there, and they're going more to non-theft recovery type bundled programs with free trials for a shorter duration of time. So we will -- more industry-standard in terms of the free type -- free trial type things for consumer.

And we think that will be possibly helpful for subscription uptake in the year as well, but it just won't come with any of those specific bundles deals. And so we will be looking to the consumer renewals that we have in the pipe here to replace that business, since it probably comes down a good [CAD2 million] in the year. So, basically looking for the renewals to replace that.

Okay. And lastly, I guess, any new opportunities for international programs that you have in the pipeline for the coming year? Or is what we know of from Dell and HP basically the horses that you're riding?

I would say the international front -- and first of all, actually in North America wide as well, I mean, we've been doing concerted efforts to go in and lift the consistency within our sales teams and drive the business forward, just through -- you know, to increase training and execution. And we're replicating that with our people over in EMEA.

And I believe just through that type of focused effort, we'll be able to move the ball forward. But at the same time, Dell, HP, Lenovo internationally are obviously our biggest three having the longest standing relationship. But some of the other ones, the newer ones like the Acers of the world and things are also very strong in that region, so we'll push forward those relationships. I would say we've been working toward that.

And at the same time, of course, we mentioned it a few times, but we've been trying to expand our telco presence as well and leverage the telco teams, because they're quite good solutions sales-oriented organizations, to augment and complement that go-to-market we have with our PC OEMs.

Okay. Thanks a lot.

Pardeep Sangha, PI Financial.

Just with regards to the last quarter, you mentioned you had the largest sales funnel at that time in your Company's history. I'm just wondering how that compares right now to last quarter and sort of comment on sales velocity, and what's it going to take to move things faster through the funnel?

I would say that the pipeline is at similar levels to what it was last quarter, which is actually significantly above where it was in Q1 last year. But as we know, a pipeline does not necessarily translate directly to sales. It takes a bit of time for that to work through the pipe.

And as we've seen in the last year or so, sometimes things can get stuck in the pipeline a lot longer than normal in this economic environment. So what that pipeline does at the moment, really, is just give us confidence that, as things slip out, as they always do, that we have something to replace it. But it doesn't necessarily translate in a lift just yet until likely the economy gets a little more predictable.

So it's healthy. We're excited about that, and it's just not a one-to-one relationship between pipeline growth and what you see coming out the other end, right? So even with that nice increase in Q3, for example, still Q4 -- during Q4, for example, that just translated to a 7% increase in sales over Q4 last year. So it's healthy, it's good to see. It will take some time for all that goodness to start coming through into the numbers.

Okay. So basically, what I'm hearing here is that sales velocity, taking things through the funnel, will increase as the refresh cycle and the economy, general economy, gets better. There's not much that you can do per se as Absolute management on that side.

And I'm just going to follow-up that with a question being, a couple of quarters ago, you mentioned you had some sales team reorganization. And just want to confirm that that's all been taken care and you're pretty confident that that's going forward, your sales team is firing on all cylinders.

Yes, the sales organization is firing on all cylinders, as Rob talked about in the chat earlier. We're actually very pleased with the sales leadership performance there. The team is fully staffed or fully trained. We had a very successful global sales meeting in San Diego during July. Everybody is highly motivated. The sales organization is very excited about all the goodness we're bringing in terms of new functionality inside Computrace, the Absolute Manage product and service.

So there's a lot of good things for the sales organization to be excited about. I think we are -- we have a broader, more compelling value proposition for our traditional markets -- education, corporate, healthcare, government. So, because we have more to offer customers, it's easier for us to have better conversations inside those customers and become a little bit more sticky in terms of getting some business done.

So we are excited about next year, there's no question about it. We're just trying to be cautious because we've been excited before and then paid the price. So we're cautiously optimistic about fiscal 2011 and we'll just take it one quarter at a time.

Okay. So on the sales and marketing expenses, I think in last quarter, you guys mentioned you were expecting things to start leveling off a little bit. And we've seen a huge ramp in the last two years in your sales and marketing expenses. So this quarter, again, it is up; it hasn't leveled off. And maybe you can give us some more insight in terms of that, in terms of why it's still going up.

I'd say -- what we did mention in the past was what's missing from a bit of our run rate during the beginning quarters of the year is, of course, variable pay was down considerably. So, in our fourth quarter, with a 29% increase in sales in the quarter versus sequentially, we now are announcing a more full complement of variable pay coming into play here, which is definitely part of it.

And the rest, of course, we had some programs that we had already started underway planning for that the bills for came in, in our fourth quarter. So a few of those things that we've seen there just happened to fall there in terms of some of the programs with our partners.

Okay. The encryption product, what's the timing on that in terms of which quarter we might see that?

We already have something in beta. You'll see it released before this calendar year out.

Okay. Just a quick follow-up on the attachment rates. There was a question earlier about attachment rates. I'm not sure if I actually heard a percentage attachment rates at all, in terms of I think in the past, you've sort of talked about a 4% rate that some of the OEMs are at, and you're looking to drive that up higher to 10%, 12%. Maybe you can just comment on attachment rates in particular where you're looking at these days.

Yes. We -- on the OEM side, I think Dell has probably held while HP and Lenovo have increased. But overall, we don't have good enough data on the overall market shipments to really make an accurate estimate right now. So that's why we've not mentioned anything in particular. It is very hard data to really get a handle on. So it's just not readily available out there.

Okay, thanks. That's it for me.

Paul Steep, Scotia Capital.

John, just one quick one here. Where do you think the Company is two or three years out in terms of a mix -- in terms of lifecycle management versus the traditional product? And how close -- what do you think you need to do over the next little bit to get there?

I think probably within two or three years, I think the mix is probably somewhere around 50/50. We believe that Absolute Manage, our lifecycle product, will be as a full lag for the Company.

When you combine the persistent technology that we have and you come up with lifecycle management, persistent lifecycle management, that's extremely unique in the industry; nobody else has it. No one else has the visibility we can give organizations into all their devices.

And I think the customers are slowly waking up to how important that is for all of the compliance reasons. You can't have a good management and security strategy for your remote mobile computers if you only see 70% of them. And we literally have customers, like Grant Thornton and others, saying 99-plus percent of all their mobile devices. So that built into Absolute Manage is a huge differentiator.

And because the lifecycle management market is just so much bigger and better known than the anti-theft market, I think you see a very rapid growth on that side of the business and a more just traditional growth on the Computrace side of the business. But I would say 50/50 within three years. And we're obviously going to add some additional value to Absolute Manage and Computrace, likely around the state of protection market. So maybe that's a third leg.

And then you've got the device management market, which is emerging as well, which is an exciting market -- that's all of these smartphones and iPads and what-have-you. Those new devices all need to be managed; they all need to be visible. And we'll have a very unique offering in that space as well. So we're trying to build a number of platforms for real growth over the next two to three years.

And how close do you think you are in terms of the infrastructure, the sales force, to sort of get you there on the sales side? Like, obviously, the traditional model is evolving a bit, but it's there. And on the other side, how much more investment -- is '010 or '011 pretty much an investment year or (multiple speakers) --?

For which business leg?

For the LCM side. I'd assume Computrace has been working and continues to work; it's just evolving.

Exactly. No -- the lifecycle management side, I mean, as we talked about, we're already winning business against larger companies like LANDesk and BigFix and others. So we've got a very excited, loyal, evangelistic customer base. I think we've got around 250,000 seats now in Absolute Manage. And those customers really love the product and they speak very highly of it. You'll see us, I think, win a fair bit of business in that space, and it should grow to a sizable business for us in the next two to three years.

I think the way to look at it, Paul, is that the team we have in place, in terms of the sales organization, has excess capacity to deliver; it just needs a little bit more to sell. So this adds the more to sell. So from the initial phases, there's not a lot to do. But, of course, as the yield within each one of those territories gets to an unmanageable level, we, of course, will invest to add new territories and keep that growth trend going, but, of course, once it reaches the yield metrics we're looking for.

Okay. Thanks, guys.

I hope we answered your question there. I just want you to -- Paul, I want you to feel confident that the offer -- the technology and the offer the product that Absolute Manage already is, that Martin and Peter built as -- is a very competitive, fully-featured lifecycle management product and it can go toe-to-toe with all of the existing players in that market today.

So it's just a matter of us getting in the Gartner Magic quadrant, which we're working hard to do, and some other things like that, that will really increase our visibility in that market. And I think that will come with rapid increase in adoption for us. So the product is ready to go. The sales organization has been trained; we're just working on the industry awareness component to really get a lot more deal cycles.

Thanks.

Sera Kim, GMP Securities.

A quick question on Intel. Just given the acquisition that was announced last week with security being a new priority, I'm just wondering if you've seen, I guess, a change in the push on their front with anti-theft technology?

No, I think that's a signal and a symbolic of how committed Intel is to security. And obviously, they believe in security enough to go and buy McAfee. So you're going to see Intel work with McAfee to figure out what solutions they want to build into the chipset.

But at the same time, the kind of company that Intel is, being what some would call a monopoly in the chipset area, they have an obligation, obviously, to keep an open API for other vendors like Symantic and other people in the antivirus business, and other people in the security business, like Absolute Software.

So, we would expect -- we have a good relationship with Intel. We're currently evangelizing Intel anti-theft business and we'll continue to do so. We also have a relationship with McAfee as well. So we're working both those relationships and we'll continue to do so.

And can you just comment on, I guess, what impact you've seen from the Intel relationship in fiscal '10? And how you expect to see that change based on what you see in the pipeline for fiscal '11? Is that something that you could -- you have color on?

I think we've just seen in Intel -- we've seen Intel increasing their efforts in the anti-theft space. I mean, they -- really, they've had to wait for their platforms to catch up out there and the OEMs to sign up and start shipping the hardware.

So, along with that throughout the year, we've seen Intel getting more engaged in it, which is great to see. And with this acquisition, I think we'll see them continue to get more engaged, trying to push the overall security envelope of which antitheft is a part of it, so.

Okay. And on the consumer front, I think last quarter, you talked about, I guess, some changes to the consumer renewals with respect to registrations and whatnot. I'm just wondering if you have an update in terms of what impact these changes have made on the consumer renewal side?

Yes, we've seen -- we have seen an increase in consumer renewal rates. I mean, they still are quite low, as we've mentioned. We don't happen to be giving out specific numbers. With each little incremental improvement that we've been doing in terms of the geo-location type information, the customer interface, self-serve data delete, all these sorts of things we've been adding, certainly with each one, it helps increase it a bit more.

It's at a level now, as we said in the call, where we're confident that it will be sufficient to replace the business that comes out as a result of phasing out the bundled programs. So we're happy with where it's at now. We're going to continue to push it forward. And we'll likely -- hopefully, do things this year, like bring out the automated renewal capability through Digital River and other strategies to overall increase that renewal ratio.

Okay. And just last question, do you guys have the revenues segmentation by your vertical?

We do -- we generally don't give out the specific segmentation, but I can assure you that education continues to be the strongest segment. It's up 21% in the year. Corporate, obviously, the second largest. And it's basically flat on the year, although all of the decline in it was all in the first quarter. The rest of the quarters throughout the year were actually up in corporate. So that's a good sign.

I think government -- small, less than 10%. But unfortunately, as we've noted, it's off of last year by a significant amount, but down 42% for the year. And then healthcare continued to be strong. It grew 20% in the year. And again, smaller segment together with government, both are -- both of those are less than 10% of sales currently. But they're both coming along.

And I really think -- obviously, we're excited about healthcare, because it's a natural with HIPAA regulations and things for the type of services we provide. So hopefully, we'll see that trend continue there.

Okay, great. Thanks a lot, guys.

Blair Abernethy, Stifel.

John, I'm just wondering if you can give us a little more color around progress you've made so far this year on the telco front and some of your mobile offerings or plans for mobile offerings?

Well, sure. We've been working away on a lot of the different wireless technologies. QUALCOMM has been a very good partner with us. So we are working closely in that area. We want to support a broad number of all the device operating systems, and really leverage what we've done into a mobile device security management play, which is getting -- which is a very exciting space at the moment.

So we feel like we've built a lot of technology and now it's ready for -- it's ready to go to market. So we're working with those industry players and including some telecoms to bring it to market. So I think it's safe to say that you'll see some announcements this calendar year along those lines. And we'll get to that news as soon as it's ready.

Okay, great. Thanks. And just, Rob, just a follow-up on the pipeline. Just to clarify, can you describe the pipeline as you entered Q4 and then versus as you exited Q4? Was it basically the same?

Yes, I mean, Q4, as we mentioned, around May, was around [CAD43 million], right? And we're at similar levels here this year in Q1. And not really much in the way of growth, but it's definitely holding strong, which is good to see because that is significant growth over the prior year. So we're happy, very happy with where the pipeline is at. Does that answer your question?

Yes, that's great. And just in terms of the composition of the pipe, how much of the Absolute Manage is in the pipe today? How much of the pipe --?

It's a very small component of the pipe today. About -- let's see, 20% range? -- yes, 15% to 20% of the pipe.

Okay, that's great. Thanks.

And your last question comes from the line of Gabriel Leung from Paradigm Capital. Your line is now open.

Given that we're, I guess, halfway into the fiscal Q1, have you seen enough data points out there to give you confidence that the core is capable of showing year-over-year growth in line with what you're guiding for, for the full year? And can you talk a little bit about what you're seeing in terms of back-to-school activity? Thanks a lot.

Thanks, Gabe. I mean, the pipeline, back-to-school continues to be -- again, this will be a strong education quarter, which brings with it two things -- good commercial sales for education and also good consumer sales. I think we're seeing things just like normal there. It is more in line with how we've guided basically in the year, with -- the growth will be there in line with the trends for this year.

I think the one thing I'd mentioned for Q1, of course, is last year, the average rate on sales was [CAD1.10]. And, of course, it's about -- the exchange rate has about [CAD1.04] here. So we do have to get over that hurdle. But other than that, things are looking in line here.

And just secondly, just on the tax, I guess, based on your commentary and on your MD&A, looks like you will have sufficient tax loss carryforwards to shelter your income this year. What's the view for next year based on your current position?

Well, the view for next year is certainly that we will not be paying any cash taxes. We have sufficient tax assets in the US and deductible assets in Canada as well. Going past 2011, it's a little bit difficult to predict right now. It's going to depend on our international structure among other things.

Okay, great. Thanks a lot, guys.

And there are no further questions at this time. I'll turn the call back over to management for any closing remarks.

Great. Thanks, Operator. Thank you, everybody. We appreciate you attending today's call and your continued support. And we'll look forward to reporting to you in the coming quarter. Thank you.

And this concludes today's conference call. You may now disconnect.