Absolute Software Corp (ABST) 2012 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Absolute Software Corporation's fiscal 2012 year end and fourth quarter conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

Before beginning its formal remarks, Absolute would like to remind listeners that certain portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events. Any such statements are subject to risk 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, Monday, August 13, 2012, at 5.00 PM 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 welcome to our Q4 fiscal 2012 conference call. With me today is Errol Olsen, our Chief Financial Officer, and Rob Chase, our Chief Operating Officer. Fiscal 2012 was another exciting year for Absolute, one that has seen us raise our profile as a major player in the end point security in management industry and cement our role as a technology leader and visionary. We now enter fiscal 2013 with a fantastic opportunity to continue our organic growth trend into the coming years.

We are competing in a dynamic $4 billion market with the right solutions, strong defensible competitive advantages and a proven track record. We believe that the new leaders will emerge and that Absolute is intent on winning the leadership share. While the general economy has seen some cautious spending patterns and traditional PC shipments have been relatively flat, there's an urgent growing customer need to secure and manage the accelerating growth of multiple types of end point devices. In the global commercial market, more than 200 million mobile PC's will ship in 2012 along with another 150 million tablets and even more smartphones. Collectively, these growing markets demonstrate solid short- and long-term opportunity for Absolute. Our customers need to adopt mobility and manage and secure these devices and their data, and that continues to accelerate.

At the same time, organizations are faced with budget constraints and increased security and management requirements. These are the trends that keep our business exciting and relevant as we are enabling our customers to efficiently and effectively overcome these challenges. Absolute's vision is to provide a single absolute solution for customers to track, manage, and secure their many types of devices and data. Absolute's market positioning is many devices, one solution, track, manage, and secure, and I'm happy to report our vision and positioning is resonating in the market. Gartner named us a visionary in their Client Management Tools Magic Quadrant and highlighted that the client management tools and Mobile Device Magic Quadrants will need to emerge in the future.

Industry pundits, such as EdNET, have called out our many devices one solution strategy as compelling and visionary. And our competitors have begun to try and emulate our many devices one solution vision, but they're miles behind as years of work to add PC and deep Mac management capabilities to an existing MDM play.

We've also proven our ability to execute on our strategy. For two years in a row now our commercial sales have grown 19% over to the prior year. Including consumer sales, our total sales increased 12% in fiscal 2012 and 20% in fiscal 2011. At the same time, we have held adjusted operating costs relatively in check across the last three years. These productivity gains have enabled us to increase our cash from activities by 47% in fiscal 2012 and by 94% in fiscal 2011. In addition, we have proven our ability to grow both our core Computrace theft management business and evolve new data and device offerings to serve the ever changing needs of our customers.

Our core Computrace theft management offering grew 7% in fiscal 2012, provides customers with the defense and depth they require for complying with various data regulations and for general governance, risk mitigation, and compliance best practices. Our data security and device management solutions grew an impressive 67% over last year and now represent 27% of our overall business. This includes our data delete solutions, which we believe are now industry standard, that fulfill the base level data security needs for customers that do not require the full investigative capabilities of Computrace. Our Absolute manage offerings, which bring together life cycle management and mobile device management as a single solution, today we believe that Absolute Manage is the best-in-class solution for securely managing Mac, PC, IOS, Android, and Windows mobile devices all from a single console.

Looking at the year on a quarterly basis, we saw stronger sales growth in the first half of fiscal 2012 with lower growth in the second half. This is in part due to cautionary spending patterns, a decline in calendar quarter PC shipments, and pending Windows 8 launch which has translated to slower growth and large deals for Absolute. This is reflected in our large deal performance which grew 73% in the first half of the year compared to only 11% in the second half.

In addition, we held our operating costs relatively constant in the last three years, meaning that we've realized much of our available productivity gains by the end of this year. Anticipating that, we were reaching this level and given the compelling opportunity ahead of us and the success we're seeing in the mobile space, we began increasing our spending levels in the fourth quarter. The spending increases are targeted at sales and marketing capacity and our development capability with a goal to extend our market reach and to continue our market leading product innovation. We will target our spending modestly up from our Q4 levels. We expect to see increasing growth towards the second half of the year and into fiscal 2014 as we begin to realize the productivity benefits of these investments. Overall, we believe our sales growth for the year validates that we are going to market with the right product vision at the right time.

We have built our solution set upon our unique competitive advantages, persistence, cross platform support, multiple device compatibility all delivered through a single well integrated management console. We believe this will enable us to lead in this exciting, emerging multi million dollar end point management and security market. With that, I'll turn it over to Errol to discuss our financial results in greater detail. Errol?

Thanks, John. Good afternoon, everyone. In fiscal 2012, we performed well across all of our commercial market verticals. We expanded our international customer base, and sales of our device management and securities solutions continues to outpace our overall growth rate.

Total sales contracts in fiscal 2012 were $88.7 million, up 12% from last year with the growth driven by our product expansion and our strengthening market position in all of our target commercial verticals. Commercial sales contracts were $81.5 million, up 19% from fiscal 2011. For Q4, total sales contracts were $23.8 million, up 5% from Q4 of last year, and commercial sales contract for the quarter were $22.7 million, up 8% from Q4 of last year.

In Q4, we saw continued growth in all of our commercial verticals versus the prior year. However, relative to the first quarter, we would normally expect a bigger lift in these commercial sales. This reflects the current economic climate, as mentioned by John, which has led to slower growth and large deals, particularly in the education sector. We would like to emphasize that we continue to see a pipeline for the larger deals. However, the sales cycles have lengthened due to cautious customer spending patterns.

Fiscal 2012 commercial sales contracts for assessed management products were $57.4 million, up 7% compared to fiscal 2011. In Q4, commercial sales contracts of theft management products were relatively in line with the prior year at $15.6 million. Overall demand for our flagship products remains robust. They continue to be relevant, particularly with the growing market awareness about the data and compliance risks associated with lost or stolen devices.

In terms of our device management and data security products, we delivered significant year-over-year sales contract growth. At $24.1 million for the year and $7.1 million for Q4, sales contracts for our device management and data security products were up 67% and 30% year over year respectively. Importantly, the growth within this category is being driven by both Absolute manage, including MDM, as well as the data lead versions of Computrace.

On the consumer front, annual sales contracts were $7.2 million, which was down 32% from fiscal 2011. Q4 consumer sales were $1.1 million, down 34% from Q4 of last year. The declines were the result of two factors. One, the planned termination of our low margin, high volume OEM bundled programs at the end of Q3 last year which we expected would put downward pressure on our consumer results for the year. And, two, a decline in retail sales in Q4 as some of our retail partners eliminated boxed software products from their shelves. To counter this retail shift, we've recently begun to offer LoJack for laptops through prepaid subscription gift cards. In Q4 we announced our agreement with InCom whereby Computrace LoJack for laptops prepaid cards will be offered in many new retail locations across the US. The rollout of this new program didn't start until July, so while we remain optimistic, it is yet to be proven.

Now, looking at our operating expenditures. Adjusted operating expenses, which includes cost of sales and operating expenses but exclude non-cash charges for amortization of acquired intangibles, and stock-based compensation, were $64.1 million for the year, a 3% increase compared to last year. In the fourth quarter, adjusted OpEx was $17.9 million, a 19% increase from the prior year period. We are pleased that we have managed to hold the annual operating costs relatively flat since fiscal 2010 while increasing sales by 34% over that same timeframe, demonstrating our ability to unlock efficiencies in the business and maximize sales productivity.

However, at this stage we believe it is important for us to increase our investment for key areas of the business to fuel continued growth. As such, our Q4 adjusted operating expenses were up with us making investments at the end of the year so that we can begin to see the benefits in fiscal 2013. We increased our investments in three key areas. First, sales. We split select territories in North America where we believe that we have hit or are nearing capacity, and we added additional pre sales engineers. We also added a small number of heads in Europe and Asia where we are seeing significant growth.

Second, R&D. We have been running below budget in this area for most of fiscal 2012 due to challenges in finding the right skill sets. Many of these positions were filled in the back half of the year and our goal going forward is to maintain spending in this category more in line with industry averages in order to continue to bring new capabilities to market. The third area is marketing. As our product portfolio and international footprint have grown, our marketing dollars have become stretched. Additional targeted marketing spend will enable us to gain further product and brand awareness in the global marketplace. We are confident that we'll successfully capitalize on these investments to deliver continued sales contract growth, just as we have demonstrated in the past.

As a result of our increase in revenue and the relatively flat cost structure for the year compared to last year, our fiscal 2012 adjusted operating income, which is IFRS revenue less adjusted OpEx, improved 89% to $10.4 million. Reflecting the increased investment in Q4, adjusted operating income decreased 44% compared to Q4 last year to $1.7 million. Cash from operating activities continues to be a key financial evaluation metric for us. In fiscal 2012 we generated $18.9 million in cash from operations, a 47% increase from last year. For Q4, cash from operating activities was $4.7 million, up 52% compared to Q4 of last year.

And now looking forward to fiscal 2013. We expect to continue to grow our sales contract and cash from operating activities. From a cost perspective, we expect to maintain our fourth quarter spending levels with the potential for modest increases through the year. We believe fiscal 2013 will be another exciting year for Absolute. And as our new sales teams come up to speed in the second half of the year, we expect to increasingly benefit from the investments that we're making in the business. Now, I'll turn the call back over to John.

Thanks, Errol. Having delivered a solid performance in fiscal 2012, we have entered fiscal 2013 with a three-pillar strategy that we believe will translate into continued growth. First, expand our go to market capability. As discussed, we're investing in sales and marketing both domestically and internationally across our target commercial verticals to drive organic growth. Second, fully capitalize on the mobile opportunity. We will continue to invest and expand our mobile device management and data security solution set. Throughout 2012 we've proved that we can bring new solutions to market, compete, and win, and we will continue doing that. Third, lead the convergence of life cycle management and mobile device management by executing on our vision, many devices one solution, we are uniquely positioned to address popular computing movements such as the bring your own device and COPE, corporate owned personally enabled environments. We're the only company that offers device management coupled with content and application management for all popular devices, PC, Mac, Android, and IOS, and we will continue to leverage this.

To conclude, we believe there is a compelling and real opportunity for Absolute to merge as a clear leader in this brand-new dynamic, exciting, and growing marketplace. 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. Good afternoon. Just maybe first of all, I think the areas that you detailed for spending increases were all foreshadowed on the last call, so nothing too surprising. I don't know if Rob's on the line, but maybe you could talk a little bit more in detail about how many territories there are now in North America? And then how many bodies were added to the Asia and Europe force?

Hi, Scott, it's John here. I'll take that.

So, we've gone from 22 territories North American sales to 28 territories. I believe that's correct. So, that's really what we've done. We've doubled down in certain markets where we think we're going to grow the business and we've brought some very seasoned veterans in to manage those territories.

Okay. And then the Asia Europe?

Asia Europe. In the European side we've grown that business. We've expanded out to five distinct markets for AMEA. And on Asia Pacific we have a go-to market plan in place with a third party specialist that operates out of Australia and will also take Singapore and Malaysia and some of those markets. And then we have an additional three-market coverage capability covering China, India, Japan, Korea, et cetera.

Okay. What is the timing of single management console for both the Computrace and management side of the house? And then is there sort of any interim deliverables that we can look for before that?

Sure. Well, we're already there in terms of securing and managing really as we talked about. The PCs, Macs, IOS devices, Android devices, Windows 8, tablets, et cetera, so we're there today with all of those, that range of devices. In terms of the Computrace functionality also being included in that picture, look toward the end of this calendar year for that to be fully integrated.

Okay. And the timing of presumably October for Windows 8 and the tablets, what should we look for in terms of announcement from you regarding design wins or any embedded wins in the tablet space?

Well, we'll keep you guys posted, Scott, as those announcements come out.

Often times the Windows positioning and being embedded in those as they come out, generally just kind of happens. It isn't usually a press releasable event per se, so we'll try and keep you posted, but it may not be done by a press release. You might just see them showing up on Dell's website or HP's, et cetera.

I think the important thing there to remember there is we're already persistent on Windows devices when it comes to the traditional windows platform. So as Windows -- when Windows moves into a Mac-like platform, then the persistence opportunity is not available in that type of scenario.

Right, okay. One last one. I know the consumer business is pretty small, but could you just detail a little bit more what the revenue and business model is for you on the prepaid gift cards from InCom?

It's the same as we normally get through retail, Scott. So, we'll do a bit of a discount usually off the one-year and three-year price on those gift cards, but the model is identical to what we've experience on the retail side.

Okay. Thanks, guys. I'll turn it over.

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

Hi. Thank you and good afternoon. Just on your sales and marketing spend, and just maybe the overall strategies you hit the market. You're talking about a convergence of traditional life cycle management and BYOD-type products, but the marketing might be more split than that. So how do you try to evangelize one combined type solution and the buying behavior for both where BYOD has a lot of market dollar spend, a lot of confusion and traditional life cycle management may be a little bit separate? Mainly talk about your focus on that side.

Sure. We do -- we are driving a BYOD campaign. And when you look at BYOD it really spans both mobile devices and also, of course, mobile computers, notebooks, et cetera. So, when you look at actually managing across a spectrum of all devices, we believe we're the only company today that can help customers manage that BYOD with respect to end point devices because we can manage and secure the notebook environment and the MDM environment whereas the MDM vendors can only do MDM management and security.

They can't address Windows notebooks, Mac books, et cetera. So, we have a big, big advantage there and we're certainly Evangelizing that advantage with webinars, et cetera.

Okay. And on other large deals, I don't think you mentioned it, but is there a chance to try to chunk them up into smaller situations to get a deal through, or is it a lot of all or none-type situations?

Yes, I wouldn't characterize it as all or none, but for the most part where we see an opportunity to take off a smaller chunk and we have some confidence that over time we'll be able to pull in the rest of the deal, we'll do that. But it's really deal specific on that. There's no generalization.

Okay. And with the sales changes, what do you think the capacity is or can you give us a bit of color on the capacity of the organization now? Could it handle based on full quota 30% higher volumes or is there a few additions to be had over the course of the year to meet your numbers?

Well, Tom, we look for a team of two on our sales team to deliver $3 million plus a year. Right? So, on the commercial side and those metrics, in fact we got past those metrics during our fiscal 2012. So, certainly we can do that, but it does take time and so hopefully by the end of the year those new patches will be at that run rate.

Okay. Very good. Thanks. I'll pass the line.

Thanks, Tom.

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

Hi. Good afternoon. Can you elaborate a little bit more in terms of what you're seeing from I guess a macro perspective? You said there's increased caution from customers.

Is this primarily in education or are you seeing it elsewhere? And is it primarily on the large deal side or is it affecting sort of the overall business? And how should we think about the degree or extent of the slow done you're seeing?

Well, I think it's an overall industry slowdown, Thanos, that we're talking about. In general, we're seeing less PCs shipped in the environment which has been our strong hold. So, obviously we've shifted the Company into both the traditional mobile environments, computing environments, and MDM as well, but things are a lot more competitive for us in the MDM space.

So, that's what we're seeing out there and what we're doing is just focusing on the areas that we feel can best grow, which is the division of many devices, one solution and really evangelizing that, because that's key. That's what customers want. Customers want that single console to be able to secure and manage all other devices, both MDM and PC, Mac, et cetera.

So, yes, the overall shipments are flat for traditional computing and that has a little bit of effect on some of our business segments like education, but at the same time there's a tremendous uptick in these multiple device types that we're seeing. So, I think the overall market is increasing, it's just in our traditional business we're seeing some of that market slow down.

Okay. That's helpful. And obviously I guess you're able to offset that to some extent with your increasing international penetration this quarter. Maybe just on the international front, can you talk about the strategy in the air, what you're seeing in terms of leveraging your partnerships and driving that traction?

Thanos, before we get on to that, I just might add quickly here, what you're seeing is pipelines continuing to stay strong and grow and we've added to the number of sales teams we have so we can increase capacity. So, there are a lot more of those smaller deals that are just happening day in and day out. Our large deals are still growing and we don't want to give the wrong impression here. Large deals are still getting done, they are still growing, just not quite as rapidly as they were. It seems that some of the steam came off in the back half of the year.

So only growing 11%, as John mentioned in his prepared remarks, in the back half while in the first half we saw 73% growth in large deals. So, really there's a lot there. It's just they seem to be a little bit slower to get over the finish line here in this current climate.

Okay. That's helpful. So, maybe can you talk a bit more about I guess internationally? Is it really your partners helping you drive that growth that we saw this quarter and in recent quarters on the international front?

I think it depends on the market that you go to. So, for the AMEA market we are replicating the North American sales model there, so a lot of that you see is our sales guys getting more effective at what they're doing and slowly coming up towards North American metrics. We still have a lot further to go.

John mentioned there's five territories there and that's the same numbers we have this year, but what we've done is we've added around those territories from a channel in the marketing perspective to enable them to reach North American metrics. And if they do that, there's plenty of expansion opportunity just from what we have now where as if you go to the Asian markets and the Latin America markets, that is primarily partner driven. So, it's a function of which partners we pick and when we add them. But it's also leveraging those OEM relationships that we have right now and really just opening the doors to those relationships we already have.

Okay. And then finally in terms of verticals that you mentioned education is a little bit softer. Any other trends worth highlighting in terms of the other end markets and verticals you sell into?

I would just say that the other -- if you look on the year as a whole, education was up about 15% whereas our other commercial verticals were up 24%. So, certainly stocks are growing part of the market for us. There is a lot of great drivers, whether it be corporate healthcare or government, and we've just been focused on increasing our ability to execute in those areas, so I think we'll see that to continue.

Thank you. I'll pass the line.

Your next question comes from the line of Blair Abernethy from Stifel. Your line is open up.

Thank you. Just on Thanos' question, Rob. I missed part of that question in terms of the growth in the education vertical versus growth in the non-education markets.

Education for the year was up 15% while -- where as our non-education vertical, corporate healthcare government, were up 24%.

Okay. Is that is all products or is that theft versus device or -- ?

It's just all products. It's just a vertical slice.

Okay, great. Thank you. And then, John, earlier in your prepared remarks you talked a little bit about seasonality in Q1. Maybe you can just help us out a little bit in terms of what you think fiscal 2014 is going to roll out like?

Sorry, fiscal 2014?

Sorry, fiscal 2013.

I think we're just continuing to double down on what's working in fiscal 2012 and fiscal 2011, so we feel very confident in our sales organization. We've invested quite a bit in the training required in the marketing and product management pieces. We'll continue to double down on those efforts.

As Rob and I spoke of, and Errol spoke of, we're making these investments into the sales organization. We're growing it to 28 teams. All of that will definitely have a positive impact for 2013. Your probably going to see more of that be impactful in the latter half of 2013.

So, we're making these changes and we've made these changes last quarter. It typically takes three quarters really for a sales team to be fully up to speed.

Okay. Great. And on the tablet side, John, can you just give us some more color in terms of tax rates on tablets or how you're seeing that play out in your traditional education market?

Well, education obviously are buying all kinds of mobile devices. They're still buying a lot of notebooks. They're buying a lot of desktops, and they're also buying a lot of tablets, and in certain environments they're buying both. Many -- most environments they are buying both and for some teachers, et cetera, they are giving both a notebook and a tablet to teachers.

So, there's a lot of opportunity for us in the education market. We did 15% last year. There's no reason why that won't continue going forward for next year. We have deep relationships with educators across North America. And they're very involved in our road map sessions and speaking about how they want to enhance and accelerate their vision for students and student computing initiatives, et cetera. So we'll continue to stay close to education and grow that market.

Okay. Great. And last one for me is just any update any how you're doing with Absolute Safe in the marketplace?

Sure. Absolute Safe is a great technology that we have customers using. We're adding some functionality apps, which we'll be announcing in the future, that will make it even more easier to use and more ubiquitous in the marketplace.

I would just add the big piece of overall, obviously our mobile device solution is mobile device management, mobile application management and mobile content management and safe, as you to talked about, is the content piece. But overall that product is continuing to grow at rates much higher than what you see our data device and data device management vertical growing. It grew 67% last year, right? So, much more growth in that market is continuing to be very exciting.

Great. Thanks, guys.

Thanks, Blair.

Your next question comes from the line of Michael Urlocker from GMP Securities. Your line is open.

Thanks very much. I wonder if you could, John, just expand a little on the MDM in describing your business. How is far do you think the penetration is on tablet market in enterprise? Is this something where people haven't -- where enterprises recognizes rate now the need is to secure that data or is that kind of still an evolving situation and such that tablets are only a smaller part of the business?

I think it's always evolving. I think what organizations are grappling with, as we talked about, the BYOD environment and the COPE environment. So, it's certainly grappling with employees bringing their own devices into the organization and how to make sure that you manage those properly and secure the corporate data on an employee-owned device.

With Absolute Safe we have an excellent solution for that very scenario where the organization can open up an application and distribute corporate documents down to the employee's device that they can use. And then we can put a lot of limitations around when you have access to those documents, and if that employee was to leave the organization or lose their tablet, actually remove all of that corporate content. So, allow really two personalities, a work personality and a personal home personality on that device. So, that's certainly resonating with corporations and very helpful.

I think you'll see us expand that offering to include more around content management and get in over time to specific content enablers for certain types of industries. And that's something that we're in the exploratory stages of, but I think it's very exciting for MDM industry as a whole, so it's certainly moved from managing a device to managing applications. Now, it's all about managing content on the device, making sure that's secure, and also helping organizations make those tablet devices even more productive inside their -- inside the company. So, lots of opportunity there.

And if you were to kind of separate the current revenue, what's the proportion, if you could say, between tablets and phones?

I mean, we haven't done that, so I can't really comment. Errol, any comment?

I assume phones would be a much larger part of it at this stage, no?

Well, certainly it does depend on the product we do, cover phones with our Computrace mobile product as well, we cover Blackberry devices, but I would say over time the shift is moving more in favor of tablets than phones.

Okay. Okay. And then I wonder if you could maybe just describe a little bit. I'm a little bit familiar with the enterprise market in terms of the Blackberry solutions. What's the dynamic you're seeing let's say among the classic enterprise customers that used to use BEZ or have BEZ, and once upon a time were considered locked up with that solution? What are the descriptions you would say of the market dynamic at this stage?

Unfortunately, because obviously being a Canadian company we would be very supportive of Blackberry is a Canadian company but, unfortunately. What we're seeing just generally is folks are taking out those solutions and opting for more Android solutions and Apple, and IOS solutions rapidly.

So it's not just a coexistence, it's a replacement?

Yes.

Okay. And therein lies an opportunity for you, correct?

Certainly. Certainly. As people move away from the BEZ server, there's an opportunity for Absolute, definitely.

Thank you very much. I think that's very helpful.

Great. Thank you.

Your next question comes from the line of Paul Steep from Scotia Capital. Your line is open.

Great, thanks. John, maybe you could talk a little about this device management and more MDM I think than anything what the long-term target is there in terms of when you see that maybe crossing over sort of a 50% level in terms of sales contracts. And if there's any goals near-term in what you're pushing the sales team to do next year?

Well, we're having tremendous growth in that segment. Errol, what was our growth last year in that particular segment?

We don't give out that resolution, but the general segment is 67%. And we're certainly seeing device management and mobile device management growing at a very rapid rate. But it's actually going to take a long time, if ever, before it hits 50% and the reason for that is that our Computrace data protection product is growing just as fast as the Absolute Managed product is. So when you look in that broad category of device management security, you've got MDM growing at extremely rapid rates, albeit from a smaller base, and then you've got the Computrace data securities, so the non-theft version of Computrace growing at the next fastest rate followed by the management.

Paul, the other thing about your comment, which is really interesting to note, is when you speak to Gartner, what they're seeing is that the client management tools quadrant, formerly known as the PC Life Cycle Management Quadrant, is moving and actually merging with the mobile device management quadrant. So, the Mobile Device Management Quadrant is a rapid grower. Millions and millions and millions of units across phones and tablets and much more rapidly growing, but the PC Life Cycle Management are the Client Tools Management Magic Quadrant is where the money is, if you will.

So, these two are moving together and coming together, and the exciting piece about that, as we've said on the call, is that absolute already supports both the life cycle management market and the MDM market. So, together, we really do something that nobody else does and this is inevitable that these two are coming together. So, that's where we believe that we're not only very well positioned, but will be the solution of choice for many of these customers as they try to amalgamate that solution set.

So, John, to that point then, is the desire for the Company to use the balance sheet and maybe clean up some of the people like legacy players in that PC Life Cycle management market to sort of boost up the client base more rapidly? Or is it you're going to keep the cash, use the buyback, and sort of continue to deploy on growth as you've articulated so far?

We certainly will utilize the buy back and continue on there, but I think your point is a very good one. For us to find a very targeted player that may extend the content management capabilities for Absolute or may bring in specific features and functionality along with customers, revenue, and cash flow it's something we're very interested in and we do have an effort there.

And because it's now been -- I guess to not put words in your mouth, but on the sales side, the business is sort of absorbed fully the acquisition. You're in a place where you could do a deal again if you could find something at the right price, of course?

That's right. And a lot of these players unfortunately they're in this mobile device management space are doing very small revenue numbers and have pretty exorbitant ideas about what their valuation is. I think there's going to be a tremendous amount of consolidation. So, give it another 6 months, 12 months, 18 months, you're going to see a tremendous consolidation on market.

A lot of -- it's tough to make a living in MDM. It's not an easy market to make a living in. So, I think you're going to see a lot of those players, their valuation, expectations come down and their technology be right for integration with Absolute's larger platform.

Okay. One last one. Just on the sales and marketing headcount. Is it fair to say, Errol, or whoever wants to grab it, that we're going to be done adding sales capacity in Q1 or is that going to lag into Q2, just so people can sort of get a sense of obviously the numbers will move up, but are you going to be adding capacity beyond Q1?

No. I'd say by the end of Q1 we'll be pretty much at planned capacity in sales and marketing. I think if you look in the MD&A, we had roughly 375 employees at the end of the year and there's probably another 25 or so in Q1 and then it should pretty much level off at that point.

Great. Thanks, guys.

Yes, and that delta is across all categories, all departments, of course.

Thanks, Paul.

Your next question comes from the line of Gabriel Leung from Paradigm Capital.

I think in most Absolute Manage engagements, and maybe less so for MDM, typically you're dealing with a rip and replace situation. So maybe you can talk a little about, John, in areas where you have been successful? What customers are telling you, reasons why they're choosing you versus sticking with their incumbent solution, I suppose?

Well, I would say first of all our largest limitations are existing customers, Computrace customers. So we obviously have built a valuable relationship there and we've delivered for that customer.

Now, they're looking at how do they extend and manage their mobile devices. And usually that's the conversation that starts to bring forward the fact that they're not that happy with their existing PC and possibly Mac management infrastructure. So, we're able to really tie it all together. Instead of having one or two vendors that maybe they're not that happy with, we can roll it into solving three problems that they are happy with.

So, that's really been what we've done is almost taking over the entire management security infrastructure for a good sized customer with say 60,000, 70,000 devices and we're doing everything for them. We're managing the PCs, we're managing the Macs, we're managing the tablets, and they're able to manage their iPhones and Android phones as well. So, that type of opportunity is very exciting for us and we've got sort of a half dozen of those that we've done, and we're going to go do another dozen or so over the next 12 months. And those are big, big deals in the millions of dollars and we're happy, obviously, to be doing those.

All right. And one more thing. Errol, any update on what we should expect on the tax front in fiscal 2013 and maybe beyond, if you can comment on that?

Sure. We're not expecting to pay any cash income taxes in fiscal 2013. Right now I'm expecting that in 2014 we'll start evolving into cash tax position, but not at full tax rates. Our effective tax rate is about 27% in British Columbia, and in 2014 we might be maybe a quarter of that, just depending on where our profits lie internationally.

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

Thank you. Good afternoon. Just in regards to pipeline. In the past you've driven some sort of sense of how much percentage of your pipeline is by Absolute Manage and MDM Solutions. Looking if you could give us any kind of update on that, if there's any difference in that? I think one-third is what the pipeline what you said in the past?

Yes. It's Rob here, and it remains at bout a third and we're seeing again pipeline continuing to grow, so it seems to be holding at about that level.

And just with regards to pipeline as well, you mentioned that the sales there are longer sales contracts, but there's still some growth in the larger deals. Just wondering, is the size of the deals getting any bigger or larger that you're seeing out there?

So, the number and actual value of large deals has gone up year-on-year every quarter for the last recent future, all of last fiscal, of course. It just slowed in the back half of the year. We mentioned it was up 73% in the front half and only 11% in the back half, so continues to grow, just not as rapidly as it was. Hence, the higher growth rates overall in the front half of the year last year.

Just want to discuss a little bit with regards to the increase in sales and marketing costs. A couple of years back we saw a large increase in sales and marketing costs and it was an environment where there was caution and then there was an environment where there was a reduction of spending. What you're talking about today is that there is once again some caution and some of the customers are having some caution in PC's shipped, et cetera, slightly less favorable macro environment than a couple of quarters ago.

Is that changing the way you might think about with regards to your adding sales capacity? Are you still looking at adding some more sales capacity or are you still thinking about since there is some caution in that environment are you thinking about curbing that a little bit at all or -- it seem likes you're not thinking that way at all?

Well, let's see if you roll back a couple of years ago we did basically a doubling of the force in a very tight much more drastic economy, of course. But what we're doing now differently, a few things differently. One being that where we are expanding is prices that have already reached full capacity and have actually been doing above average relative to industry stats that we expect out of territories.

So, we're expanding in a more targeted fashion and, as well, we have done a lot of work in the last couple of years on our productivity within our teams, how we train them, how we bring them along, the types of activities they do, the things that we layer around them to ensure that they can be successful. So, I think we've also gotten a lot better at making a territory successful, consequently and because of those two things we have highest confidence in continuing to build the team.

Last question is around the consumer segment. Just on the last quarter conference call I think you guys mentioned that you are expecting consumer sales to improve in fiscal 2013 and all we've seen here is that once again it goes down this quarter. So, do you have a different view on that now or is maybe the InCom gift card, prepaid gift card, supposed to make an impact on that segment? I don't know. Maybe you can give me some sense of why you thought it would be improving and it's still not seeing anything.

Pardeep, I think when we talk about fiscal 2013 improvements and we feel like with fiscal 2012 the consumer really did bottom out, if you will. And now we fully have, I think, gotten the bundle deal out of our system and we are growing that business. We've got a really exciting opportunity with universities where we're going out to the universities and pitching them a blanket security package for the entire student base. That seems to be getting some traction.

We've got the InCom gift cards. We have the new ultra books. We also have the new renewal capability that we're launching that auto renewals at the end of the trial period, and we think our cash rates on that will go up quite significantly.

So, I do believe that consumer is poised now to turn and grow in fiscal 2013. Nothing dramatic, but can we certainly beat the whatever we did, $7.2 million in fiscal 2012? Yes, we certainly can.

And what you have to remember about consumer, it's important to have a consumer business, strategics of the Company. It allows us to work with a number of the OEMs, particularly the Asian-based OEMs like Samsung, Acer and others, and it allows us to drive our persistent strategy amongst those vendors. So, there is reasons for us to have that business. We do believe it will grow.

We're doing a lot more business development than we've ever done. We're doing a lot of programs now with frequent flyer programs and all kinds of different programs to get folks to trial the software. So, I know it's been a long-term project, but I do believe that it's about to increase modestly in fiscal 2013.

Just before you go on that, too, and with respect to Q4 specifically, when we announced right after that actually the boxes coming off shelves happened literally just days later, so that's sort of the misconnect there for us. It was the retail side. InCom meant to replace that, but it ended up only launching in July and it sort of won't be full functioning until probably October. So you'll see retail still stay lighter in our Q1 and consumer improving through the year, I would say.

Okay. Thanks.

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

Just to add, one follow-up. Just one distinct advantage that I think you guys may potentially have is the presence of the OEMs when it comes to people purchasing MDM solutions. I just wondered if you could kind of expand on what you're doing from a marketing standpoint to really wrap your arms about that OEM as a channel. And then the other question to that would be when end customers, organizations are buying MDM solutions, is it the same purchasing group that also manages the PC side?

It depends, Scott. Sometimes it is and sometimes it's a different group.

But first and foremost, we've made sure that every single one of our 30,000 commercial Computrace customers knows that we're in the MDM business and that's a massive opportunity just in itself. And then what we've gone, we've actually hired a new PR firm. They've done great job getting us a lot more coverage in the MDM space. We're getting on the vendor list now properly.

We have a fantastic solution there. World class solution and we support Macs and we support PCs. So, the message -- Absolute's capability is in a leadership position. We are doing a lot of work on the PR front. We're working very hard with the analysts, Forester, Gartner, IDC, et cetera, to make sure they fully understand what Absolute's requirements or capabilities are there.

You will see, we just did a, what was it, a seven-city tour with a couple of competitors that was launched through one of the analysts to really put ourselves on the same playing field as the two leading MDM players. So, I think more and more they're seeing us in their rear-view mirror, which is good.

And, again, we have a very unique selling proposition against them. They do not have PC capability. They do not have Mac capability. And if they -- they've actually just both launched a very light version of Mac capability which is just enough, so now they're on our playing field. And when customers go through the due diligence around real Mac requirements, we're so much superior that we should be winning all that business, and they haven't even addressed the PC market. And both these markets take years of product development to have a legitimate offering in that space.

So I think that the MDM market is very exciting, but in some ways it -- it's a shortened path for these vendors because they really have to diversify in order to be relevant, in order to grow their business and have an actual cash profitable business. If you look at the two leading vendors, they're burning all kinds of cash, so they're not profitable. And the only way to be profitable is have a broader selection of services and to cater to a more traditional functionality set. And we -- Absolute has that, and that's why we're running a profitable business over here, and we're certainly going to amp up our efforts to be more noticed in the MDM space.

Okay. Thank for that. Errol, I just wanted to -- if you guys are talking about 25 heads or so in Q1, that seems about the same number that were added in Q4. Is it a good way to think of the potential jump in expenses, let's say another $2 million on top in Q1, and then leveling out from there?

No, it's not and that's a very good clarification. Thanks for bringing that up, Scott. What's happening, it's just a little bit of offset within our cost structure between marketing programs and head count. So overall we're still expecting really the model off of the Q4 run rate with some modest increases through the year.

Okay. That's helpful. Thank you.

Thanks, Scott.

Your next question comes from the line of Andrew Albert from Invicta. Your line is open.

Hi, guys. I noticed that there was no share buyback in the most recent quarter after some pretty aggressive action the last couple of years. Was there anything that precluded you from buying, and do you expect to be even more aggressive going forward just given the cash balance up to $70 million, about a third of the market cap? Any color on that would be helpful. Thanks.

Well, we -- because we're blacked out during a large portion of the quarter, we have to given a range preset and the buyback didn't come into the range for the quarter. That's why we weren't buying back. But you'll see us, we will certainly have that buyback in place and if we're in the range of the buyback, we'll be buying back stock. But we would agree that it's a good buying opportunity.

Okay. So, there was no corporate events or anything like that, that blacked out, it was just normal course of business that blacked you out?

Yes, it is, and this is Errol. Yes, the way that we look at our buyback program, it's really to support the stock and to create a floor if necessary for the stock. So, we're not active in the market every day. It's more price and volume specific, and if that happens, if the opportunity happens at the same time that we're in a blackout, well, then we're frozen.

All right.

Thanks, Andrew.

There are no further questions at this time. I turn the call back to the presenters.

Well, thank you, Operator, and thanks, everyone, for joining us on today's call. We look forward to updating you on our continued progress when we release our Q1 fiscal 2013 results. Good afternoon.

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