Absolute Software Corp (ABST) 2014 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's third-quarter fiscal 2014 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 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'd like to remind everyone that this conference call is being recorded today, Monday, May 12 at 5:00 p.m. Eastern Time.

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

Thank you, operator. Good afternoon, everyone. Welcome to our Q3 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. Then after Rob, I'll take a more detailed look at the financials, followed by the Q&A.

Absolute continues to be well-positioned to solve the key problems faced by enterprise, IT and security managers. With a combination of mobile computing continuing to rise, a growing market emphasis on data security, and a demand for solutions that simplify and bring efficiencies to IT, the relevance and market opportunity for our solutions continues to grow.

The shift to mobility is obviously a key driver for our business. With 20 years of developed technology and expertise in tracking and protecting off-network devices, we are in a unique position to track, manage and protect today's broad array of mobile endpoints. Laptop or convertible computing devices remain the devices of choice for the mobile knowledge worker. And, in most cases, tablets are brought in as a complement to laptops, thereby expanding our addressable market. While our technology has become a standard in the US education vertical, our aim is to now establish Computrace as a standard across our expansion verticals of healthcare and the broader corporate market.

Data protection has also arisen as a key corporate priority, as data breaches rise at exponential rates. Headlines of corporate data breaches are occurring almost weekly. And data breaches generally happen in one of two ways: either a targeted attack or a lost or stolen device. This latter scenario, lost or stolen devices, is the most frequently cited source of corporate data breaches. Passwords, encryptions, and other forms of authentication, are proving to be less-than-perfect. And it is clear that a complementary solution, such as Computrace, is required.

And with the shift to mobility, accompanied by BYOD, IT management is becoming increasingly complicated and inefficient. Gone are the days when IT standardized on Windows computers and Blackberry devices. Today, PCs, Mac, iOS, and Android devices are the norm, and the prevalent IT management paradigm is separate solutions for each of these. For both efficiency and control purposes, IT managers are in need of a single solution to manage and secure this diverse population of device types and operating systems. For the reasons just outlined, we continue to believe that our strategy is solid and that our solution portfolio will enable us to drive continued growth.

Our headline sales contract results for the third quarter were $20.5 million, up 8% from $19.0 million in Q3 of last year. These results reflect continued strength in our core North American commercial business, with the reported growth rate tempered by a lower growth rate in our international commercial business and a decline in the consumer business. Both the education and corporate verticals were strong in the quarter, assisted by increased cross-selling of our Absolute Manage and MBM products.

The lower growth rate in our international business reflects its formative stages and, in particular, the absence of any large individual deals in this particular quarter. But the international business remains healthy, with 29% year-to-date growth.

From a near-term strategic perspective, we continue to drive forward with the strategic initiatives for 2014 that we have discussed previously. 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 making progress. We've now completed the first version of a common WebView I architecture for Computrace and Absolute Manage MDM.

The first version of this has been launched with a group of beta customers. The next step toward integration will be single sign-on functionality, which will enable a user to access both Computrace and Absolute Manage with a single user logon. This is expected to be rolled out in the first half of fiscal 2015, along with DLP integration.

While each of our product offerings remains competitive in its own right, and will continue to drive growth on a standalone basis, through integration, our solutions become even more differentiated in ways the competition cannot match, and will enable us to unlock increased cross-selling opportunities. And we believe that the increased level of cross-selling that we saw in Q3 validates this thesis.

On the CEO search, the Board is continuing to move through the recruiting process. We have a short list of very high-caliber candidates, and we expect to be in a position to make an announcement sometime in Q4.

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, Q3 sales contracts of $20.5 million were up 8% from Q3 last year. However, it is important to note that the underlying growth was higher, with North American commercial sales growing 11% in Q3 and 6% year-to-date over the same period last year. The strong Q3 North American commercial growth was offset by a 23% decrease in consumer sales and slower growth of 4% in international commercial sales compared to Q3 last year.

Consumer is now only 5% of sales, and is expected to remain a small part of our business as we continue our focus on enterprise markets. While small, our consumer business is achieving improved renewal rates, and our team has been focused on developing new bundle and partner programs to drive customer acquisitions. We expect this will stabilize consumer sales in the coming fiscal year.

We also had lighter growth this quarter in our international commercial business, which grew 4% over Q3 last year. At this stage of development, our international business can be lumpy from quarter to quarter, as one or two large deals can significantly impact the results. As the business scales, those fluctuations are likely to narrow. The outlook for the international business remains strong, and our pipeline in multiple geographies continues to grow.

We are very pleased with our domestic sales performance, particularly as it represents 81% of our overall sales. We are beginning to see the impact of our sales compensation plan changes, which rewards our sales team for new customer acquisitions and for cross-selling our product portfolio. At the same time, they must maintain existing customers if they are to realize these rewards.

We've seen some positive signs as a result. Existing customer sales continue to deliver 75% to 80% of our overall sales. Our customers continue to renew and expand their Computrace footprint, and are adding our Absolute Manage mobile device management and service offerings at an increased pace. We had an exceptional quarter of cross-selling our product portfolio, which resulted in record sales for our Mobile Device Management, or MDM, offering. This is a significant part of the 24% increase in our data security and device management product category. Existing customers have generated a majority of our year-to-date Absolute Manage, MDM and service sales, which we believe is providing validation of our product's vision.

Our core Computrace Desk Management offering continues to generate growth, with 2% overall growth in Q3 and 10% year-to-date compared to the same periods last year. It is important to note that over 50% of the sales of this product are to non-education verticals. This is due to our continued push into governance, risk management, and compliance and data security, which customers can significantly improve by leveraging our cloud forensic and investigative capability that was originally developed for the recovery of stolen devices. This continuing adoption by non-education verticals suggests that we are making good progress transitioning our Computrace offerings from a device-centric product to a must-have solution for data security and management.

Mobile devices continue to increase in overall relevance for both our Computrace and management offerings. On a unit basis, our mobile sales have risen to 15% to 20% of total unit sales, and on a dollar basis, were up 161% over Q3 last year. It is also important to note that we had a particularly strong education sales quarter. This is due to a number of factors, including improved existing customer renewals; accelerated adoption of our mobile device security and management offerings, particularly on persistent Windows tablets; and increased success in cross-selling our management and service solutions to existing customers.

Turning now to our sales expansion and execution initiatives, we are continuing our efforts to expand and hone our sales capability. Since the end of our last fiscal year, we have increased our sales and marketing teams by 22 people to 188 in total. 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. The strong Q3 performance in North American sales and in Absolute Manage MDM suggests that these efforts are beginning to bear fruit and validate our strategy.

Sales execution includes continuing to evolve our OEM relationships. Our persistent technology is a unique differentiator, and we continue to win persistence with new OEMs and on new device types. In the quarter, we deeper-penetrated the Samsung product line. We are now embedding our technology into the firmware of several more Galaxy mobile devices, including the new Galaxy S5 Note Pro and Tab Pro.

Our third main strategic initiative is to develop our Value-Added Reseller, or VAR, channel to complement our OEM channel. We have now hired the key members of our VAR team, developed our channel strategy, established relationships with a number of premium VARs, and began to work with them to build and execute on the sales pipeline. Given this stage of development, we have yet to see a meaningful contribution from our expanded VAR strategy this fiscal year. However, we are expecting this strategy to begin adding to our growth in fiscal 2015.

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

Thanks, Rob. I'll take a quick look at our cash from operating activities first. Cash from operating activities was $3.8 million in Q3 compared to $4.8 million in Q3 of last year. Cash from operating activities reflects a payment of $1.4 million of post-retirement benefits that were paid during Q3 of this year.

Adjusted operating expenses, which include cost of sales and operating expenses, but exclude non-cash charges for depreciation, amortization, stock-based compensation, as well as post-retirement benefits, were $18.9 million in the quarter -- a 6% increase compared to last year, and up 3% from Q2 of this year. The year-over-year increase in adjusted OpEx was primarily attributable to higher sales and development headcount in fiscal 2014.

Our third-quarter adjusted EBITDA increased 76% to $5.2 million this year compared to $2.9 million last year. This is primarily a reflection of IFRS revenue growth rates exceeding increases in our cost base. An explanation of adjusted EBITDA is included in our Q3 earnings release. We ended the quarter with fiscal -- of fiscal 2014 with cash and investments of $74.3 million compared to $62.9 million at June 30th of 2013. Our cash and investment position improved, largely due to cash generated from the operations of the business.

The primary nonoperational use of cash during the period was for our dividend. We paid a CAD0.06 per share dividend during the quarter, totaling approximately $2.4 million.

In closing, we remain confident in our strategy, and continue to be excited by our market opportunity. Our abilities to expand into the corporate and healthcare verticals internationally, and through cross-selling our management service products, have all been proven. And the market opportunity continues to grow. We are confident that we have the right strategy, product portfolio, and team for success.

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

(Operator Instructions) Blair Abernethy, Cantor.

Just a -- Rob, I wonder if you could give a little more color on a couple of things here? The volume of large transactions has been a fairly -- has been lower in the last couple of quarters. And I guess I just want to understand, is there a change in the marketplace happening, from your perspective? Or are things taking longer? Just give us, if you can, just a little bit of color on how your large transaction pipeline is looking.

Yes, Blair. Good question. So, when we think of larger deals, really, we track things -- customer deal sizes over $100,000. That's been our traditional tracking. And we continue to see good things there. You know, deals over $100,000 are up actually 15% year-to-date and were up over 30% in the quarter.

Interestingly, it's a different story on deals over $500,000. So, we've replaced, say, that large healthcare deal from last year, and also a couple of some large international ones, with our domestic growth in yields under $500,000, is what we really have done. So, there continues to be -- I mean, the key thing is, there continues to be some large deals in the pipeline, which we are continuing to work, particularly on the international front. And it's just difficult to say exactly when those will close.

So, we are very happy to see us carrying the water and increasing the overall large deal performance with deals under a $500,000 band and above $100,000. Does that make sense?

Yes, that's great. Thank you. And then on the product roadmap, the next -- between now, and I guess, and the end of 2014, can you just remind us sort of the major releases? And in your MD&A, you talked a little bit about the data loss prevention solution. Just a sense of how that is going to be sold? Is it going to be sold separately? Or what kind of price point is that at?

Sure. The major focus in the dev team right now -- I mean, obviously, there are a number of things that they are doing, but the biggest is our next-generation project. And next-generation encompasses a few things. One is the Web-based console. One is a services layer, and the third I would characterize as kind of a back-end architecture in database.

But from a customer perspective, the most apparent deliverables are going to be the Web console. So we've -- we have completed the Web console for Computrace in beta form. It's being used by a number of beta customers right now. And we've also done the same -- a very consistent console with Absolute Manage MDM. So this will actually go GM most likely in Q1. And when they go GM, that will be the first release of DLP. And DLP will be sold as a component of Computrace.

Okay, great. That's great. Thanks very much.

Thanks, Blair.

Scott Penner, TD Securities.

Can you just -- Errol, maybe first of all, the little commentary in the press release seems to be a little bit tempered on the cash flow side of things, yet the cash flow year-to-date, if I add back the retirement, the post-retirement benefits, is up year-over-year right now. So I'm trying to just sort of reconcile those two.

Sure. And I think that you are referring specifically to the corporate outlook in the press release. It is up -- cash flow, you're right -- in adding back the post-retirement allowance would be up a little bit on a year-to-date basis. If you have a look at our working capital, you'll see that our -- I think our accrued liabilities of payable were a little bit higher than what we would traditionally expect at this time of the year. So we'll see a bit of a reversal of that in the fourth quarter. And that's the reason for the outlook that we provided in the press release.

Okay, fair enough. The operating expenses outlook for the year as a whole, I'm just trying to get a sense. I think, last quarter, Errol, you had said kind of 5% to 6%-ish growth, likely at the lower end of that, given FX. I'm just trying to get a sense, given your hiring plans and where you may be on that right now, what the outlook is at this point.

Sure. Well, we are not -- I wouldn't say we are aggressively hiring at the moment. We are still hiring. But what I would expect over the last part of this year is that any incremental costs from the hiring that we are doing right now, on a year-over-year basis, would be offset by the fact that the Canadian dollar is lower. So the guidance that we gave last quarter, which was -- you're right -- I think it was 5% to 6% year-over-year growth in annual adjusted OpEx -- we are still on course for that, and certainly towards the bottom of that. So more like 4% or 5% would be my expectation.

Okay. I wanted to look at just the education market, because Chromebooks have become a meaningful piece, at least according to some pundits, a meaningful piece of the market there. And yet I'm not sure whether you have the management capabilities on the Chromebooks. I'm just trying to get a sense of how that may have impacted you with all -- despite that, seems to be very strong education numbers.

Well, that's right. And I tried to say there are a number of dynamics in play right now in the education market. And it's a little bit difficult to say how it will all shape out.

From a headwind perspective, certainly, we are seeing Chromebooks move into the North American education space. The question that remains, though, is -- are these Chromebooks displacing iPads? Or are they displacing laptops? And what we saw in the third quarter was -- I mean, obviously, we were very strong in education. And what we saw there was they seem to be displacing iPads at the moment.

The other dynamics at play, though, would be -- the primary one would be the positioning in education. And in addition to -- or one of the things that drove the growth in Q3, I would say, is just our face-schools positioning, which has actually helped us just to increase our penetration overall across the North American market. And then the other positive dynamic is just that our sales force seems to be getting more confident and more adept at cross-selling our management MDM solutions into that space.

So, you've got some offsetting dynamics. They're hard to say how it's going to shake out, but certainly, we were pleasantly surprised by the strength in Q3 in education.

Okay. One last question for me, if I could. And that's just the -- the consumer business just does not really seem to be doing anything there but sputtering a little bit. And I'm just trying to ask a question whether it is additive to margin? Or why, I guess for the lack of a better way to put it, why you feel the need to be in the consumer business at all?

Yes. This is Rob here, Scott. Definitely, as we transition that business more to a bundle approach and perhaps white label as well, I think we'll see some changes in the coming year. We have been working toward that for some time, and deemphasizing retail focus, if you will, where it's always been a bit of a challenge and some of the additional costs are.

So we think at these levels, it will be additive to overall margins as we fully transition more to a product bundling and OEM approach. So that's really the focus for consumer. And we do believe it's very important to be there, because it does ensure our persistence in those devices. And as we see these devices, consumerization of IT and these devices coming into the corporate environments through BYOD, we do think it's an advantage to have our persistence in place there. So we would like to continue to build the consumer, even if in the short-term, it's maybe a margin negative.

Right. So, fair point. Thank you.

Thanks, Scott.

Thanos Moschopoulos, BMO Markets.

Can you elaborate a little bit on the terms of the cross-selling that you're seeing? Was that primarily in education or is that in other markets? And then were you primarily talking about Computrace customers adding on Manage? Or are some of them adding on Service as well? What are you seeing on that front?

So, definitely, cross-selling is happening across all markets. I would say it is strongest currently in education. Obviously, we have a strong educational base, so it's kind of natural for it to happen there. And it's -- today, it's primarily Manage and MDM. And both Errol and I noted, it was a record quarter for MDM this quarter.

It's kind of interesting how that happens at the same time AirWatch gets taken out, and maybe helps us to stabilize that market a little bit more. But indeed, we are seeing all customer types adopting those solutions. The service solutions, which are newer to our team, are slowly picking up steam. But given our -- you know, that we've had Manage and Service -- Manage and MDM in place longer, our team is a little stronger. So we are selling those products than the Service product.

One thing I would add to that is, in terms of cross-selling, we are seeing it happening in two ways. One is follow-on sales to our existing customers. But the other one, and particularly in Q3, is actually in new sales, where we had a few decent-sized deals that included all of our solutions. In fact, we had -- I believe it was two that included Computrace, Manage, MDM and Service. So, the cross-selling -- yes, as I said in my script, the cross-selling piece, it certainly seems to be playing out.

Great. That's good to hear. And then can you elaborate a bit further in terms of your commentary around the VAR channel? I know you've been working on this initiative for a while. And so, does it just take a while to ramp up and get the right partners in place? Or was it more that you were just in the process of building the team at this point, and now that you've got them hired, now you are in the process of trying to find the partnerships? Where are you at this stage?

So, yes. Good question, Thanos. And we do continue to see it as a pretty key strategy for us going forward. And certainly, the last person on the team was finally added in, in our Q3. So, it has taken most of the year to get that team fully up and running. Maybe a bit -- a little bit slower than we would've liked. But we are starting to see some good markers along the way that indicate it's heading in the right direction.

You know, everything from having a stable of about six or so that we've identified as premium VARs who are already in the process of getting up and running. And we expect them to be up and running in time for fiscal 2015. So, we do expect to have a lift next year from the VAR strategy. But I would say, yes, it's contributed less year-to-date than we might have hoped. And it just takes time as we find to build this out.

Okay. And one last one for me. Can you remind us in terms of your expectation for cash taxes over the next few quarters?

Sure. So the expectation is certainly no cash taxes this fiscal year. Moving into 2015, I think it's possible we'll have cash taxes but no more than around the 5% mark. And then I can see us transitioning to our full effect of tax rate of around roughly 25% over the next probably 3.5 years.

Great. I'll pass the line. Thanks.

Okay. Thanks, Thanos.

(Operator Instructions) Pardeep Sangha, PI Financial.

And so education and corporate were strong this quarter, and healthcare and government were a bit slower. Anything -- any sort of commentary with regards to healthcare and government? Is there any kind of seasonality? Or do you think they'll pick up a bit next quarter? Or is there anything in particular with regards to healthcare and government?

No, I would say that in healthcare, the relative weakness that we saw in the quarter is probably more a reflection of the opportunities that our sales team chased after, and that it just seemed we had a lot of momentum in education. And that's for some of the guys who run nonspecific -- non-vertical specific patches where they have the opportunity to jump where they see the lowest-hanging fruit. I would say the strength in education caused them to focus a little bit more on education in the quarter.

So, suffice it to say then that the relative weakness in healthcare was more an aberration than anything. Yes, in government, we were down year-over-year. And that, when we drill into it, that weakness is the fact that we did have a decent-sized government deal. Last year in Q3 was one of those deals that was between the $500 million mark. And we've -- that deal didn't repeat this year because it was a multiyear deal.

Okay. On the MDM side, mobile side, it seemed like you're starting to get some traction here. Maybe you can just give us a sense of the competitive landscape then? Do you feel you are winning market share or has been, given you also that you mentioned there is a AirWatch take-out, and a number of sort of moving parts in the MDM space. You know, give us your sense of the competitive landscape and how you guys are doing in that landscape.

Sure. It's a little bit difficult right now to take a full read on that market, just because the acquisition of AirWatch by VMware is still relatively fresh. But I think, as Rob alluded to, it does appear as though that market is stabilizing. And as we've talked about before, right, I mean, we really didn't even see it as a viable business market, in that it was hypercompetitive. The ASPs were extremely low. We saw competitors discounting just by shifting a decimal point over in their proposals.

And now it seems that there's a little more, I would characterize as rationality in that market. Right? The deals that we're -- we don't chase after unprofitable deals. And so the fact that our guys -- our team is looking at MDM and picking MDM more, implies that it is -- there's an opportunity for it to be a more profitable market. And second, the hypercompetitive nature seems to be dissipating a little bit.

Okay. And lastly, if, on the international side, you can just give us a sense of kind of some of the -- you're seeing in the different geographies right now -- Latin America, Asia Pacific, Australia, et cetera. Just go through a couple of these different geographies and what you're seeing right now.

Sure. So, I would start by pointing out the dynamics in each of those geos is quite different. When we look at Latin America, we've had a lot of success. And certainly, our pipeline remains strong. Many of those opportunities are education-focused, where we are seeing almost a play-out of what happened in the US six or seven years ago with the 1-to-1 student computing programs, with the difference being that in Latin America, they tend to be driven on a nationwide basis rather than at school districts or even a provincial basis.

And that's why the deals tend to be large and a little bit lumpy. We've also had some success and see a pipeline with government deals in Latin America.

Moving on -- in Asia, the opportunities, they are in all segments, but I would say they're -- we seem to have more pipeline and have had more success, just in the general corporate space. Australia, for us historically, has been an education-dependent market. And there's a lot of changes at play in Australia. It's hard to say how it's going to shake out. It tends to be statewide education-driven programs in Australia. We've been very active in that historically. It slowed down a little bit the first part of this year, but it does look like the opportunities there are reemerging.

Okay, great. Thanks.

Okay. Thanks, Pardeep.

Richard Tse, Cormark Securities.

Errol, I wondered if you could actually give us any commentary on the CEO search/ Just wondering if the Board is looking for a CEO to kind of continue executing on the strategy that's sort of laid out here for the next 12 to 24 months? Or are you going to augment that a bit and just kind of inject a new one?

Sure. I would start by saying, I mean, the Board is -- first of all, has been progressing steadily. The Board has not been in any sort of panic. They want to find the right candidate for the role. And as I mentioned in the prepared remarks, I think that we're close; we've gotten it down to a short list of candidates at this point.

In terms of the relationship to corporate strategy, the Board does feel that right now, in terms of broad strategy, that they are committed to the strategy. But having said that, certainly, if somebody -- when somebody new comes in, I do believe the Board would be open to new ideas. I mean, nobody wants to do a 180 on this business, because I think we've got the strong momentum. But certainly, the Board would definitely be open to refinement of that strategy.

Okay. And then you guys talked a little about competition. You've got, what was it, 48 patents and 118 other in-process here. And you've got a ton of competitors. What's your view on kind of going out to defend some of those patents? Because I imagine some of the competing guys out there have some conflict potentially here.

Well, yes. We do have a fairly robust patent portfolio. And historically, we've always viewed patents as being defensive in nature, i.e., just making sure that nobody can knock us out of our business, rather than using them on an aggressive basis. We do continue to look at the landscape. Most of what we've seen, when it looks like there might be some infringement, is primarily on the consumer front. And then it comes down to a decision of, Jesus, it's -- is it worth the diversion of attention and resources? Because trying to enforce patents, as you know, can be extremely expensive.

So, to date, we have been content to use them in a defensive nature. If we do see somebody encroaching on to our playing field in an aggressive way, then we'll certainly be prepared to use those patents. But we haven't had the need to do so, so far.

Okay. And then one last one, Rob, for you. I think I missed the -- you kind of were speaking a bit fast on the mobile data numbers. Would you mind just repeating that quickly? (multiple speakers) So, just mobile (multiple speakers) --

Sure. Well, yes, on a unit sales basis (multiple speakers) --

Yes.

-- they're 15% to 20% of our overall unit sales. So, in that range now. So, I mean, that's ticked up from below 10%. And, you know, as I said on the call, as well, our Q3 was particularly strong. And we probably don't give this out on a regular basis, but our mobile sales overall were up 161%. And that's a combination of both our Mobile Device Management offering and our Computrace mobile offerings, which are primarily being sold onto persistent tablets -- tablets where our persistence is in place.

Most of those are Win8-based tablets. Some are going to be Android, Samsung tablets as well. So, very happy to see that moving in the right direction.

Okay, great. Thank you.

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

Okay, well, thank you again, everyone, for joining us on today's call. And we wish you a pleasant evening. Thank you.

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