Absolute Software Corp (ABST) 2015 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and thank you for standing by. Welcome to Absolute Software Corporation's fourth-quarter and year-end fiscal 2015 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'd like to remind everyone that this conference call is being recorded today Monday, August 17 at 5 p.m. Eastern Time. I'd like to turn the call over now to Mr. Geoff Haydon, Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and good afternoon everyone. Welcome to our Q4 fiscal 2015 conference call. Joining me on the call today is Errol Olsen, our Chief Financial Officer.

Q4 represented the conclusion of an important and transformational year for Absolute. I'd like to take this opportunity to recap the significance of the changes that occurred in fiscal 2015 and how our execution against key strategic initiatives has positioned us strongly for the future. We concentrated or focus in 2015 on those products areas that represent the greatest level of differentiation and opportunity for Absolute growth.

We improved our bench strength in key areas of the organization. These included our Board, Advisory Board, senior leadership, sales, product management and development. We rationalized our market focus and concentrated our investment on those specific geographies and vertical markets that represent the highest return on investment.

Finally, we substantially completed the reorganization of our North American sales team. This included defining, executing and staffing our next-generation sales structure with the clear objective of increasing productivity and accelerating growth.

Despite the significance of the changes we made in fiscal 2015, I'm pleased to report we delivered growth across all key financial metrics. These include billings, revenue, annual contract value, free cash flow and EBITDA.

We anticipated the strategic changes we made in 2015 would be disruptive to some short-term results. This disruption was reflected in our Q4 billings performance which contracted by 6%. This decline was a function of two things: our international business which we are moving quickly to fix and our new business development performance which was affected by the final stage of our salesforce reorganization.

On a positive note, we have seen some early indicators of progress in key performance areas. Q4 customer renewal rates were strong. We also grew our commercial annual contract value base by 2%.

The business continues to generate strong cash flow. Cash from operating activities was $2.7 million, up 42% from Q4 last year. As a result we finished the quarter with no debt and $85.8 million of cash and investments up 17% from last year.

We further enriched our leadership structure with the addition of Steve Munford to our Advisory Board. Steve is a prominent figure in the information security industry with strong operating and leadership experience. As the chief executive officer at Sophos he was simply involved in driving growth and distinguishing Sophos as a global endpoint security leader. He is currently the director of the Sophos Board.

Along with Art Coviello Steve will provide valuable guidance to Absolute in several key areas. These include product market strategy, operating effectiveness and the productive deployment of capital in the spirit of accelerating growth. Moving into the new year with the changes made to our strategy and our structure, Absolute is uniquely and powerfully positioned to capitalize on one of the most exciting and lucrative areas of information technology, enabling enterprises to embrace and expand mobility while achieving critical security and compliance objectives.

Our Board of Directors recognizes the strength of Absolute's opportunity. As a reflection of this confidence CAD50 million have been allocated to repurchase Absolute shares in Q1.

Additionally the Board intends to increase the quarterly dividend going forward from $0.07 to $0.08 per common share. Our current cash position combined with strong cash flows allows us to execute these capital initiatives while investing in future growth.

Before reviewing our strategic priorities in more detail, I want to say thank you to Absolute employees and partners for your outstanding efforts in helping our customers around the world achieve their most critical endpoints and information security objectives.

I will now provide a more detailed description of our progress against our four key strategic priorities: product strategy, product market focus, brand awareness and sales productivity. In Q4 we further clarified our product strategy. By announcing our intent to divest the Absolute Manage and Absolute Service product lines we are now singularly focused on strengthening Absolute's position as a data and device security leader.

This was an important decision for several reasons. First of all, DDS formerly known as Computrace, is our core business representing almost 90% of our revenue and over 95% of our customers. Secondly, this protection of endpoints and the information that reside on them leverages our Persistence platform, one of our most unique and powerful competitive advantages. Finally, with the emergence of mobility as the new enterprise computing standard, the growth of information on these mobile endpoints and the increasing consequence of data breaches, endpoint and information security has become a top business spending priority.

With this clarified focus we're in a position to think much more innovatively and ambitiously about a longer-term plan to monetize the unique capabilities of DDS and our broadly embedded Persistence platform. This includes our ability to maintain the integrity of endpoint software agents and to elevate the visibility to and security of endpoint devices that are both on and off the network. Christopher Bolin, our new Chief Product Officer, will be sharing our plan to do this during our upcoming Analyst and Institutional Investor Day in Toronto on September 16.

A narrower product focus also allows us to intensify investment in DDS product development. This has already resulted in shorter development cycles and the accelerated delivery of innovation to our customers and partners. This was evidenced in our most recent product announcements which included zero days support for Windows 10, a health check capability from Microsoft SCCM and the integration of critical DDS endpoint intelligence to industry-standard, security incident and event management or SIEM platforms.

This SIEM announcement is particularly noteworthy. Being able to consume critical Absolute endpoint intelligence using industry-leading security management platforms and to correlate this information against other security feeds for enriched risk assessment has been an ongoing request from some of our largest healthcare and corporate customers.

This capability resulted in a partnership with RSA to integrate Absolute endpoint intelligence into the RSA security analytics monitoring platform. Our joint customers can now access endpoint risk and remediate security incidents more effectively and within the broader context of the RSA security analytics environment.

This work represents an elevated commitment by Absolute to collaborate with other information security leaders on technology integration and go-to-market strategy partnering. In addition to enriching the customer value of DDS, these partnerships showcase our technology to a much larger base of potential customers.

We've also been able to accelerate the progress of the new DDS user interface and the DLP or endpoint data discovery integration. Both initiatives are now on track to launch in open beta in early October based on positive constructive feedback from our closed beta participants. In 2016 we will continue our focus on innovation, increasing the functionality and value we deliver to customers, finding new use cases for our unique technology and expanding our reach into targeted vertical markets in order to accelerate growth.

Our product market strategy continues to concentrate investment and energy on geographic and vertical markets that represent the greatest return. In North America during Q4 we progressed the shift of sales and marketing resources to those metropolitan centers where our opportunity is most concentrated. We also substantially completed our North American sales reorganization which I'll detail shortly.

In our international theaters we are looking to accelerate growth by implementing the go-to-market blueprint we have developed and executed in North America. This includes the appointment of theater leads that reside within their geographic areas of responsibility who have outstanding track records of building strongly performing teams and businesses. I'm pleased to announce we have done this in both Europe and the Asia-Pacific regions with the appointment of James Pattinson and Thierry Regnier respectively.

Our international go-to-market plan also includes the coverage of our OEM, VAR and distribution partners, the establishment of an inside sales capability and the expansion of qualified direct sales leaders. Strengthening and leveraging these areas in our international theaters will be a top priority in 2016.

Our new branding strategy was launched on July 22 at our Global Sales Meeting in Vancouver. It is intended to clarify Absolute focus on data and device security. The new Absolute brand is being backed by an extensive media campaign with the objective of elevating our profile in our specific target markets and supporting the new customer acquisition efforts of our sales team.

The media campaign has been active for less than a month. We have already seen website traffic rise by almost 20% and lead generation up by over 10% predominantly in our targeted verticals. We anticipate these numbers will continue to climb as we increase impressions within our targeted audience segments and contribute to the depth of our sales pipeline.

We initiated a sales reorganization in 2015 which was substantially completed in Q4. The impetus for this reorganization was to increase the productivity of our sales organization. During the last few years almost half our revenue has been spent on sales and marketing.

Despite this quarterly growth has been inconsistent with annual growth rates never exceeding 10%. We had a highly stacked sales organization that was optimized around the renewal of existing customer contracts. We needed to create a more substantial, dedicated new business development capability.

The initial stage of this reorganization was the reassignment of existing customers to a sales team that specializes in the retention and expansion of these relationships. We have already seen a positive outcome from this change in terms of the sales cost on this business and strong customer retention levels, as mentioned earlier.

The final stage of the reorganization involved the creation of a customer acquisition team and the transition of all non-customer accounts to this team. This included the appointment of three highly qualified regional directors supported by a team of direct salespeople with rich backgrounds in information security and new business development. I'm pleased to say this organization is now fully staffed and operational.

One of the primary performance challenges we had in Q4 was our new business development activity in North America. We believe this was largely a function of the existing sales team anticipating the transition of non-customer accounts to the newly created business development team on July 1. Simply put, existing sales teams weren't spending time on prospecting a customer base they would have to hand off to another team moving into the new year.

The sales reorganization was an ambitious organization but a necessary one. It was originally intended at the beginning of the year to take 18 months to complete. Based on the success of the changes we made in the first half of the year we made the decision to accelerate the process and execute the final stage of transformation by July 1.

While this pace and the final stage of the transformation was disruptive we are now moving into the new year with a go-to-market structure that is aligned with industry best practices and will enable us to execute more productively against our next generation of growth. Our focus has shifted from reorganization to the execution and the performance of the new sales structure. Almost 40% of the North American sales organization has been in their roles for less than six months.

In support of their success we recently completed a global field enablement program in partnership with Force Management, a sales effectiveness organization that works with many of the most productive sales teams in our industry. We expect the productivity of the new sales organization to increase as we move through fiscal 2016.

In summary, 2015 was a transformational year for Absolute. We defined our core product strategy, we redefined our brand accordingly, we organized key resources around targeted geographic and vertical markets and substantially completed our sales transformation.

While these changes have impacted some short-term results they were thoughtful and necessary. We have moved into fiscal 2016 with a strong strategic organizational and operating platform, a platform that will enable us to achieve our two primary objectives: to accelerate growth and to distinguish Absolute as a leading provider of innovative, impactful endpoint device and data security solutions.

Now I'd like to turn the call over to Errol to discuss our financial results in more detail. Errol?

Thanks, Geoff. Good afternoon everybody.

Fiscal 2015 was a successful year for Absolute. While executing significant organizational changes to support our strategic focus we continue to grow the business with a 3% increase in revenue and a 5% expansion of our underlying commercial ACV base. From a profitability standpoint we increased our adjusted EBITDA by 5% and grew our cash from operating activities by 49%.

In Q4 total billings which we previously referred to as sales contracts were $29.0 million, down 6% from Q4 of last year. However, this billing metric can be misleading and in the case of Q4 does not capture the success we're having in growing the business. We are therefore expanding the metrics that we provide in order to offer greater transparency into our performance.

These annual contract values, or ACV metrics, align more directly with revenue growth. They are critical performance metrics underlying our subscription business model and they are a key focus for management.

ACV-based metrics also enable us to drill deeper to measure our success on key customer focused activities. These key activities, new customer acquisition and existing customer retention and expansion drive long-term revenue growth and ultimately allow us to maximize the lifetime value of our customers.

So in contrast to the 6% decline in total billings we successfully grew our commercial business in Q4. Net ACV retention from our existing customers was strong at approximately 102% and is an early indicator of the benefit of the restructuring of our North American sales team.

We also added an incremental $0.5 million of ACV from new commercial customers. Overall we grew our commercial ACV base by 2% over the course of Q4. Billings of course do remain an important metric for us as they are aligned with cash generation and they are also unique element of Absolute's business with our prepaid multiyear subscription license model.

Turning back to Q4, we experienced some weakness in our commercial billings which accounted for 97% of our total billings. Absolute DDS formerly known as Computrace represented 87% of commercial billings and was down 7% year-over-year.

In Q4 7% of our commercial billings were from new customers. This compares to 17% in the prior-year period, this being the primary reason for the year-over-year decline in billings. As Geoff previously mentioned, we believe that this decline in new customer acquisitions was impacted by the reorganization of the North American sales team which we implemented over the course of fiscal 2015 and which was substantially completed in Q4.

Internationally, our Q4 commercial billings were down 9% year over year and represented 10% of total commercial billings. This weakness was consistent with the performance of our international business throughout fiscal 2015.

With the appointment of new sales leads for APG and EMEA we are confident that we will bring these businesses back to growth as we progress through fiscal 2016. From a market vertical perspective, in Q4 the combined education and government vertical was up 3% year over year while the combined corporate and healthcare vertical was down 20% year over year with the decline being correlated to lower new customer business.

The process to divest our endpoint Management and Service products which we announced last month is ongoing. The assets and liabilities of these businesses are now presented separately on our balance sheet but the operations do not qualify as discontinued operations in our statement of operations. The Q4 billings from our endpoint Management and Service products were unchanged year over year.

Turning now to revenue, IFRS revenue in Q4 was $23.3 million which was flat compared to Q4 of last year. Our DDS revenue increased year over year; however, this increase was offset by decreased revenue from our Absolute Manage and consumer product lines with the decrease in Absolute Manage being related to lower perpetual license sales in the current period. Overall, 96% of total Q4 billings were recurring licenses compared to 95% in Q4 of last year.

I will now turn to our adjusted operating expenses which are defined in our press release and MD&A. Adjusted OpEx in Q4 was $21.2 million, up 11% from $19.1 million in the prior-year quarter.

The increase in adjusted OpEx reflects increased headcount and marketing program spend as well as the fact that the prior-year period included a $900,000 positive adjustment for investment tax credits in R&D. These increases were partially offset by a decline in the Canadian dollar which accounted for approximately $1 million in savings year over year. As a reminder Canadian-based expenditures account for approximately 50% of our total adjusted OpEx.

For fiscal 2015, adjusted operating expenses were $76.5 million, a 2% increase from $74.7 million in fiscal 2014 reflecting overall increased employee headcount which was offset by foreign exchange savings. Our headcount at June 30 was 444 compared to 413 in the prior year.

Looking now to fiscal 2016 we remain confident in the market opportunity for Absolute DDS. For fiscal 2016 we expect to grow our commercial ACV base, revenue and billings as related to Absolute DDS with growth accelerating over the year as our new acquisition teams come up to speed. We plan to expand our presence in the enterprise market, particularly in the healthcare and financial services vertical, launch new products and features such as DDS for healthcare and integration with third-party SIEM systems and establish additional partnerships with leading security service providers.

We therefore plan to invest incrementally in research and development and sales and marketing to support this growth while remaining disciplined on our overall spending. Cash generated from operating activities excluding income tax-related items is expected to remain relatively consistent with fiscal 2015.

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

(Operator Instructions) Richard Tse, Cormark Securities.

Yes, thanks. Geoff, given that you guys are a few months into the quarter can you give us any color on the billings given that sales transition is arguably behind you now?

Yes, the sales trends completing the sales transition is behind us but I want to emphasize once again that was a material transformation and was intended to create a go-to-market platform that will enable medium- and longer-term growth. It wasn't a transformation that we expected would impact Q1, for example. So as Errol mentioned we're intending and expected to grow the business this year and we expect to see that growth materialize as we progress through the year as those new teams become productive, Richard.

Okay, that's helpful. If you are targeting a lot of the changes you've done a lot, how far do you think you are in terms of those changes? Are you 70% there, like 90% there, trying to get a gauge of how much more is left to do before we can just see things start taking off here?

In North America I would suggest the structure the structural changes have occurred. We expect there's a lot of onboarding that needs to be done. There's going to be some tweaking and tuning as we learn from the new structure but the intention at this point is to really focus on executing and monetizing that new structure.

Internationally we've got some additional work to do. We have appointed leadership but we've got some work in terms of creating a go-to-market structure that I defined earlier, getting the OEMs covered, getting our VAR and distribution partners covered, expanding our sales capacity. So that's going to be a longer journey.

And I know you shared some metrics in terms of the progress you've made. I think you said the web traffic is up by 20%. If we could look forward for the rest of this year and I guess going into next year, what quantitative metrics will you be providing on things that we should be tracking to see the success of those transitions happening and are working?

We're really focused on the metrics that Errol described earlier. The expansion of our existing customer ACV performance, the growth of our ACV base generally in addition to billings and cash flow and profitability figures.

Okay, and I guess one for Errol, you talked about investment in R&D and sales and marketing. Can you give us an order of magnitude of what those increases are going to be just to help us out in terms of modeling the numbers here for next year?

Sure, Richard. So there are a number of dynamics at play when we think about our cost structure, the first being the divestiture of the Manage and Service business. So the Manage and Service business when we announced that I think we pointed out in the release that that was a breakeven business for us.

When we look at the cost structure of that business about it was an $11 million booking business. About 60% of our cost structure where direct costs, about 40% were indirect and allocated costs. Those direct costs go away immediately at the time of the divestiture which and the timing is TBD of course.

The other 40% are indirect and allocated. We will have a portion of what I would characterize as stranded overhead with the divestiture. That amount is probably approximately $2.5 million.

Our headcount was 444 at June 30. Approximately 40 of those people are associated with the Manage and Service business. So really the base DDS headcount is somewhere close to 400.

We expect our headcount to increase over the course of the year by roughly 15% throughout the year. So this is probably evenly spread over the next 10 months.

The net of all of this is that we expect our adjusted OpEx to increase year over year. That increase is likely to beat -- well it will be in a single-digit, sort of mid-single-digit increase. Like I mentioned in my prepared script we are expecting our cash flow to remain relatively consistent with the prior year prior to payment of income taxes.

Okay. And going back to Geoff, you mentioned in the call that the Company formerly had an investment in sales and marketing and yet they weren't yielding the results with low growth.

So I know you guys are not providing specific numbers in terms of guidance. But broadly speaking if you look at the next 12 to 24 months out, what do you think is a reasonable target or where would you be happy in terms of growth? Is that 15% number or a 20% number, like what are you guys driving for there?

I would say in terms of organic growth, Richard, 20% is a medium-term objective. Now how long that's going to take to materialize, is it two years, is it three years, it's really going to depend largely obviously on how quickly this new structure starts to produce at a high level. But that is in terms of organic growth that is an objective that we've got for the medium-term.

Okay great. And one last question, perhaps an update on the competitive landscape here, that's something you guys haven't chatted about in some time. That's it, thanks.

Yes, well I mean there's a lot of activity happening competitively. Thankfully there are no still direct functional equivalents to our DDS solution. What we're competing with is other technologies that enterprises are considering to protect their endpoints.

The good news is that the pace of innovation in our business continues to be driven by the fraud community so there is never a point where an enterprise declares victory over fraud. So they are very open-minded to considering new innovative approaches to protecting the endpoints and that affords us an opportunity.

The other comment I'll make is there is no silver bullet that enterprises use to protect endpoints. They are applying defense and depth and layered approaches to security. We just want our technology to be one of the technologies that they consider.

So other technologies that they would consider would include encryption, two factor authentication, containerization. There's a variety of endpoint technologies and we just want to establish DDS as one of them and given some of the unique capabilities that we've got, that embedded persistent technology on those endpoints and our ability to retain a connection with an endpoint device even if it's off the network, that continues to be unique and something that we're looking to leverage competitively.

Okay, that's great. Thank you.

Michael Kim, Imperial Capital.

Hi guys. First a question on capital allocation with the increase in the dividend and the buyback announced, you maybe could talk a little bit about your capital allocation priorities and how you are thinking about balancing that with internal organic investments and acquisitive growth.

Hey, Michael, good question. We have a unique position. We've got a strong cash position, in addition a business that continues to generate strong cash flows.

And so we've pursued historically a diverse capital allocation strategy which has included dividends. We've been active with our NCIB on buybacks and obviously building our war chest to invest in accelerated growth.

This quarter represented the unique opportunity I think for a couple of reasons that was the trigger for the SIB in particular. A, we're anticipating some proceeds from the divestiture. But also we sat down as a Board recently and just concluded that the best deployment of our surplus capital was the repurchase of Absolute stock.

We're left after the NCIB announcement with a strong capital position. As Errol indicated we're looking forward to continued strong free cash flow performance this year and we're looking to continue to fortify that war chest and believe that we're well-positioned from a capital perspective to execute against our growth and acquisition plans.

As we move into the new year we continue to focus more intensively on considering our acquisition strategy. In the immediate term we're focused on completing the divestiture and really executing this new go-to-market platform.

But under Christopher Bolin's leadership we now have a longer-term strategy centered on data and device security that we can start to consider acquisitions in the context of with a higher level of confidence. So we will keep you posted on that progress. Certainly at the investor event in Toronto in September Christopher will be providing some context just in terms of how we're thinking about that longer-term strategy and how that might inform our thoughts regarding acquisition targets.

Great and in regards to the SIEM integration, obviously a lot of pretty large SIEM vendors out there, with some of the technology integration opportunities do you think that also may create some go-to-market synergies as well and being able to leverage some of those channels?

We do. We absolutely do. So the companies that you're referencing obviously include RSA most notably, but there's Splunk, HPR, FireEye, quite a number of notable security analytics solution providers that represent integration opportunities for us.

In the immediate term we're just looking to enrich our value proposition to an enterprise that deployed one of these SIEM solutions. But ultimately we absolutely believe that there may be some opportunities for us to collaborate in go-to-market partnerships and to leverage some of the field capabilities of these large organizations.

Great. And if I could just add one more question about international sales org, do you think the changes that need to take place internationally will be on the same scale of disruption as we saw in North America in the short term? Or just given that it's a little bit of a different state of development that we might expect a shorter time horizon to reorg?

It won't involve the same level of disruption but it's not going to be a short-term return. Thankfully we haven't got organizations that are as sizable and as established as our North American team to restructure. We've just got some building to do.

We started that this year. With the appointment of the theater leads in Europe in particular we started to make some investments in some of the areas that I described earlier.

We've appointed someone to cover the OEMs, we've hired someone to cover the VAR and distribution community, we've hired an inside sales lead, we've expanded our direct sales capability. So it's more about building and onboarding and making productive the structures that we need to go-to-market in international theaters as opposed to massive transformations.

Got it. Great, thanks very much.

Thanos Moschopoulos, BMO Capital Markets.

Hi, good afternoon. Geoff, it might be a bit premature to ask this question since you just made all these changes to the new business development team, but currently what are you seeing in the pipeline as far as interest level across the key verticals that you're focused on, which areas would currently represent the areas of particular strength would you say?

That's a good question. So we're maniacally focused on a variety of metrics around that new business development team starting with activity levels, physical activity levels, the number of converted first meetings into pipeline opportunities, proof-of-concept activity, eval activity, pilot activity. And we're starting to see the pipeline materializing as you'd expect, I mean it's progressing from week-to-week, from month-to-month.

This is a relatively new team so we're looking for that level of activity and growth. And thankfully it's also aligned with the verticals that we're targeting. And it's not surprising they've really been given a charter to focus on healthcare and corporate segments which we believe is our largest underrealized opportunity in the kind of activity in the pipeline aligns with that vertical focus.

Okay. And in terms of the education market any particular change there in recent weeks, recognizing it's primarily I guess more focused on renewals in that market?

No the common link on education is it continues to be a top priority for us. We talk a lot about healthcare and corporate but I want to make sure people understand that the education business continues to be over half our business. It grew consistently every quarter this year and continues to represent a very substantial underrealized growth opportunity.

We are very proud of the work that we've done on the top 100 school districts but there are hundreds of school districts that we haven't touched that aren't our customers. And we continue to see an explosion in one-to-one computing programs being deployed.

So continuing to cover that education segment is a very important charter for us. That's going to be done primarily through the inside sales team focused on existing education accounts and a field organization that is focused on our existing large accounts and growing our business in the education segment.

Great. Then a couple for Errol.

The guidance calls for cash flow to be relatively consistent prior to taking taxes into account. So that said, how should we think about taxes for 2016?

Sure, it's a great question. You'll see on our balance sheet that we do have a provision for about $2 million of taxes payable this year. That $2 million will be paid out this fiscal year.

And I expect that over the course of the year I mean we are moving obviously into a cash taxable position and we'll be accruing taxes in the single-digit tax rate throughout this year. And over the next two years my expectation remains that we'll become fully taxable as we move into fiscal 2018. So just the $2 million this year.

Okay. And then on the OpEx guidance I'm not sure, just to clarify on that, you talked about a mid-single-digit increase when all is said and done. And so what was that assuming regarding the disposition of the assets?

Yes, that's a year-over-year number and I'll just clarify where that increase is coming from. It's coming specifically from two areas. One is sales and marketing and most of that cost structure is already built into the base and those are the heads that we hired over the course of the fiscal year and primarily in the back half of the year and in Q4.

So that cost base is a ready built in. We also have some additional marketing spend associated with our awareness campaigns. So that's about half the increase.

The other half of the increase in R&D where we believe that we have been underspending in R&D. We believe that we need to be more innovative as an organization. We need to bring new capabilities, new features to market at a more rapid clip.

And we compare ourselves to our competitors in the info sec space certainly you'll see that our R&D spend historically has been much lower than the averages are in that space. So we do need to bring it up a bit. And that's the other half of that increase.

Okay. But does that increase include or exclude the businesses that you're looking to dispose?

So that's net of it. Net of the disposition.

Okay. One last one for Geoff. Geoff, have you seen any changes in the overall spending environments in recent weeks or is that pretty consistent relative to the last couple of quarters?

It's consistent and it continues to be strong. The drivers around our business on all fronts whether it's the deployment of mobile devices, whether it's the volume of information, the concentration of that information on endpoint devices, the level of threat, the consequences of data breaches, all of those drivers continue to inform a very strong market opportunity for us.

Great, thanks, I will pass the line.

Paul Steep, Scotia Capital.

Great, thanks. Geoff, maybe you can talk just what your top three priorities are in 2016 and heading into 2017? I think it's clear from the call but we might as well just recap them to make sure we caught all of them.

Yes, so Paul it really aligns very tightly with the initiatives that I described earlier. Now that we've declared a commitment to DDS for the first time in my view certainly since my arrival we're in a position to start thinking much more richly about our longer-term product strategy. We've made the security declaration, now we need to think about what angle specifically we're really going to center on.

We reflect a great deal on the materiality of that embedded device population and how we leverage that platform to further inform enterprises about the risk that exists on their endpoints and how to remediate that risk. But in terms of more specific definition of how we're going to approach that, that will be a top priority. That will include not just organic development priorities but the acquisition considerations.

The second priority is clearly the monetization of the North America go-to-market structure. We've made substantial investments and substantial changes to that capability executing it. Accelerating the growth of the North American business is a top priority and obviously the international markets fall very closely behind us.

They've been a drag on growth every quarter this year. I know from a great deal of personal experience and all of the analyst reports that we read that there is tremendous opportunity that exists for us in international markets. And so building the right teams and driving the right level of execution and performance in those geographies is also a top priority.

Okay. Just to rap on growth expectations for 2016, is it fair to think about the overall year as heavily back-end loaded to Q4 of next year in terms of how we should think about billings growth as the year progresses?

Is it right to think of it that we would be in a low to very low single-digit position over the first few quarters of the year as people ramp up to speed? What's the expectation we should have on sales?

So Paul, you know we don't provide specific guidance. But I would submit that directionally but that is a reasonable expectation. We're moving into the organization, or sorry end of the year with a very nascent new business development organization structure that's recently been substantially completed and we are expecting to seat performance increases throughout the year largely in the second half of the year.

Okay and then the final one, just on the NCIB post the SIB, is the Board committed to reestablishing the NCIB after that basis to provide aftermarket support? Thanks.

We will have to review that, Paul. It's too early to make that declaration right now. Right now we're just focusing on executing the SIB first.

Okay, thank you.

Pardeep Sangha, PI Financial.

Hi, good afternoon. Just with regards to the timing of the divestment of the two business units, are you still expecting both by the end of this calendar year?

So I haven't made a statement in terms of when we're expecting that divestiture to be completed. I will tell you that we've appointed bankers, we've got a process underway. We have seen early indications of interest from several parties but in terms of a completion timeline is speculative at this point.

Would one be going any faster than the other? Any reason why one would go faster than the other?

Well be ideal actually for us is to sell them both as an integrated business unit and that's how we're approaching it.

Okay. My next question is around the international operations. Quite often you're sort of lumping them together, just trying to understand what would you say are the top two or three countries of focus internationally?

So in Europe it is the UK primarily, Germany and the Nordics. In Asia it is Japan and Australia.

Okay. The last question is for Errol.

Your cash from operations was up 49% year over year. Can you just give us an estimate what that increase would have been if you take out the exchange rate, like on a constant currency basis what would that number have been?

We estimate our savings year over year from the decline in the Canadian dollar to be about $3 million.

Okay. All right, thanks. That's it for me.

Ralph Garcea, Cantor Fitzgerald.

Good afternoon, gentlemen. Thanks for taking my questions.

If it takes let's say 12 months to fix the international business to where you like it, how big can you grow that business as a percentage of revenue I guess longer term? Can you get it to 30% or 40% of revenue in three or four years?

That is the objective. That is the objective.

Having spent a great deal of my career building and leading international businesses I'd submit that almost half of the total dollars that are relevant to our business are spent outside of the US. So certainly a 30% or 40% of total business objectives in the three- or four-year time frame is reasonable.

And then if you get that, do you think you can get to sort of mid-20% EBITDA margins at that point?

Yes, yes, we do.

And then on the M&A front or even on a hiring side, has it been tough to find talent and where are you looking with regards to either company-specific or product-specific for where you're hiring these info sec experts?

It's a great question. Listen, there is voracious demand for the talent that we're after. So these searches have been very intensive in terms of time and effort.

Our priority was to get the leadership established and thankfully we expected each of the leaders to be able to recruit from their community. And we've seen them build their teams quickly on the basis of people that they have worked with or that have worked for them historically.

The profile really centers on people with an information security background or an enterprise software background or a SaaS background with a really strong domain experience around new business development. So companies would range anywhere from RSA to Websense to Blue Coat to McAfee and there's just in terms of the security profile but it is a broad set of backgrounds.

A learning curve should be a lot less steeper than just getting a generic enterprise software guy.

The whole organization was built with the objective of a quick ramp. So hiring leaders that could build teams quickly of the right types of people and having sales teams that are well connected in their perspective geographies that can get us in front of the right customer contacts quickly. So we believe that we've made the right decisions for that reason, now we've got to execute, Ralph.

And then just on the cost structure for these guys, you're paying out on sort of a first-year ACV, on the three-year contract and are there clawbacks if the customer is either they leave after that first year, how is the cost structure to get these guys incented so you can hit your targets? And that's it for me.

So I'll just talk at a high level and I will ask Errol to elaborate. So the teams that are focused on existing customer business are compensated on the basis of ACV. So our objective is to maximize ACV performance.

There is a bonus for multiyear contracts but we're trying to balance billing's performance with strong ACV performance. The new business development teams are focused on billings once again with bonuses for annual contract value performance. So we want to generate new billings but we want to do so in a way that's accretive to ACV.

I would just augment that just with one comment around the increased discipline that we're also putting in terms of our sales compensation and ensuring that incentives are aligned with ACV growth, and I'll just give you an example. One would be that we are no longer comping for renewals that are brought in more than 60 days in advance. And that's something that historically it's generally been the practice that's been the exception going forward, obviously bringing contract renewals in early does nothing to increase ACV and so we're putting more restrictions around those types of activities as well.

And just a comment. We have introduced some new metrics this quarter, ACV, specifically both existing customer ACV and growth off the total ACV pace. The ultimate long-term objective is to drive accelerated revenue growth and ACV, strong ACV performance is going to enable that more directly.

To Errol's point when you're as a SaaS company focused on billings performance there's a lot of room for dysfunction where people will bring a four- or five-year contract up front with a massive concession that looks good today in terms of billing performance but really debilitates ACV and revenue performance over time. So we're trying to drive a much more balanced and responsible approach to billings growth but that's ACV accretive and that's ultimately going to enable accelerated revenue growth over time.

Okay, thank you for that clarity. Thank you.

(Operator Instructions) Blair Abernethy, IA Securities.

Thanks. Just a follow-up on the Dutch auction, Geoff. If you look at the size of the Dutch auction and afterwards your cash base will be in the $35 million, $40 million range what would be your base operating cash level and what is your approach or your view on M&A over the next couple of years?

So I can answer the first part of that, Blair. So you're right, prior to the divestiture of the Manage and Service businesses if you do the math and we fully spend the CAD50 million that would bring our cash down to roughly the $40 million mark. And then anything that we receive from the divestiture would be accretive to that.

Our base level, our base requirement of cash is fairly low for our business. We are constantly as you know going back many, many years have been generating positive cash from operations every single quarter. So our base requirements are quite low.

It's important to us, though, that we maintain some powder that we can use for acquisitions. And that's why we certainly would not want to bring it any lower and we expect that with our free cash flow generation going forward we can add to that $40 million base.

And we do intend to be acquisitive, Blair, just to reemphasize that statement. And the objective is to remain with a capital structure that will enable the kind of accelerated growth that we're looking to invest in.

Okay, great. And the changes this morning announced that Phil Gardner is stepping out as an advisory role. What's the makeup of your R&D leadership now or your plans with that going forward?

We've made a lot of investments and additions to that during the course of the year, most notably the appointment obviously of Christopher Bolin as our Chief Product Officer. He was the CTO at McAfee, he was the EVP of worldwide product operations at McAfee for years up until their acquisition by Intel.

He's been busy building and enriching the strength of his team including the appointment of a chief architect to focus on the Persistence platform who is looking at strengthening the team that's focused on that technology. That remains a very competitive advantage and we want to continue to extend that Persistence platform into new OEM partnerships, into new devices and perhaps to persist applications other than Absolute applications at some point.

And so Phil will continue to be actively involved in enabling that team and supporting it on an ongoing basis as an advisor. But we have made substantial investments in enriching our technology and product development capabilities throughout the course of the year. And we'll continue to do so as Errol referenced earlier.

Okay, that's great. One last one for me, just blue skying it here but as you turn your salesforce on again in the US, restructured on, and build out the international salesforce, is there a point Geoff at which you can see given it's a SaaS model that you would consider giving revenue or billings guidance?

It's too early to say. I wouldn't rule that possibility out but at this point we're not prepared to do that. But certainly we'll keep you posted on any progress that we make around our preparedness to do that.

Okay great. That's it for me. Thanks.

There are no further questions at this time. I'll turn the call back over to Mr. Haydon.

All right. Well listen, operator, thank you and I'll thank all of our participants today for your interest in and support of Absolute and look forward to seeing ideally many of you at our upcoming Investor and Analyst Event in Toronto on September 16. Thank you again.

Thank you for joining. This concludes today's conference call. You may now disconnect.