Absolute Software Corp (ABST) 2014 Q2 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 2014 second quarter conference call. (Operator Instructions) 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 quarterly MD&A. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Tuesday, February 11, 2014, at 5 PM Eastern time.

I would now like to turn the conference over to Mr. Errol Olsen, Interim Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. Welcome to our Q2 fiscal 2014 conference call. Joining me on the call today is Rob Chase, our Chief Operating Officer. Today's call will begin with a high-level recap by me, followed by an operational review by Rob.

After Rob, I will take a more detailed look at the financials and we'll wrap it up with some closing comments, followed by the Q&A.

We are very excited about where Absolute is positioned today and about our prospects for the future. Our return to growth is a reflection, both of our strategic focus and favorable market trends. With three of the biggest trends in IT -- being mobility, data security, and application consolidation -- our product portfolio and unique expertise position us for increasing success.

Absolute Computrace is once again a major growth driver for the business due to our ability to track mobile assets and protect data using technologies and services that are one of a kind. In addition, our Absolute Manage solution is emerging as a leader in unified device management, enabling IT managers to efficiently manage and control the myriad of computing device types, platforms, and ownership models that are entering the enterprise today, all through a single management console.

Our results for the second quarter reflect a commercial business that is continuing to show momentum, with continued expansion into the corporate and healthcare verticals and internationally. In Q2, we achieved sales contracts of $22.2 million. While this is a slight decline from the headline number of $22.5 million in the same period last year, Q2 of last year included the largest deal in our history -- a $3.5 million Computrace data protection deal with a Fortune 100 healthcare customer.

Excluding that transaction, our sales contracts would have grown 17% year over year. Removing that transaction for comparison purposes helps to shed light on performance of the core business. While we are in regular pursuit of large deals, those of that magnitude are generally rare.

Cash from operating activities, another key metric of ours, also performed well in the quarter. In Q2, we generated $4.4 million in cash from operations, a 4% increase from last year. On the corporate side of the business, as you all know, we had a leadership change in the quarter when John Livingston resigned from Absolute after nearly 20 years at the helm.

John's passion, drive, and commitment have left a lasting imprint on the team at Absolute. We are thankful to have had a leader who could steer the Company from its nascent stage to the robust, global business that it is today.

During this transition period, it is important to note that the leadership team in place today helped architect and remains committed to the Company's current vision and strategy. We are continuing to drive forward to establish Absolute as a leader in data protection and unified device management for today's mobile world.

The strategic initiatives for 2014 that we outlined at the beginning of the year remain our focus for the year. They are product integration, sales execution and expansion, and development of a value-added reseller channel. With respect to product integration, our development teams are continuing to make tangible progress.

We have now completed a common web UI architecture for Computrace and Manage, which sets the stage for integration. This will be followed by single sign-on functionality, which will initially enable a user to access both Computrace and Absolute Manage MDM functions with a single user logon.

MDM remains a large greenfield opportunity and is a solution that our Computrace customers have shown interest in purchasing with Computrace. We're also working toward full console integration, which will enable IT managers to realize the full benefits of all three products -- Computrace, Manage, and Service -- through a single web console.

In addition, we are also closing in on completion of the first phase of integration of our recently acquired data loss prevention technology into Computrace. The first phase will add data monitoring capability to Computrace. This will enable our Computrace customers to catalog the data at risk on their endpoints, even when those computers are off the Company's network.

Computrace can be used, if necessary, to remove sensitive files from endpoints after they are alerted through DLP. With data security continuing to be a significant trend in IT, we believe this will be a valuable addition to Computrace, particularly as we continue our push into the corporate and healthcare verticals. The first phase of this integration should be complete in the fourth fiscal quarter of this year.

I want to emphasize, however, that each of our offerings -- Absolute Computrace, Absolute Manage, and Absolute Service -- remains competitive in its own right and will continue to drive growth on a standalone basis. But, through integration, our solutions become even more differentiated in ways the competition simply cannot match.

Console integration will also enable us to unlock increased cross-selling opportunities, helping us to maximize the contract value per customer.

We have validating proof points around the synergies between our major products, as we are already experiencing increasing success at selling multiple products to our customers. Industry analysts and our customers agree that delivering on our integrated vision will enable Absolute to emerge as a next generation leader in mobile computing.

At this time, I'd like to pass the call over to Rob for an operational update.

Thanks, Errol, and good afternoon, everyone. I will provide an update on our key initiatives of sales execution and expansion and value-added reseller channel development. But before I do, let's have a closer look at our overall sales performance.

As noted by Errol, Q2 sales contracts of $22.2 million were down 1% from last year. However, this decline was entirely due to a decrease in consumer sales. Conversely, our commercial sales were up 1%. And perhaps more importantly, excluding the large $3.5 million deal from last year, commercial sales were up 22%.

We believe that Computrace is increasingly becoming a must-have layer of any effective data security strategy, and that continued growth for Computrace will come both from increasing our attach rates to PC shipments and from leveraging our persistence wins on mobile devices to penetrate the tablet and smartphone markets.

Our sales to date certainly support this belief. Computrace continued to be a major driver of sales growth. Computrace includes our unique persistence cloud-based data security and security monitoring features, and is benefiting from the secular mobile and data security trends, particularly in the corporate and healthcare verticals.

As we reported, our Computrace desk management sales remain strong and were up 9% over Q2 last year, and were up 13% year to date. This growth is a reflection of our success in penetrating corporate and healthcare verticals, where data security is paramount. These particles recorded their 10th consecutive quarter of double-digit growth, and are now nearly 50% of our commercial sales compared to less than 40% just 18 months ago.

From a device perspective, this growth is a combination of deeper penetration in the laptop market and expanding into the mobile device market. Mobile unit sales now make up over 15% of our total sales and have grown at a faster rate than our overall sales year to date.

Non-theft management sales, excluding the large $3.5 million deal from last year, were up 49% in Q2 over last year, and were up 31% year to date. Deeper penetration of the laptop market, expansion into mobility market, unified device management -- all remain the main themes for this product category. We expect sales in this category to accelerate with our value-added reseller channel development and our product integration initiatives.

From a geographic perspective, international growth was also strong, growing 52% in Q2 and 42% year to date. This demonstrates our increasing traction in markets outside of North America, particularly in Latin America, where there is a trend toward national student computing programs. On the consumer front, second-quarter sales were $1 million, which was down 35% from the second quarter of fiscal 2013.

This remains a challenging and highly competitive market segment for us. Sales of our consumer products have been impacted in recent years by fewer bundled sales with our PC OEM partners and sluggish consumer PC sales worldwide.

Conversely, we are seeing a steady increase in renewal rates with our existing consumer customers. And, in addition, the market opportunity for our Absolute Lojack for mobile devices solution is still evolving.

Nonetheless, we continue to believe that we will be successful in this market and are continuing to pursue partnership opportunities with telcos and complementary consumer mobile solution providers.

Turning now to our sales expansion and execution initiative, we are continuing our efforts to expand and hone our sales capability. At the end of last fiscal year, we began expanding our sales teams in order to improve our market reach. Overall, we have increased our sales and marketing teams by 16 people since June 30 and have also reallocated headcount to areas of most opportunity.

At the same time, we have invested in tools, processes, and training to improve our overall effectiveness. The primary focus is to ensure that our team is selling the entire portfolio of our services, acquiring new customers, and maximizing existing customer sales. These efforts are beginning to bear fruit and validate our strategy.

We are seeing improved performance from our sales and business development teams and our pipeline is being positively impacted.

Sales execution includes continuing to evolve our OEM partnerships. Our persistent technology is a unique differentiator and now extends beyond PCs to Windows and Android tablets, from Samsung, Dell, HP, Lenovo, Panasonic, Acer, and Fujitsu. In conjunction with the Q2 sale in Latin America, we also began embedding Computrace in the BIOS with PC Smart, a regional OEM in Colombia. We're seeing a trend of opportunities with upstart regional OEMs, which ultimately provide additional persistence and partner opportunities for Absolute.

Our third main strategic initiative to develop our value-added reseller, or VAR channel, also remains on track. We have now hired the key members of our team, have established our channel strategy, have begun improving performance with our current VAR partners, and have identified a handful of VARs that we expect to become premium VARs for us in the coming year.

With that, I'd like to turn it back over to Errol to discuss our financial results. Errol?

Thanks, Rob. I'll take a quick look at our operating expenses first. Adjusted operating expenses -- which include cost of sales and operating expenses but exclude non-cash charges for depreciation, amortization of acquired intangibles, stock-based compensation, and also exclude postretirement benefits -- were $18.3 million in the quarter, a 10% increase compared to last year, but flat compared to Q1 of this year. The year-over-year increase in adjusted OpEx was primarily attributable to additional sales headcount in fiscal 2014.

In addition, in Q2 of last year, we had a large bad debt reversal, which had the effect of reducing G&A in that period from its normal run rate. Our second-quarter adjusted EBITDA declined 8% to $3.5 million this year compared to $3.9 million last year. This is a reflection of our investment in sales infrastructure, while the resulting sales contracts are recognized over time under IFRS revenue recognition criteria. An explanation of adjusted EBITDA is included in our Q2 earnings release.

We ended the second quarter of fiscal 2014 with cash and investments of $71.7 million compared to $62.9 million at June 30, 2013. Our cash and investment position improved on operating cash flows and an amount of $4.8 million on proceeds from stock option exercises, less our cash outlay of $4.5 million on our quarterly dividend.

With respect to the dividend, we paid a CAD0.06 per share dividend during the quarter, which represents an increase of 20% over our previous dividend levels.

In closing, we remain energized and focused on our vision and on the execution of the strategies required to get us there. In the face of rapidly increasing adoption of mobile computing, increasing requirements for data security, and increasing demand for solutions that simplify IT management, our product portfolio is uniquely positioned to address today's top priorities for IT and security managers.

We have a talented and committed team at Absolute and are excited to continue to define Absolute as a leader in endpoint security management. This concludes our prepared remarks for today. Operator, please open up the call for questions.

(Operator Instructions) Blair Abernethy, Cantor.

Rob, just for you just to start with, I wonder if you can maybe describe to us a bit about your pipeline in terms of how it's looking by vertical and maybe how it's looking by product mix in terms of laptops versus tablets and so forth.

Yes, Blair. As you know, pipeline obviously is an early-stage indicator, but not necessarily to be relied on 100% for where you're going. But, certainly, we're seeing an increase in the newer products as a percentage of the whole, so the efforts we're making to get our team selling the entire portfolio does seem to be gaining traction.

In addition, I think what we see is a lot of new acquisition opportunities across the board. So, as you know, we do have a push on to incent our people to go and acquire new customers and certainly this year to date has been a great experience in that front, which obviously is going to then, again, prime the pump for continued growth from existing customers in the future. So were very excited about that.

But we don't really dice up the pipe more than that in terms of verticals, if you will. So I think that it's fair to say it's robust. It's going in the right direction from an overall perspective, and also from a portfolio-balancing perspective, so very good to see.

Okay. And any deal metrics this quarter, Rob? Any $1 million deals or how many deals north of $500,000?

There were a couple deals north of $500,000, but all less than $1 million. And certainly, interestingly, when we look at our large deal performance this quarter, and you take all deals bigger than $500,000, we're still left with that $3.5 million gap. Meaning we had about the same amount of deals over $500,000 last year, excluding that $3.5 million deal.

So we were able to replace all of that with deals under $500,000, some of which are sort of that $100,000 to $500,000 bucket, and indeed a lot of which are under $100,000, which we're just seeing great traction and penetration, generally, in the market.

Okay, great. And last question for me, just on -- I wonder if you can give us a little more sense of the timing on the product integration. I think there's a couple of pieces to fall this year, and maybe you can give us a sense by quarter what you're expecting as we proceed through the year. And then are you going to be beta testing some of these integration pieces before you go GA? Or what's the rollout plan?

Sure, Blair. So with regards to Computrace and managed integration, the very first stage in that is architecting and building out a common web console so each product is using the same architecture in its web console. That work, the architecture work, is completely finished. The build-out is nearly finished. We'll be seeing that coming -- that will be released in the next month or so.

And then the next step, though, and where we'll really start to realize the benefit from integration, is single sign-on. And what that means is that the IT manager, with one sign-on, will be able to access both of these web UIs and just basically flip between them. We should have that out sometime towards the end of the fiscal year, so sometime in the June-July timeframe is what we're currently targeting.

Moving on from that, the next iteration of integration is really what we're calling console integration. And this is where you actually have a singular console where an IT manager can access both the management functionality, inventory data, and all those sorts of things, as well as all the Computrace functionality.

That's something that will be rolling out in the first half of fiscal 2014. It's difficult to put a timeline on it at this point, or to specify an exact date, rather. But sometime towards the end of fiscal Q1 or maybe into fiscal Q2 is what we're currently targeting.

Okay, that's very helpful. And just on the data loss prevention product, are you actively selling that on the market? Or are you still -- got that under wraps?

Still under wraps. We were selling a little bit of the network DLP, which was an existing product that came when we bought the Company. It's a fairly small amount of sales, but we're not actively selling anything through our sales force. The DLP integration -- we're expecting to go live with that in the next month or so, so the sales team will be actively selling that towards the end of the fourth quarter.

Okay, that's great. Thanks, guys.

Thanos Moschopoulos, BMO Capital Markets.

Don't know if you can comment much on this topic, but can you give us an update in terms of how the CEO search is progressing?

Sure, Thanos. So, the Board -- this is obviously a top priority for our Board. The Board has engaged a top-tier executive search firm to help to drive the process. It's not something that's easy to put a timeline on, but I can tell you that the Board has instructed the search firm to cast a very wide net. They are going through their due process, so this is not something where there's a dramatic urgency per se.

I.e., what I mean by that is that the Board is confident that we have a very strong leadership team in place right now and a solid strategy in place. So they are going to go through their due process, but it's very difficult to pin down timing at this point.

Okay. And so the message from you guys is that you are very much staying the course and pursuing the current strategy?

That's exactly it.

Okay. A question on expenses, and so we've had a big currency move, obviously, in recent weeks. And so can you remind us as to your currency sensitivity and how OpEx should trend in the coming quarters?

Sure. So our OpEx is roughly 50% denominated in Canadian dollars, so we should start seeing the benefit of the decline in the Canadian dollar. We'll see a significant benefit in the back half of the fiscal year.

Okay, and so that means that OpEx should be trending downwards from the level that we saw or will you use some of that savings to hire in some areas?

Well, we've got -- so the guidance that we gave at the beginning of the fiscal year was to expect an OpEx increase of around 5% or 6% over fiscal 2013 levels. And I think that with the decline in the Canadian dollar overall, it's going to be at the low end of that range, possibly a little bit lower than that.

We've still got a bit of hiring to do in the back half of the year, but much of that OpEx increase should be offset by the lower Canadian dollar.

Okay. And just lastly, in terms of the international business, obviously very good growth internationally. And so, as you mentioned, is that being driven primarily by Latin America and more on the education side? Or are there other contributing factors as well?

Internationally, in this last quarter, it was certainly driven by Latin America, and I'd say about two-thirds of that business was education, where we are seeing nationwide deployments of one-to-one student computing programs. We also had -- the other third of that, though, was government department.

But if you look back to Q1, the strength in international was actually in the APAC region. We signed that $1 million deal in Japan, as an example, so it does seem to -- tend to fluctuate a little bit, but I think that we are very diversified internationally to help sustain that business and the growth rate.

Okay, that's great. I will pass the line. Thanks, guys.

Richard Tse, Cormark Securities.

Errol, can you give us a bit more color in terms of the VAR channel and what you've done thus far to build that out?

Sure, Richard. This is an initiative that we started at the end of Q4 of last year, and the structure that we have, that we're working towards, is basically five regional VAR managers, and then one person overseeing that group. And today we've hired all but one of those individuals.

So we have the people in place, and what they're doing right now is actively building relationships with VARs. It starts with a very wide group that they've targeted, and then they're narrowing it down to make sure that we -- we have a small handful of VARs that we can properly train and work together to build initial pipeline.

So we have that small number of VARs now. Think about it as roughly half a dozen in North America currently. And we're now at the stage where we're starting to see the early signs of pipeline; a few deals have come into the pipeline through that VAR channel. But the real results we should start seeing more towards -- a little bit in Q3 building into Q4, and then more significant results going into fiscal 2015.

And given the investment that you're making here, would you think would be a realistic sales contract number coming from that channel?

Well, I think for VAR, in the back half of the year, I honestly -- I say we have about six VARs -- if we achieved $100,000 to $200,000 per VAR, we would be pretty happy initially. But run right, once these guys are fully up to speed, over time, we should achieve about $3 million a year for each VAR, at least.

Okay, and then I had a question on the mobile device management business. If you look at that market, the growth rates are astronomical, and you guys seem to have a fairly competitive offering there, but yet we really haven't seen that takeoff. What's missing? Is that why you're trying to make the investment here, or am I missing something on that side?

No. The reality of the mobile device market, in general, is, in my opinion, it's never been a business, per se, which has made it fairly difficult for us. And what I mean by that is that the players out there and the names you see most often in the headlines -- they been privately funded companies that are really in land grab mode, quite honestly, right, where ASPs are ridiculously low, to the point where you cannot run a viable business at those ASPs. And that's what I mean by it hasn't been a real business.

Our expectation, though, is with the acquisitions that we've seen recently and certainly AirWatch being acquired by VMware is -- that's going to help transform this marketplace into a real business. Certainly, VMware cannot afford to keep AirWatch if it's losing the amount of money that we believe it's losing right now. So we expect that, first of all, ASPs will trend upward over time, which will be good for us.

And the other thing that should happen, by virtue of that is that -- just throwing out a data point as part of this -- is we're finding average contracts and MDM are quite short, around one year. So we expect that there will be a lot of turnover in MDM going forward, as ASPs trend upward, and that will be good for us.

Okay. And then just one last one. I think you talked briefly about the split between PC and non-PC in one of the markets, either theft management or the non-theft management. Would you be able to give the split for both of them? And also on a year-over-year basis, just so we see how those things are trending.

They are about 15% -- just over 15% is total mobile across the business, so it's not just isolated to non-theft management.

Okay, and then -- so, last year at this time it was what? Was it 5% or 10% --

No, last year this time was closer to --?

9%, I think?

Yes, closer to just under 10%.

Okay, great. Thanks.

(Operator Instructions) Pardeep Sangha, PI Financial.

It seems like you've been doing some pretty good work on the corporate and healthcare side. I just want to touch on education and government, where has been traditionally you're really strong in. Can we expect normal sort of seasonality in Q1 and Q4, usually your strong -- fiscals Q1 and Q4, these are your strong quarters. Can we expect education and government again to have those strong quarters in these Q1 in Q4 coming up?

I think that seasonality will continue over the next couple of years, but the seasonality, certainly, will be tapered over time. And the reason for that -- certainly the North American education buying seasons are Q1 and Q4. As we do more of our education business internationally, we'll see those -- education being a little more spread out throughout the year. Government, certainly in the US, the buying season is in our fiscal Q1 and that will continue to be strong.

But the other thing that's going to mitigate the seasonality is more the growth in corporate and healthcare, where, traditionally, for most companies operating in those spaces, the December quarter, our fiscal Q2, is the strongest quarter. So, over the next couple of years, as corporate and healthcare continue to grow at rates that are faster than education, what we'll find is the tapering of the seasonality and very likely our fiscal Q3 will be the weakest quarter of the year over time.

Okay. With regards to acquisitions, can you just give us an update in terms of the plan or strategy right now? Is that on hold now that you're looking for a new CEO? So what is the acquisition strategy there?

Yes, Pardeep, it's Rob here. I think that acquisition-wise, of course we remain interested in what's going on in the market and watching closely, but we're not actively pursuing anything at this time while we get our strategy all locked down and our integration locked down here with the products we do have. As we believe we have so much opportunity today with what we have that we don't necessarily need to acquire something in the near term.

Okay, thanks. That's it for me, guys. Thanks.

And we have no further questions on the phone at this time. I would like to turn the call back over to our presenters.

Okay. Well, thank you, everybody, for joining our fiscal 2014 second quarter update and we look forward to reporting to you again next quarter. Thanks very much.

Thank you.

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