Absolute Software Corp (ABST) 2012 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Absolute Software Corporation's fiscal year 2012 third quarter conference call. (Operator Instructions).

Before beginning its formal remarks, Absolute would like to remind listeners that certain portions of today's discussions 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 quarterly MD&A.

(Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Monday, May 7th, 2012, at 5 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.

Earlier today we released our fiscal 2012 third quarter results. You can find the press release, financial statements, and MD&A at absolute.com.

With me today is Errol Olsen, our Chief Financial Officer, and Rob Chase, our Chief Operating Officer. I'll begin today's call with an overview of our performance for the quarter. Errol will review our operational and financial results, and then I'll discuss our strategic outlook. And finally, we'll open up the call for your questions.

We believe Q3 was another solid quarter for Absolute. While Q3 sales contract growth was 8% over Q3 last year and is below the 15th growth we posted year to date, it is the components making up our growth that we're excited about.

Absolute had an excellent quarter in our core North American market. Sales were up 15% over the same quarter last year and outpaced year-to-date growth of 13%. And I want to thank our entire North American sales organization for their performance.

This growth was due a resurgence in our Computrace sales and a strong showing from our Absolute Manage and Mobile Device Management solutions, which continue to be our fastest-growing solutions. This reconfirms our vision to provide a single solution to track, manage, and secure multiple cross-platform devices is on target and that Absolute is delivering the right solutions at the right time into a rapidly expanding marketplace.

Overall, Q3 sales growth was slightly suppressed by a lumpy Q3 internationally. International sales were down 28% over Q3 last year due to an expected decline in consumer bundle sales and an absence of a large international deal. Given the developmental stage of our international business, we can expect lumpy sales performance from time to time.

Having said that, our year-to-date international growth remains robust at 31% over the same period last year and we expect international to return to growth in Q4.

Absolute's business is vibrant, healthy, and growing because of three simple factors. Absolute solves priority, security, and management issues for customers that others can't easily solve. Absolute is well positioned to continue solving for the fast accelerating BYOD market requirement and Absolute does a diverse number of things really well, some better than anyone else in the world.

For example, in the end point security market, there is no better solution or technology than Computrace for tracking and securing end-point computing devices to help organization's with good governance, regulatory compliance, risk mitigation, device and data security and with timely investigative response capabilities.

In the UK, SC magazine just recognized our remote forensic capability, naming Absolute's Computrace solution the best forensics tool for 2012.

Government and customer requirements for protecting data and ensuring compliance with various global data security and data breach regulations will only continue to increase over time. Absolute's flagship solution, Computrace, arms customers with an on-demand security response system to remediate an end-point security incident and to prevent it from happening again through features like device freeze and messaging and auditable Department of Defense grade quality remote data wipe and our remote forensics investigative services.

As a result, we continue to see robust demand for Computrace theft recovery, investigation response, and remote forensic solution sets and that continues post quarter with the $1.4 million Computrace contract we announced earlier today.

With our client management tools solution, Absolute Manage, we also help customers manage and automate their devices, keeping their devices in good operating health, through ensuring the appropriate security patches and policy-aware software configurations.

Customers rave about this product line and how it is designed exactly the way they would design it themselves, which is, obviously, a good thing to hear. This positive customer feedback was also recognized by Gartner and resulted in Absolute being places as a visionary in Gartner's Magic Quadrant for client management tools, which we mentioned last quarter.

Now, with the huge growth of consumer smart phones and tablets, many IT departments have embraced the notion of providing support for these employee-owned devices. Bring your own device, or BYOD, is a powerful trend that's quickly become the number one issue facing IT today.

Absolute Manage MDM, Mobile Device Management, provides an excellent framework customers to support BYOD. Not only can Absolute support and provision software and apps to secure the new phones and tablets coming into the organization, but we can also support and secure the personal Macs and PCs coming into the organization, as well.

We believe this is a subtle, but meaningful, differentiator because our customers want to support all major device groups. We are the unique company that offers a natively-designed, cross-platform comprehensive solution that supports all relevant devices coming into the enterprise.

As a follow up to the recently released and feature-rich Absolute Manage 6.0, later this month we will be releasing Absolute Manage 6.1, which we consider our BYOD release, and which includes more exciting features for AbsoluteSafe and adds additional applications management capabilities.

Our vision includes the ability for IT to manage and secure both corporate-owned and individual-owned devices with the same solution. Earlier in Q3 we announced our AbsoluteSafe system for secure document distribution and control as an essential component for solving for BYOD, which has been very well received in the marketplace.

The important takeaway is we believe Absolute is healthy and -- is a healthy and diversified business. Our expanding solution set creates more opportunities for us, enabling cross selling into our existing customer base and new customer wins. Many of our new BYOD offerings are excellent lead generators, with MDM leads coming in at a 3 to 1 ratio in comparison to our other products. Over the coming quarters, BYOD will be a key focus for Absolute as we continue to execute on our exciting vision.

With that, I'll turn it over to Errol to discuss our financial results for the quarter in greater detail. Errol?

Thanks, John. Good afternoon, everyone.

We delivered another quarter of year-over-year sales contract growth. Q3 sales contracts were $18.9 million, up 8% versus $17.5 million in Q3 of last year. Year to date, sales contracts were $64.9 million, up 15% from $56.3 million for the same period last year.

Commercial sales contracts for the quarter were $17.1 million, up 14% from Q3 of last year. The year-over-year improvement reflects productivity gains and the benefits of our expanded commercial product offering. In the quarter, we particularly benefited from strong demand in the North American corporate and government market verticals. Year to date, commercial sales contracts were $58.8 million, an increase of 24% over the same period last year.

Looking at our new versus existing customer split, with our continued growth and the expansion of our product line, we're beginning to see a gradual change in the new versus existing ratio. While historically 80% to 85% of our commercial sales have been from existing customers, we're now trending toward a healthier range of 75% to 80% existing customer sales. While customer retention remains high, our Abs Manage and MDM products are helping to drive a higher proportion of new customer sales.

Commercial sales contracts for our theft management products were up 17% year over year in the quarter at $12.8 million. Year to date commercial sales contracts for our theft management products increased 9% to $41.8 million. Demand for our theft management products, in and of themselves, is robust. They continue to be relevant in the market and we are increasing benefiting from the growing market awareness about the data and compliance risks associated with the loss of mobile devices.

In terms of our device management and data security products, which we formerly referred to as non-theft-recovery products, we delivered continued year-over-year sales contract growth, as well. Commercial sales contracts were $4.4 million up 5% from Q3 of last year. Year-to-date commercial sales contracts for our device management and security products were $17 million, up 89% compared to the same period last year.

The lower growth rate that we experienced in Q3 reflects a shift in the weighting of Computrace products toward a greater proportion of theft management versus tracking and data delete in Q3. Meanwhile, our Absolute Manage MDM was a particularly strong performer in the quarter and plays an increasingly important role in fueling our continued growth.

On the consumer front, Q3 sales contracts were $1.7 million, which was down 28% from the prior year. Year-to-date consumer sales contracts were $6.1 million, down 31% compared to the same period last year.

We expected to see a year-over-year decline because we terminated our low-margin, high-volume OEM bundled programs at the end of Q3 fiscal '11. What is worth noting, though, is that some of the expected decline was offset by a 24% year-over-year increase in sales to our retail, direct, and higher-margin OEM channels in the third quarter and a corresponding 2% increase for the year-to-date period.

Year-over-year, our Q3 IFRS revenue, which continues to be a lagging growth indicator for Absolute, increased 9% and increased 10% for the year-to-date period. The increased revenue reflects our growth trend in sales contracts from prior quarters, which are accumulated in deferred revenue and drawn down over the average contract term of 26 months.

Now, looking at our operating expenditures for the quarter, adjusted operating expenditures, which includes cost of sales and operating expenses, but excludes non-cash charges for amortization of acquired intangibles and stock-based compensation, were $15.2 million, a 2% increase compared to Q3 of last year.

Year to date, adjusted operating expenses were $46.3 million, down 3% year over year. We're very pleased that we've managed to hold operating costs flat over the past two years, while continually growing sales. Looking forward, we see an opportunity to emerge as a leader in the mobile device management space and in order to achieve this, we expect to make some modest increases in our cost structure, particularly in the go-to-market and R&D sides of the house.

As a result of our increase in revenue and cost control, we generated adjusted operating income of $3.2 million, a 55% improvement year over year. For the year-to-date period, adjusted operating income was $8.8 million, up from $2.6 million from the same period last year. We define adjusted operating income as IFRS revenue less adjusted OpEx.

In addition to sales contracts, as you all know, cash from operating activities continues to be a key financial and valuation metric for us. In the quarter, we generated $2.6 million in cash from operations. This was down from $3.0 million in Q3 of last year as a result of two factors. Sales for the quarter were slightly more back ended than usual, and a large payment, which was due in the quarter, didn't come until immediately subsequent to quarter end. Year to date, we generated $14.2 million in cash from operations, compared to $9.7 million in the prior year, a 46% increase.

Looking now to the remainder of fiscal 2012, we expect to continue to grow our sales contracts and cash from operating activities above fiscal 2011 levels. We're seeing continued demand for both of our major commercial product categories, and we expect to return to growth in both the international and consumer markets. We're executing on plan and we're confident in the positive returns that we will see as a result.

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

Thanks, Errol. In closing, we believe we are going to market with the right product vision at the right time. Our sales and cash flow performance provide validation of this vision.

All of our products are growing and with international expecting to return to growth in Q4, our geographical markets are also growing. We have built our solution set upon unique competitive advantages that we believe will enable us to emerge as a leader in this exciting multi-billion-dollar market for end point management and security for both corporate owned and individual-owned devices.

A couple of our advantages include Absolute, as the only company that natively designed support a cross-platform solution for PC, MAC, iOS, Android, and Windows Phone 7, with 8 coming shortly. We have the world's only persistent management solution for PCs and the only complete theft management and investigative response system on the market.

We will leverage these advantages, and others, to solve for the critical problems facing IT in ways that no one else can. Today our focus is on solving for the BYOD trend. At the same time, we will continue to move our traditional solutions ahead, as we grow our global presence. In doing so, we will continue to strive to become the go-to vendor for organizations that are looking to embrace mobility and to truly unlock the cost and productivity gains that mobility can offer.

This concludes our prepared remarks for today. Operator, please open up the call for questions.

(Operator Instructions). Your first question comes from Thanos Moschopoulos with BMO Capital Markets. Your line is open.

Hi, good afternoon. John, the $1.4 million deal you announced today, can you tell us what geography that was in?

Sure. That's in the US.

Okay and that leads to, I guess, my next question, which is hearing more and more about sort of state and local funding challenges and so it would seem that for the time being you've yet to see an impact on your business in the education sector from that. Correct?

I think that's true, Thanos, but I would say that the funding challenges do come and go and they do impact us in some areas of the US today.

And specifically you're talking about on the education side or across other verticals?

No, I think in education I think there's some states, specifically, that are struggling with funding. And that's something that is ongoing. The states tend to rotate, the challenges rotate through the states over time. But there's certainly some states in the US today that are not getting the dollars that they would like to have.

Maybe just expanding on that, can you provide some more color in terms of whether there was anything that stood out in the quarter as far as the mix of vertical markets?

I would say that -- it's Rob here, Thanos. But in terms of our verticals, certainly it was a slower quarter for education from what we've seen in the previous quarters. So, whether or not that's directly related to funding across the board or not is to be seen, but I would say we just watch it very closely as a business and make sure we're ready to adapt.

And, Thanos, I think in regard to education and budgets, there's always some state, obviously, that's not getting full funded. I think that's pretty consistent and has been for a number of years. It was California for -- a couple years ago and now it's some other areas that are struggling a little bit with funding. But we feel that funding is cyclical and eventually it'll return as the requirement grows.

Okay. Now, receivables were higher in the quarter than I was looking for. I think Errol provided some color around that, so given that you collected the large payment subsequent to quarter end, presumably we should see receivables come back into normal levels next quarter? Or are there any other dynamics we should be aware of?

No, no, you state it accurately there, Thanos. I would put this down to a timing issue that corrected itself early in the fourth quarter.

Okay. And then finally, just on the OpEx side, you mentioned that you plan on doing some modest hiring going forward. Can you provide some more color, either quantitatively or qualitatively, in terms of how much hiring and how much of an OpEx increase we should be looking for?

Sure, Thanos. It's -- so, there's really four areas that looking forward sort of into fiscal 2013 where we're expecting to make some increases in our expenditure. One would be North American commercial where we're looking at the opportunity to split two or three territories, which means hiring additional sales people and pre-sales people to support those.

Secondly would be in the APAC region, where we see a lot of opportunity in APAC and we're expecting that we'll hire a small handful, i.e., around 5 people, in Asia to support that initiative.

On the marketing side, as we've expanded our product portfolio, it's become pretty clear that we're also stretching our marketing budget as we try and support multiple products. So, we expect we're going to spend a little bit more on marketing next year.

And then the fourth areas is R&D, where we've been tracking well below our budget in R&D throughout fiscal 2012, just because we've had some real challenges bringing in the specialized technology expertise that we require. Having said that, our hiring, especially on the R&D front, accelerated quite a bit in the last couple of weeks and into April and I expect that we'll be -- most of the acceleration in R&D spending will happen in Q4 and Q1.

So, then, I mean, in the R&D side could we see a bit of a step change or should we think about the increase across the board being more incremental than anything?

It'll be more incremental than anything.

Okay. All right. Thanks, guys, I'll pass the line.

Thanks, Thanos.

Thanks, Thanos.

Your next question comes from the line of Pardeep Sangha with PI Financial. Your line is open.

Thank you. Good afternoon.

I think, John, you had a bit this comment, something about MDM and 3 to 1 ratio. Can you just elaborate on that? I didn't quite catch what you were saying there?

Well, sure. As we talked about, the bring your own device movement is a huge fundamental change and shift in the way IT is supporting devices coming into the enterprise. So, with that -- with that requirement to support these new form factors, these iPads, iPhones, Android tablets, et cetera, Windows Phone 7, we have, obviously, more Mobile Device Management solution. And we're just getting 3 to 1 in terms of lead interest. When customers are calling Absolute, they're calling us 3 times as much for our MDM solutions than they are for our traditional products.

We see this as an excellent opportunity to have conversations with customers about what their needs really are, obviously supporting their BYOD requirements, but also ensuring that they have their management and security capabilities for their laptop devices, PC, and Mac devices, as well.

Okay. So, you're getting 3 times as many calls and interest on MDM than you are sort of for your traditional products. Now, how does that translate into your sales pipeline, let's say, or funnel in terms of I guess you would say what percent of dollar value in your sales pipeline sort of is MDM versus traditional? I'm just trying to get a sense of dollar value that would translate into.

So, Pardeep, the MDM piece is just part of Absolute Manage. It remains an unreported specific number and we don't intend to report that specifically. But what we can say is that, really, MDM is actually exceeding our expectations. In fact, it was about 2X what we thought it would do this quarter. So, it's surprising us to the positive and that's because of that in-bound lead, which has really driven part of why our Absolute Manage pipeline overall is up quite nicely, as well, for the year.

In the past, I think you have said Absolute Manage is making up a third of the dollar value of your pipeline. Is it around that range or is it making up to half of your pipeline these days?

It's still around the third range. Likely, it was sort of on the light side of a third before. Now, it's a solid third, if you will. It's certainly growing faster than our overall pipe at the moment.

Okay. Errol, you had a comment about the return in growth in international and consumer. If you can just elaborate on that, I can understand what you're saying on the international side, but on the consumer side what we've seen over the last little while here is that consumers are flat, whereas the growth has been from commercial, as well as on the Absolute Manage and BYOD sort of phenomenon we talked about. But, the consumer side, what gives you comfort that we are going to see a return to growth on the consumer side?

Well, it's -- you know, the primary headwind that we've been faced with on consumer is the unwinding of these unprofitable bundle -- or marginally profitable bundle programs that ran through -- right until Q3 of fiscal 2011.

So, this is the last -- the final quarter where we've got that -- where we're comparing our results against prior-year results that include that bundle program. And if you look outside of the bundle program, our consumer business -- and I'm talking about retail, online, and other OEM business -- has been growing 24%, at least in Q3. And it's really that growth I expect to look at, going forward, in the consumer business.

So, non -- the non-bundled programs, those are growing modestly, because we've stepped away from these unprofitable bundles, and retail online and other OEM programs are growing quite nicely.

Okay. And just on the -- I guess you're calling it the device management and security side or non-theft-recovery you used to call it before, I mean, it's seeing growth year over year from Q3 of last year, but sequentially it's down a little bit from the last couple quarters. Anything there that -- just timing of contracts or is still going to be kind of lumpy as well? Or can you comment a little bit about that comparing on a sequential, previous-quarter basis?

Yes, Pardeep, is primarily because in that bucket is both Computrace sales and Abs Manage sales, which include -- Abs Manage, of course, includes MDM. And what you're seeing is really this Q3 was an exceptional quarter for the Computrace sales that included theft recovery and, really, more customers just opted for that in the quarter as opposed to the ones that -- just the data protection piece.

So, what you're seeing is, if you were to look sequentially and we're not divvying up that particular category, but if you were to look sequentially, Absolute Manage products grew again quarter on quarter, both sequentially and annually, whereas the Company's Data Protect product was down slightly as it's more allocated toward theft recovery services this quarter. Make sense?

Yes, yes, makes full sense.

Great.

One thing I would add to that, Pardeep, is we did announce that large Queensland deal in Q2, which was non-theft-recovery.

Right. Right. Okay, thanks. Thanks a lot. 'Bye.

Thanks, Pardeep.

Your next question comes from the line of Tom Liston with Versant Partners. Your line is open.

Hi, thank you, and good afternoon. Just more on the BYOD trend, obviously it's top of mind with most CIOs and you talked about your investment in marketing, which I assume will target many of them.

How do you get this messaging out where you're -- I think you said natively developed for most of these platforms, whereas some of the traditional, more client-management-centered tools say they have MDM support, but maybe not at the same level. But they're kind of the default, go-to vendor as CIOs, maybe, are in a bit of a panic mode and maybe not have full view of the landscape.

So, how do you make sure and where do you target where an incumbent might try to extend MDM where you can kind of get in there and make sure the messaging is proper?

Well, Tom, we're working with our traditional OEM partners on bringing BYOD solutions to the marketplace. We're working with some of our VAR partners, as well, some that have a heavy Apple presence in distribution. So, it's really taking our partners that are best suited to helping solve for BYOD and making sure that we're the product of choice, that we're getting their sales teams' mind share and that they're pushing our solutions and understand our solutions and how they are the better solution for many of these customers looking for -- to solve for BYOD.

The key thing that we have that nobody else has is that we have the ability of supporting for BYOD across all the platforms. So, we have it for Macs, for PCs and for iOS, for Android, Windows 7. Because we've got the full cross-platform support, we're able to really provide a true BYOD environment.

And just related, because the market's so big, is there a certain area that maybe not in terms of necessarily avoid, but target other areas where maybe there's existing heavy infrastructure that you just don't see the client ripping out or what have you? I mean, the message, obviously, plays across many organization, but is there certain areas that you're targeting more than others, giving your advantages?

Tom, I think that maybe the way to look at it is, one, we do have, of course, representation in the Gartner Magic Quadrant, which Gartner will tell you they're getting more and more calls about it. So, people are hearing about it that way, about, hey, this is the only solution that can do natively everything, right?

So, that's one way. The other, I think you've got to look at it, is we do have a large base of Computrace customers, approximately 34,000, all of which have this problem. So, we are seeing interest there and will be continuing to doing a lot of marketing into that existing customer base. And then the final one is, really, a lot around the pay-per-click stuff, making sure that we tie into the Gartner Magic Quadrant with pay-per-click advertising and other spots where people are bound to look, to drive attention to us. And that's why we're seeing a 3 to 1 lead ratio in the space, right?

And are most customers connecting the two? I see Lenovo on the tablets, you're on the [deck]. It's a leak right now, but one of the major vendors has a tablet, sorry, coming up for Windows 8 that it appears that they're marketing you heavy on the Computrace side. Are customers making the connection between the two and are you really having those fulsome discussions on both sides?

Definitely. And what we find is customers will come to us for one solution and walk out buying three. So, it really -- they really go well together. There's ample examples within the sales that we've just been having here where maybe there's an RFP for a client management tool solution and end up coming out with an MDM and a Computrace sale in the mix, as well.

Okay. And finally, how much -- I think John mentioned regulation, but certainly HIPAA, I believe they're in the final throes of altering the rules and increasing the provisions for breach notifications and some of the security elements. Are those helping drive discussions? Are they -- is there specifics in some of those regulations that they need to have those discussions now?

Those regulations are very helpful for us, Tom, and if you really want to conduct yourself with really good governance and best practices, then you really need to look at Computrace alongside your encryption for these end-point devices, because encryption is just not good enough. It's part of the equation, but it doesn't cover the internal theft component and if you're -- if you're really going for best practices, you need to consider Computrace.

There's nothing like it. It's the only tool that provides this investigative services on-demand response type capability, which is extremely valuable for enterprise America. So we're quite bullish on our ability to continue to see Computrace grow in the markets.

Great. Thanks. I'll pass the line.

Your next question comes from Sera Kim with GMP Securities. Your line is open.

Good evening, guys. Earlier you mentioned a growing proportion of your pipeline for Manage and MDM products. Which verticals are you seeing the greatest opportunities for these offerings?

Well, it's one of those things that everybody needs, Sera, so, really, it's cross-vertical. Education needs it, corporate needs it, government needs it, healthcare needs it. So, the opportunity is a truly cross-vertical opportunity. In our customer base, obviously, as Rob mentioned, we have a lot of educational customers, so we're certainly well ingrained in the education in the educational customer discussions for BYOD. And we also see at the corporate level as well and state and local, et cetera. So, lots of opportunities for BYOD across the board.

Would you be able to say what percentage of your pipeline is for education, for the education vertical?

No, we don't really chop our pipe up that way, Sera.

Okay. Just -- and also, given that the BYOD is kind of top of mind for a lot of these IT departments and Absolute's advantages, I'm just -- especially from talking to customers it seems like you guys can deploy relatively quickly. So, I'm just wondering, because of that, are you -- have you seen a change in your sales cycle? Are you seeing that shortening? Or is it still pretty long?

The sales cycle on that MDM side can happen very, very quickly and so, definitely we see that as an advantage. But part of what we're starting to do, as well, is go into a customer or a prospect and actually stand up the server quickly for them and let them start to experience it themselves in a trial type of concept. With the ease of deployment and getting things registered, we can certainly win a lot of deals that way, I think, once they see how simple it is.

So, it's started to change somewhat, but it's not really an overall change in the business, if you will.

Okay, so, generally, do a lot of your customers try the trial before moving or are there -- I mean, I'm just wondering from vertical markets to -- between vertical markets does one prefer to do trials versus others or does everybody or does everybody do trials?

They --

No, they'll all do trials. Everybody wants to evaluate the solution and usually you're evaluated against a couple of different players. So, that's a pretty key component.

But, Sera, the one thing I did want to add is I think this is really early, still, in the BYOD curve. And the BYOD curve has got a long, long tail on it. So, a lot of customers -- they may only buy some -- a BYOD solution to support 300, 500, 1,000 iPads that they bought or 1,000 Android tablets that they bought, but there's going -- there's a lot more to come.

So, we're just on the beginning of this really complete -- I mean, huge change in the industry, at the very early stages of it, and this is something that's going to have a long tail on it and I also think, over time, there's going to be a lot of consolidation in the market and I think there's going to be a chance, as well, to replace some solutions that maybe didn't perform the way they -- the way vendors had promised them to perform.

So, you're going to see a lot of changes in this market and I think it's going to provide Absolute opportunity for many years.

Okay. And just kind of that front, I mean, you have a growing cash balance and in the past you did mention M&A, so any updates on that front?

No, we don't have any M&A -- we don't have any updates with M&A, but we are regularly looking at acquisitions and if they are accretive and they align with our strategic vision, we'll certainly take them into account.

Just kind of talking about the overall MDM market, I mean, generally, I realize that it is pretty early, but there's tons of companies out there that claim to do a lot of similar things. So, I'm just wondering how do you think the whole MDM industry's going to play out? You've got a lot of these smaller, emerging companies coming and you've got some of the larger companies trying to get into the space.

So, can you just kind of comment on where -- how you think this whole market will shake out in the end?

Well, we feel very fortunate. Because we have a core business in Computrace and lifecycle management that's mature and continuing to grow, we're able to afford to be in the MDM business. Because a lot of the startups, it's all they're selling. And at some of the price points in a competitive situation, it gets -- you're almost writing an unprofitable deal, just to get it done.

So, I think you're going to see a lot of consolidation around MDM and a lot of the smaller players are going to, actually, probably go out of business and then some are going to get bought. But a lot of consolidation to come and MDM in itself is not that profitable, but if you can attach it to another piece of business that you're in to wrap a much larger solution around for the customer to provide true BYOD support, then that's really where the dollars are and the opportunity is.

So, I think the point solution providers of MDM are going to have an uphill battle.

No, that's helpful. Thank you.

And just last question, you haven't talked about Secure Drive lately, so I'm just wondering is there an update on that front and when do you start to expect to see revenues on that offering?

Sure. We're -- we're out marketing Secure Drive with -- through our partners and through our sales organization. I think we have a webinar coming up, I believe it's --

This week.

-- this week featuring consultants around Secure Drive. So, we're excited about that. I believe we've got 300 to 400 leads already on people partaking in the webinar.

So, we're certainly -- we're certainly getting -- it is getting some market attention, but it's early in terms of it being material to us from a sales perspective.

All right. Thank you.

Great. Thanks, Sera.

(Operator Instructions). Your next question comes from the line of Richard Tse with Cormark Securities Inc. Your line is open.

Yes, thank you. John, just -- I wanted to sort of ask you a question on penetration rates on the MDM side with your existing customer base. Do you have a sense of what it would be in terms of even some of the competitive products that are in there? I imagine it's probably pretty low.

Sure. We're targeting approximately 50% of our existing customers. So, there's a pretty nice opportunity there for us and so the job is to get in front of them as quickly as possible to get them up and running and evaluating our solution.

The beauty of our solution is it's using the same console that any of our Absolute Manage customers already have. So, from that perspective, they're already familiar with how to shape the user interface the way they want it, et cetera, and how to get things done with our Absolute Manage console.

So, it makes a lot of sense for anybody that's an Absolute Manage customer, it makes the most sense for them to continue their BYOD and their MDM challenges with Absolute Manage.

If I sort of look through your MD&A here and we sort of look at the device management section of the MD&A, you sort of refer to growth rate is expected to fluctuate between product lines depending on the natural timing of sales. And so I guess -- and you had some decent, really good momentum here on MDM and you've got a great pipeline, so is kind of like the -- just a little bit of softness in the quarter attributed to the fact that that's the natural timing of sales and that's a new market, or what else are you referring to there?

No, we talked about the -- a little the slight, slight slowness in the quarter was due to international and consumer international, primarily. MDM is growing as we're expecting it to.

But one thing about MDM you've got to realize is the average selling price is much lower than our traditional average selling prices of our other products and solutions. So, you might put in a 1,000 unit MDM installation would be a lot less than what we'd get for 1,000 units of Computrace, as an example.

So, because of the lower ASP, even though we're doing some decent numbers there in terms of units, you're not going to turn the same sort of sales volume within the MDM solution, but you are going to open up opportunities for your other products, like Absolute Manage and Computrace.

Okay. And, Errol, a quick question for you on the cost side. When you referred to sort of a bit of a lift coming to invest in some of the new products, so the bulk of that, should I take, is starting to come in 2013 as opposed to the next quarter?

We'll see part of the increase happen in Q4. In Q4 more related to some of the R&D headcount that I mentioned earlier. The rest of the increase will come over primarily Q1, depending on our success in actually getting the right people in the door, but Q1, probably part of it trickling into Q2, as well.

Okay, great. Thank you.

Thanks, Richard.

And your next question comes from the line of Doug Taylor with TD Securities. Your line is open.

Thanks, Doug Taylor on for Scott Penner. Just a couple questions for me.

Firstly, you guys haven't talked much about the healthcare market, in particular. Any update on how that vertical is going for you?

It continues to be an area of focus for us and as alluded to earlier on the call, with the regulatory pressure that Tom pointed out, certainly one that has some natural drivers in it for us. So, we're seeing both the Computrace side and MDM interest there as these organizations try to roll out and take advantage of the mobility they get with the tablets, for example.

So, things are -- it's still a focus area for us, still having strong results there, and have expanded the team around that, as well. So, we expect good things and part of our growth strategy in commercial to be coming through healthcare here for next year.

Okay, great. Thank you. Next question for me, I just wanted to talk a bit about reseller partnerships. You mentioned last call it was an area you were looking at expanding your ecosystem there. Have there been any developments on this front or are there any initiatives in progress to continue to foster the channel?

Yes, the channel's been going very strong for us. Of course, OEM still remains our strongest channel and, in fact, I just might mention that we expect to win Lenovo's Diamond Award this week in China, which is for their top software vendor.

So, things have been going very well on that front. And recognize to get it right with HP and Lenovo, you really have to be able to tap into their reseller channels. So, certainly we've been expanding and touching those folks more and more.

But at the same time, we have a strategic initiative underway to really expand our VAR and LAR channels here. We have a lot of them already, so it's not such signing up new ones as it is getting them really rallied behind the Absolute Manage and MDM message, in particular. And we've hired some new people in this area of things, as well, and we're off and running there, the key strategic focus, again, that you hit on.

For both North America and internationally, as well.

Yes.

Okay, great. Thanks. I'll pass the line.

Thanks, Doug.

And we have no further questions at this time. I turn the call back to our presenters.

Great. Well, thank you, operator. Thanks, everyone, for joining us on today's call. We look forward to updating you on our continued progress when we release our year-end results. Thank you so much.

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