Absolute Software Corp (ABST) 2011 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. 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, Thursday, August 18, 2011, at 5.00 p.m. Eastern time. I would now like to turn the conference over to Mr. John Livingston, Chairman and Chief Executive Officer. Please go ahead, sir.

Thanks, Operator. Good afternoon, everyone. Earlier today we released our fiscal 2011 year-end and fourth quarter results. You can find our press release, financial statements, and MD&A at absolute.com.

With me today in Vancouver is Errol Olsen, our Chief Financial Officer. I'll begin today's call with an overview of our performance for the year. Errol will then review our operational and financial results, then I will outline a strategy for fiscal 2012, after which we'll open up the call for your questions.

I'm very pleased to announce that the Absolute team delivered strong results in fiscal 2011, including for sales and cash flow, we delivered 20% sales contract growth year-over-year in constant dollars. In fact, we delivered record quarterly sales contracts in each and every one of the four quarters.

We increased cash from operating activities 94% year-over-year to CAD12.5 million, and we generated record adjusted operating income of CAD9.4 million for the year. We also improved the effectiveness and efficiency of our sales operations, which increased productivity and is enabling us to better leverage our business model.

Product launches and technology innovation. We launched several key product initiatives during the year such, such as support for Android devices and for Apple iOS 4 devices. We extended data and device protection capabilities with the launch of Absolute secure drive to help manage self-encrypting drives. And we introduced Remote File Retrieval, a data-leakage prevention feature for our Computrace umbrella of security services.

We also integrated the Computrace Persistence technology with Absolute Manage to create the world's only persistent self-healing life cycle management solution. And subsequent to year-end, we announced Persistence support for Lenovo Android tablet devices, and we introduced a new look and feel for our LoJack for Laptops customers.

Diversification and leadership -- during fiscal 2011 in constant currency, we grew our theft recovery business by 16% and our non--theft recovery business by 31%, and with growth in all of our key market verticals, as well as internationally. Today we have clearly established our computer theft recovery offering as the leader in this space for both the commercial and consumer markets.

We officially surpassed a significant industry milestone with more than 20,000 computers successfully recovered, leading to literally hundreds of millions of dollars worth of assets, investigative security, and management value generated for our customers over the past years.

Throughout the year, we increasingly benefited from improved momentum in the pc refresh cycle and saw growing demand for use of our offerings on a wider selection of devices, namely iPads and Androids.

We are seeing improving sales momentum for our newer products. In particular, Q4 was a strong quarter for Absolute Manage. We signed 2 deals, each worth close to a million dollars, that were driven by Abs Manage. Both of these deals were competitive bids. Both were for 100% pc management. And both were for customers who own both Absolute Manage and Computrace.

These deals demonstrate that we are competing and increasingly winning in the life cycle management market, and our cross-platform Absolute Manage product is robust enough to even win in pure PC environments, and we strongly believe our strategy of bringing together management and security is now being validated in the marketplace.

Overall, I trust you will agree with me, a very solid performance as we successfully executed on many fronts and achieved these results while holding the line on costs. We have entered fiscal 2012 a stronger organization. Our expanded product mix, larger international customer base and increased productivity have better positioned us for continued growth.

On that note, I'll turn the call over to Errol to walk you through our operational and financial results in greater detail. Errol?

Thanks John, and good afternoon everyone. Over the past few years, we have evolved as an organization, and with that, we believe, so must the metrics that we report on. Looking at the business today and our strategic direction, we think that some of the underlying metrics that we have provided historically no longer provide accurate indicators of our current and future sales contract performance.

Accordingly, we are updating the metrics that we provide to better align our performance indicators with the key drivers of the business. The changes are as follows. First, given our objective to diversify our revenue base, we will be providing additional segmentation of our commercial sales contract results between our core theft-recovery product line and our non-theft-recovery products, which include our Asset Management, Tracking, and Data Protection offerings.

Second, we are discontinuing the reporting of ASP. Now that we have multiple product lines and are often selling multiple products to the same customers, ASP no longer serves as an accurate performance indicator for the overall business. For example, ASP can decrease while operating margins are increasing. Ultimately, successful execution of our strategy is measured in sales contract growth across a wider selection of products and geographies and operating margin expansion.

Third, we will also no longer report our expiring subscription ratio and associated detail on expiring subscriptions. Our customer base is large and growing. With this increase in scale, the renewal ratio has naturally trended lower and has fluctuated quarterly based on sales opportunities. However, as we've demonstrated, a lower renewal ratio does not necessarily correlate to lower sales contracts.

We do want to emphasize that our existing customer base is a significant asset for generating recurring and expansion sales. With that in mind, we will continue publishing the average percentage range of sales to existing customers. For all of our other key metrics, we will report them as we have in the past. As a transitional measure, the fiscal 2011 ASP and expiring subscription ratio have been published in our 2011 MD&A.

Now on to our financial and operational results. Our fiscal 2011 performance was strong on all financial fronts. Sales contracts were up 20% in constant currency for the year and 21% in fourth quarter. We saw improvements in nearly all regions and in both our commercial and consumer verticals. Commercial sales were up 18% in constant currency for the year and 22% for the quarter.

During the year we saw strong sales growth in all of our target markets -- education, corporate, government, and health care, with our Q4 sales growth driven predominantly by education and corporate. Increasing commercial sales for our theft-recovery non-theft-recovery products is key to our long-term growth.

For fiscal 2011, sales contracts from theft-recovery products increased 16% in constant currency. For fiscal 2011 sales contracts for non-theft-recovery products grew 31% in constant currency and comprised 21% of commercial sales contracts.

For Q4, sales contracts from theft-recovery products increased 13% in constant currency, and sales contracts from non-theft-recovery products increased 57% in constant currency, and comprised 26% of Q4 commercial sales contracts.

Consistent with prior years, 80% to 85% of our commercial sales were from existing customers, and were are a key component of our growth this year. We maintain a strong customer retention rate and we continue to expand our footprint within our existing commercial customer base. We also added numerous new customers throughout the year, creating additional growth opportunities as we further develop relationships with these customers.

On the consumer front, fiscal 2011 and Q4 sales contracts were up 28% and 11% year-over-year, respectively, in constant currency. The improvement was the result of the continued diversification of our consumer business through non-bundled OEM, retail and online channels. Fiscal 2011 non-bundled consumer sales were up 43% in constant currencies, and for Q4, they were up 26% in constant currency compared to Q4 last year, a clear sign that our diversification strategy is on track.

Throughout fiscal 2011, we continued to expand our global customer footprint. International sales increased 93% in constant currency, representing 10% of total fiscal 2011 sales contracts. In Q4, international sales were up 56% in constant currency, representing 6% of total sales contracts. These increases reflect international expansion in both the commercial and the consumer verticals.

Looking now at our operating expenditures -- maintaining tight cost controls was a major focus for us in fiscal 2011. Our adjusted operating expenses, which include cost of sales and operating expenses, but exclude non-cash charges for amortization of acquired intangibles and stock-based compensation, were CAD62.8 million, representing a 1% decrease from CAD63.7 million in fiscal 2010. Adjusted OpEx for Q4 was down 14% from Q4 of last year, largely due to lower spend on partner marketing programs.

For the year, reflecting our 13% increase in GAAP revenue and our ongoing focus on cost control, we generated adjusted operating income of CAD9.4 million. This is a significant improvement from adjusted operating income of roughly CAD400,000 last year. For Q4, adjusted operating income was CAD4 million compared to CAD800,000 in Q4 of last year. We defined adjusted operating income as GAAP revenue, less adjusted OpEx.

In addition to sales contracts, we consider cash from operating activities to be a key financial valuation metric for us. As John mentioned, at CAD12.5 million we nearly doubled cash from operating activities compared to the prior year. For Q4, we generated CAD3 million in cash from operating activities, compared to just CAD200,000 in Q4 of last year.

In summary, as supported by our metrics, our business is growing. We are continuing to diversify across product lines, we are expanding internationally, and we are increasing our leverage and profitability. We believe that our fiscal 2011 results reflect positive improvements in the Company that position us for successful long-term growth.

In terms of fiscal 2012 guidance, we expect to grow sales contracts and cash from operating activities above fiscal 2011 levels. With respect to our cost structure, we expect to make targeted operational investments to support our continued growth initiatives. However, we remain committed to carefully managing our expenses.

Before passing the line back to John, I want to take a moment to discuss our transition to International Financial Reporting Standards, or IFRS, as of next quarter. The key changes to the way we report include reporting currency. We will start reporting our results in US dollars.

This will have the benefit of reducing the currency-driven variability of our reported sales contracts. Deferred contract costs -- we will no longer defer into amortized contract costs. This will result in a slight increase in reported sales and marketing expenses each period.

Share-based compensation -- we will be changing the methodology by which we calculate stock compensation expense, which will result in a more front-loading of stock-based compensation charges.

Further details in our plans to transition to IFRS and the resulting impact on our financial statements can be found in our fiscal 2011 MD&A. When we report our Q1 fiscal 2012 results, we will present the current and comparative quarter results according to IFRS. We will also provide quarterly historical results going back four quarters.

Now, I'll turn the call back over to John.

Thanks Errol. Our fiscal 2011 results clearly demonstrate that Absolute is growing and we expect growth to continue through fiscal 2012. We have enhanced the business and are positioned to compete on a broader scale and with much bigger players. Our target markets -- computers theft recovery, data protection, computer life cycle, and mobile device management, represent a combined $4-billion-plus market opportunity.

Heading into fiscal 2012 remain committed to driving continued top line growth will carefully managing our expenses, as Errol mentioned. We plan to expand the business by first continuing to enhance integrate our products. This includes enhancing feature sets for our existing products, adding support capabilities for additional devices, and further integrating our products. We continue toward our longer-term vision of enabling organizations to manage, track, and protect all end points via a single pane of glass perspective.

As announced in August, we've won our first persistent deal in a tablet with Lenovo and expect this to enable us to continue to extend this competitive advantage that you're very familiar with on the PC side of our business.

Second, to deliver on new opportunities to accelerate sales growth of non-theft-recovery products. Our non-theft-recovery products including Absolute Manage grew over 40% last year, and we believe we can continue to win market share with these new products.

Third, optimizing our valuable customer and partner relationships. We will continue to work with leveraging our existing partnerships and relationships and build new relationships to expand our relevance, our distribution network, and our Persistence technology across new devices.

Fourth, continuing to grow our global customer base. The needs of our international partners and end customers are similar to those of the North American market. We will continue to leverage our existing OEM and partner relationships to grow our footprint in EMEA, Asia-Pacific, and Latin America.

Finally, we believe in Absolute, and that Absolute over time can be a very significant player in this fast-growing and broad $4 billion computer, tablet, smart phone, end point, and management market. We're very excited about our future. This concludes our prepared remarks for today. Operator, please open up the call for questions.

(Operator instructions).

Your first question comes from the line of Scott Penner from TD Securities, your line is open.

Thanks, just to clarify when you say next year to grow faster than this year, is the bogey the constant currency number?

That's based off the constant currency number, that's right.

Okay. Then just John, given the environment right now, could you give a little bit more color on the education and government market -- how healthy you see it going forward and maybe a little bit more numbers about how it did in Q4?

Sure. Our education market, Errol, was up in Q4 in constant dollars, education was up just around 25% in Q4. Government was relatively flat.

John, from what you're seeing out of the pipeline, and there's obviously a lot of concerns over government spending and education as an arm of that, are you seeing that?

No, not really, Scott. We've been hearing rumors for a number of years that education would slow. That hasn't been our experience, and obviously there's some additional pressure there. But it seems that educators do continue to have budget, and we continue to get included in those budgets.

So no, I don't see anything dramatically changing on the education front. The federal government market hasn't been a huge area of success for us in the past, so we have limited exposure there. But we'll continue to chip away. I mean it's a massive market, and as you know, our attach rate can only grow, so we feel that those big macro indicators probably aren't going to have much impact on us.

Right. Talking about the Absolute Manage-led deals that you mentioned, the 2 of them. It's obviously fabulous to hear. Can you tell me a little bit more about the sales cycles that were involved in those deals. And whether it was really the same purchasing manager that was already involved with the Computrace deployments?

Yes, that's right, they were both existing Computrace customers that we had good relationships with for a few years. Both were looking at different life cycle management vendor type products, and when they heard that we had an offering in the space, were very interested in hearing from us.

We went in and presented our products and solutions and won those deals. I think that opportunity is, we're going to hear that story more and more as we go forward for Absolute.

How long a cycle was that sale from the presentation to close?

I think 1 of those customers, it was probably months, as opposed to years, and the other 1 it was probably a couple years. A couple of years we had been talking to them about expanding the relationship, and probably around a year in terms of the introduction of Absolute Manage.

Okay, guys, thanks a lot.

Thanks Scott.

You're next question comes from the line of Thanos Moschopoulos from BMO Capital Markets. Your line is open.

Hi, good afternoon. Starting off with operating expenses, we saw sales and marketing and G&A come down relative to Q3. Is that currency, or were there any head count reductions or other significant cost reductions in the quarter?

No, there were no head count reductions in the quarter, Thanos. What you're seeing there on a quarter-over-quarter comparison is really -- it has to do on the sales and marketing side, there are a number of factors, 1 of which is our annual sales conference, which happens in the third quarter. So, it was a little bit higher in the third quarter. Outside of that, it was a little bit a partner marketing, and then just some miscellaneous smaller-type items that all added up.

Okay, so in the near-term would you expect OpEx to remain fairly consistent with current levels? Or in light of the strong top line performance, might you start to invest a bit more in sales and marketing, or some of the other areas?

Right. We're not targeting any broad-based increases for next year. We are intending to make some targeted increases. I think in Q4 it was a little bit lower than what I would characterize as our run rate. But when you look at the total year of 2011 for next year, we're expecting to make some small increases, but certainly not into double digits. So, single-digit only.

Okay. Now as we head into this quarter, I guess the world is becoming a bit of an uncertain place. At the moment, based on what you're seeing in your pipeline, would it be reasonable for us to expect a typical seasonality for Q1 relative to Q4?

I think that's a fair comment.

So, in other words, you're not seeing anything right now that would suggest any type of slowdown in the opportunities that you're seeing, at least as of today?

No, we are not.

Okay. Finally, can you provide us with an update on some of the consumer trial programs that you have rolling out. I believe you recently launched, or are in the process of launching some consumer trials for your partners?

Yes, Thanos. Some of those programs are still in the process of launching. What we're seeing right now, those are being launched throughout the calendar year, and it's really too early to tell what sort of up-take we're going to get on those programs.

I think, Thanos, when you think about consumer, the consumer team has done a very good job diversifying away from the bundle deals that we've had in the past, so we've been much more stable consumer business and really those free bundles that you're talking about will be a small slice of the overall consumer picture. But we are trying a number of new things in the consumer market. You'll see a little bit of low-cost advertising come into the mix.

Mark and his team have been a very good job of a few other neat ideas, in terms of -- obviously, we're still bundling with Trend Micro. We've got a whole bunch of different things that we're doing, with a little bit more on the retail space. Our Apple relationship is still moving forward in consumer. Mark's diversified the consumer business well. Again, it's only 15% or less of our overall business.

Right. Okay. Thanks guys, I will pass the line.

Thank you.

You're next question comes from the line of Pardeep Sangha from PI Financial. Your line is open.

Thank you and good afternoon. Just thinking a little bit on Absolute Manage here, can you characterize why you're winning some of these deals? Is it that able to provide multi-platform, is it Persistence on the theft side of it? What is it that helps you win these days -- these contracts?

Sure. Why don't we start off by saying it's a large market, CAD2 billion market, there's big players in it. Altiris is in there and LANDesk, and Microsoft System Center -- typically the products we come up against are not easy to use. They require a lot of customization. They require large teams to support them.

Absolute Manage is a very easy-to-use, nimble product that really gets 90% of what IT wants to get done, done quickly and easily. I think that's why people like it. The fact that it's cross-platform is huge. The fact that it supports iOS 4 devices is huge.

The fact that it's going to be supporting Android devices here very shortly, as well -- it's a really nice product. It's priced well. Typically it's a lower-priced product than its competitors. And we have Persistence, which nobody else has.

So, this is a big market, it's a mature market, there's a lot of customer satisfaction issues with existing products there -- there's not a lot of customer loyalty, and we have a chance of going in and replacing Legacy systems with Absolute Manage and customers are very happy to go that route. We also have a very, very good team around Absolute Manage that's led by Peter Frankle and Martin Bestmann, and they do a heck of a job responding to customers and updating the product very quickly. It's a very good product and we are very proud of it.

Okay. Digging a bit further into Absolute Manage, on the pipeline what percent, if you can tell me, what sort of percent of your pipeline is Absolute Manage? Are they typically all these big kind of deals, or are there small ones, as well? Will you just characterize your pipeline for Absolute Manage?

The pipeline for Absolute Manage is about 30% of our overall pipeline, which is somewhere around CAD50 million and continues to grow. So, yes, it's a decent-sized pipeline, and we've got a very good product there.

Okay.

Yes, Pardeep. Typically, the deal sizes are bigger in Absolute Manage, as well. We do see those million-dollar deals. I think we're going to see a lot more of those as we go forward over time.

Where are you seeing these deals in terms of sector -- education, government, corporate, for the Absolute Manage, I'm talking about?

Yes, we're seeing them everywhere. So, the 2 deals that we just closed, one was a state and local deal. The other 1 was an education deal. We've closed them in corporate, so corporate and public both. Everybody needs to manage their end devices, right? So it applies to every vertical.

Okay. Just with regard to the international side, can you just talk a little bit about sort of your overall sort of strategy there in international? You've done some work in Europe, you've done some work in Asia, help me understand where you are really going, and what your focus is on the international side.

We're focused on 3 markets. We're focused on EMEA, which is really UK, Germany, and France is the primary market there. So we have full Computrace support, and all the languages set up.

We have the infrastructure there, recovery infrastructure is there, a lot of successful recoveries. We've got a core group of customers there. They're advocating and they're very pleased with the service. And we've introduced Absolute Manage, we're getting a lot of traction with Absolute Manage over there, so I think EMEA will continue to grow for us.

Latin America is sort of the next focus. We've had a lot of success in Latin America, particularly with Computrace, because there is a lot of computer theft in Latin America, as you can imagine. There just is. We've been very successful down there with a number of school initiatives, et cetera. I think that's probably where there's -- it's just a very significant demand for Computrace, so that's been a very strong market for us.

Then we have Asia-Pacific. We spent time in Australia. You know about New South Wales. We've had other Australian provinces come to the table, that are putting us in a standard inside of Australia.

So, we're actually having a lot of success in Australia. Then we're seeing our business slowly but surely grow in markets like Japan and other markets. Malaysia, et cetera.

We're looking closely at Asia-Pacific to really figure out where our next piece of growth would be. Obviously, somewhere like China and India is a very interesting, but we need to proceed cautiously in those markets because of IP theft issues and things like that. But, there certainly could be very lucrative and exciting opportunities. So, we're looking at them the most strategic way, and the best technology delivery method for those markets.

Overall, obviously we're excited about international. We've invested there for a number of years now. Finally, we have an exciting story to talk about with the kind of growth we're seeing there.

One last question for Errol. What was your head count at the end of the quarter and where do you sort of see this go in terms of total head count? You said it's only small increases here and there. Maybe you can give us some numbers, sort of what you were at end of the quarter, and where do you think you'll be in 12 months in head count? Or a quarter out or 2 quarters out?

Yes. We ended the year at about, just under 340 employees. That's permanent full-time employees, so obviously we've got some contractors, and a few part-time that's around, but 340 is probably the right number to use. Going forward into next year, at this time next year there will not be any huge changes. I think on the high side, if we increased our employee base by 10%, I would say that would be the absolute maximum.

Okay. Thanks very much guys.

Okay, thanks Pardeep.

You're next question comes from the line of Sera Kim from GMP Securities. Your line is open.

Hi, good afternoon guys, and congratulations on the quarter. Earlier you mentioned that you're going to be providing Android support soon. I know that you already provide support for the iSO 4. I was just wondering what percent of your sales contract is coming from these mobile platforms?

It is very small right now. Even though mobile device management gets a lot of press, and it's a very exciting topic because there's so many of these hardware platforms coming to market, in actuality, the market for, just generally, from all device management, it's a small market.

The leader in the market's probably only doing around $20 million in sales in terms of management of these mobile devices. This is actually a small market at this point in time. Not to say over time it won't grow, and there's some estimates that grow it into a CAD1.5 billion market over the next few years.

We see this as more of a long-term play. What we're doing is we're building full functionality for all of these different types of operating systems, Apple, Android, BlackBerry, et cetera, into both of our platforms, the Computrace platform and the Absolute Manage platform, and will be able to support all these devices in these 2 different contexts.

I think that as the market grows you will see us as a leader in this space. We have obviously a very unique set of functionality with our lock, delete, locate, on the Computrace sided. Then on the Absolute Manage side, it's more of a full-service mobile device management, where it includes telecom expense management capabilities, and those software deployment patching type capabilities. So, those are the 2 ways that we're approaching the market.

Great, and I'm just wondering if you can give us an update on the competitive landscape, if McAfee announced a mobile security solution, and it seems like they have locate and track feature, as well. So, I'm just wondering if you are seeing any competition from them, and if you see them becoming a larger competitor going forward?

Yes, there is a lot of buzz out there and just general noise I would call it in terms of the consumer market, where people can and do add some delete functionality and lock functionality, which is pretty -- you know, it's not that difficult to do that.

On the commercial side, you really have to have Persistence in order to be credible in the market for anything to do with location or recovery or deletion and auditing capabilities on the device, so that you have to survive that reformat or OS reinstall, otherwise someone can easily delete McAfee's agent and it's gone, and it's not going to really prevent against theft. We almost call those false features in a sense, because without Persistence they really don't serve customers.

When you're in commercial markets, it doesn't take very long for the IT guy to ask you whether or not you're persistent or whether you survive a reformat of the hard drive. What happens if I delete the app? Oh, my anti-theft app has been deleted, it's gone, it doesn't work.

They won't buy from you in commercial markets. But we can tell that IT person well, you can delete it, and then it comes back when you -- you don't have to do anything. If you do reinstall it or you delete it within a certain number of hours, the app's back, and it's there protecting a device.

That's the protection that commercial organizations need, want, and will buy. That's what we sell. Everybody else sells, honestly, something that doesn't really work. It just takes, with commercial customers, they understand the differences. Consumers may or may not be sophisticated enough, depending on the consumer, to understand the difference.

1 thing that I would add to that, Sera, is that what we are seeing, there is a positive outcome from this increased competition that we're seeing on the consumer front. It's kind of 2-fold. 1 is specific to consumers, where you're starting to hear stories of vigilante-ism and people locating their iPads and then going to get it and then getting punched in the nose or worse. So, it's creating a great story for our managed theft recovery, and I think that's very important.

The other thing that we're seeing, because of this, the increased number of companies out there, is just more market awareness off the value in having these remote security features, and that's starting to percolate up. The awareness is being created within the corporate market as well, which is good for us.

Yes, that's a great point that Errol is raising. Our whole emergency services category is getting a big lift by some of these quasi-entrants, if you will, coming into the consumer market. So, it's only helping us, actually.

Okay, great. And then another question is just on the Secure Drive encrypted solutions, what sort of traction do expect to see for fiscal 2012? Can you just talk about the sales cycles and what you expect the timing of the tick-up to be?

Well, it's still really early in that product, but we do have a number of customers evaluating our solution today. We do also have some incentives with our sales organizations to sell Absolute Secure Drive. So, we think we will sell it this year, but it's probably not going to be a material number.

It's probably going to be similar to some of the early years, that when we -- that first year that we adopted Absolute Manage. So, it will be maybe a CAD1 million or CAD2 million, it's not going to be significant. But it's going to set the stage, I believe, for a lot more business in the next couple of years in this Opal secure drive management.

Okay, and 1 last question. Errol, what do you expect the tax rate to be going forward?

What's most important to us obviously is our cash taxes, and for fiscal 2012 we're not expecting to pay cash taxes. It's part of our year-end -- completed an analysis there. It seems we've got sufficient tax shelter within our main markets, which are really the US and Canada, that will cover us for 2012. Going into 2013 I think we'll start paying a bit of tax in Canada, but expect the rate that year to be no more than -- our effective rate, put it this way, is around 30%. I'd expect in 2013 would be at the most, a third of that.

Okay, great. Thank you.

Thanks, Sera.

Your next question comes from the line of Justin Kew from Versant Partners. Your line is open.

Thanks, good evening, John and Errol. Actually John, I just had 1 question to tie off here. You had mentioned that your pipeline right now is at $50 million. How does that -- number 1, what does that represent? Is it kind of sales contract in the bag, or very close to the bag? Then second question is, how does this compare with kind of recent -- is this an all-time high in terms of pipeline, or in the last 8, 10 quarters?

A lot of questions there, Justin. I'll start with the first 1. Our pipeline, typically, has been growing over the last few quarters, as we talked about. I think it's somewhere around CAD50 million at the moment. We typically close in excess of a third of that in a given quarter. Then it just keeps replenishing and growing as it moves forward. So that's North American sales, I'm talking about. That's our most significant market. So, those are the numbers for -- that's how that works.

The second question is just on an absolute basis, how does the $50 million look compared to the last 6 quarters?

I can answer that 1, Justin. I think the last time we disclosed what our overall commercial pipeline was in North America was in May of last year, and at that point in time it was closer to $40 million, so that will give you some context.

Okay, excellent. Thank you very much.

Thanks, Justin.

(Operator Instructions)

You're next question comes from the line of Russell Lint from Park West. Your line is now open.

Hi, good afternoon. Thanks for taking my question. Can you hear me?

Yes, sure.

I was hoping you could take us through in more detail what the impact of IFRS will be on the income statement? I understand that in terms of contract costs it won't matter on the cash flow statement, but just for modeling purposes, I want to make sure we understand what the impact will be on the income statement.

Sure. Okay, it's not a simple answer I'm afraid. But at a relatively high-level, we've got -- so on the top line obviously the conversion to US dollars is going to -- our reported sales contract -- well, this is outside the financial statements, but the good news is we don't have to talk in constant currency any more.

At the revenue level, if you compare that to our current financial statements which are in Canadian dollars, our deferred revenue balance will go down. The number is quantified in our MD&A, and I think it's roughly $5 million. So that will translate into slightly lower GAAP revenues, if you were to convert fiscal 2011.

On our operating expenses, what we'll find is stock-based compensation will be a little bit higher. I'm unable to quantify that 1 right now. No longer deferring the contract cost -- what that means is we'll be expensing them directly as compared to right now, where we defer it then we amortize it. But, the actual impact of that in any given quarter will be maybe a couple hundred thousand dollars.

Then translating our costs from Canadian dollars to US dollars -- for context, roughly 50% of our costs are denominated in Canadian dollars, roughly 40% are in US dollars, and the other 10% is in other currencies. So, I think you can probably do a conversion just based on having those details.

Okay, but in terms of the deferred contract cost, it's only a couple hundred thousand dollars impact a quarter?

That's right, because it's really the delta between the current amortization charge versus direct expensing. That's right, it's only a couple hundred thousand per quarter.

Okay. You will give us some historical numbers to work with?

We will. At the time that we publish our Q1 results, we will be also publishing four quarters of comparatives for 2011.

Okay, great. Thanks for the clarification.

All right. Thanks, Russell.

Your next question comes from the line of Scott Penner from TD Securities. Your line is open.

Sorry, just 1 follow-up, Errol. I'm not sure, you may have mentioned this already. But I think there was quite a large component of new commercial business in Q4. I was just trying to get a sense of whether that's right and what that relates to?

There was nothing singularly that would have caused a change there. When we talk about commercial, this includes all 4 of our major verticals, right -- education, corporate, government and consumer. The big movements in Q4 would have been certainly Abs Manage grew considerably year-over-year. Outside of that, it was really the growth within our education and our consumer markets.

That's all I wanted, thanks.

Thanks Scott.

There are no further questions at this time. I'll turn the call back over to the presenters for closing remarks.

Great. Thank you, operator. We just want to quickly thank everybody for the continued support of Absolute. We feel really good about last year, and we look forward to reporting to you next quarter at the end of Q1. Have a great evening everybody.

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