Absolute Software Corp (ABST) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's fourth-quarter and year-end fiscal 2016 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 also like to remind everyone that this conference call is being recorded today, Friday, August 19, at 8:30 AM Eastern Time.

I would like to turn the call over now to Mr. Geoff Haydon, Chief Executive Officer. Please go ahead, sir.

Operator, thank you. Good morning, everyone. Welcome to our Q4 fiscal 2016 conference call. Joining me today is Errol Olsen, our Chief Financial Officer.

I am pleased to announce financial results continued to improve in Q4, driven directly by the progress we've made against our key stated strategic initiatives. These include enriching our product offering, elevating the performance of our global sales organization, and penetrating our targeted geographic and vertical market segments. Notably, performance this quarter was driven largely by the adoption of new product features, the acquisition of new customers, and the growth of our healthcare and corporate markets.

Growth is accelerating, with Q4 DDS revenue at $22 million, up 7% from Q4 fiscal 2015. Recurring revenue represented 97% of Q4 revenue.

Commercial ACV increased by 3% globally and 2% in North America. New customer ACV was $1.8 million, almost doubling from Q3. Existing customer ACV performance was strong at 100%.

DDS billings in Q4 were $30.1 million, representing a 19% increase over Q4 fiscal 2015. Looking forward, we are confident momentum will continue to build across our business, driven by continued strong execution against key strategic product development, market focus, and sales execution priorities which I will now review.

Our product strategy continues to center on enabling enterprises to understand and manage endpoint- and information-related risk. This involves expanding our embedded Persistence platform and leveraging it to provide substantially enhanced functionality around endpoint awareness and resilience.

In Q4, we extended our endpoint awareness capabilities with the launch of Endpoint Data Discovery, or EDD. This is a highly customizable feature that allows customers to identify sensitive data characteristics and to observe the presence of this data throughout their entire endpoint population, across and beyond the corporate network.

This ability to observe endpoint data attributes complements our current ability to capture endpoint telemetry on device characteristics, application activity, and user properties. The result is a rich, multidimensional, resilient, and entirely unique perspective on endpoint risk.

The value of this perspective was reflected in a risk management solution for data stored in the cloud we announced earlier this quarter. Cloud storage applications are used broadly by employees to store and share corporate data, often without the involvement of IT. Because they are hosted off the corporate network and typically not subject to traditional security and compliance controls, cloud storage applications are emerging as a substantial blindspot and source of risk for most enterprises.

This new Absolute feature allows our customers to identify devices that are synchronized with cloud storage applications and to monitor the movement of sensitive data to and from the cloud. DDS can then be used to remediate any potential risk that's identified around compliance violations or unauthorized user access.

This new offering will soon be extensible beyond storage to any cloud-based application and will play a critical role in enabling enterprises to control shadow IT, one of the most prominent sources of insider threat-related risk. As an example, a recent survey shows that 69% of US employees are able to access corporate data stored in the cloud even after their employment is terminated.

In Q4 we also made substantial progress in our efforts to extend and monetize our Persistence technology around non-Absolute endpoint agents and applications. Our SCCM report feature, which was introduced less than six months ago, has now been deployed on over 3 million devices.

We also announced Persistence services, which enables enterprises to automatically reinstall any endpoint agent or application that is missing or damaged, regardless of user or device location. This ability to control endpoint controls has emerged as one of Absolute's most compelling offerings.

In Q4, new customers adopted this technology to protect a variety of endpoint agents including Dell KACE, Symantec Client Management, Pulse VPN, Microsoft BitLocker and LANDESK. It's worth noting that 90% of our new customer ACV in Q4 was driven by the adoption of DDS professional and premium versions, which are required to realize new features like SCCM report and repair and EDD, respectively.

The richness of our new product features and the enthusiastic pace of customer adoption reflect a strengthened capacity to deliver innovative, predictable, and marketable product features and to monetize them. For this reason, in 2017 we will increase investment in our product development capability with the objective of accelerating our innovation agenda and revenue growth.

This investment will focus on two specific initiatives. First of all, we will enhance our SaaS platform, our software-as-a-service platform, ultimately reducing associated operating costs by over 30% and repurposing these savings to expedite product roadmap execution. More importantly, we will emerge with a SaaS platform that is performat, scalable, and extensible, capable of supporting Persistence on any application, on any endpoint, in any geography and enabling our vision of establishing Persistence as an entirely new platform for ensuring endpoint agent effectiveness.

Secondly, this increased R&D investment will begin to materialize our ambitious vision around next-generation insider-threat optimized endpoint security. We will enrich our unique capabilities around device, application, user, and data awareness with the objective of positioning Absolute to capitalize on and ultimately to lead the emergence of a new solution category characterized by contextual and predictive endpoint protection.

We continued in Q4 to concentrate our go-to-market investments on those specific geographic, vertical, and horizontal markets that represent the greatest return on investment for Absolute. Appropriately, these markets led our growth results this quarter.

North American ACV was up 2%. New customer ACV from corporate and healthcare customers exceeded $1 million. And importantly, we continued to see success in large enterprise accounts, driven by the adoption of our newest DDS and Persistence offerings and targeted prominently at the insider threat.

Our most significant new customer win in Q4 represented one of the largest deals in the history of Absolute. The customer, a Fortune 50 US-based, multinational manufacturer of medical devices, pharmaceutical, and consumer packaged goods, is using our DDS technology as a critical component of their strategy to understand and manage user-related endpoint risk. They will also leverage our ability to report on and repair their Microsoft SCCM agents.

Finally, they are using the remediation capabilities of DDS to prevent the spread of malware and ransomware across their organization by quarantining and disabling infected devices. This deal totaled over $2.4 million over four years.

We also saw strong renewal and expansion activity within our existing customer base, including a $700,000 order from one of our largest healthcare customers. This was driven by the renewal of DDS licenses being used to monitor the status of critical endpoint management and security agents such as encryption and SCCM. This customer also upgraded to the premium edition of DDS to activate the Endpoint Data Discovery capability so they can locate and protect electronic health records.

These results reflect the extent to which our enriched product offerings are being valued by some of the largest and most sophisticated customers in the world. Once again, they also reflect the contribution of our new product features to driving enhanced renewal rates, expansion, and upsell performance and new customer acquisitions.

Our success in Q4 also reflects improvements in the effectiveness of our global field organization. Quota attainment by our sales reps has doubled quarter-over-quarter since Q1.

The number of field reps that have met or exceeded our objectives in Q4 was up almost 50% over Q3. This was reflected in our new customer ACV performance in Q4 of $1.8 million, once again up from less than $1 million in Q3. The billings performance of our new customer acquisition team was up 134% quarter-over-quarter.

In summary, we enter our new fiscal year with strength and momentum. Through the changes we made in 2016, we have a substantially enhanced product platform, a highly performing product management and development capability, an increasingly productive global field organization, and a strong balance sheet.

Our priority this year will be to leverage these strengths in conjunction with an accelerated product development agenda against a secular shift that's occurring in endpoint security from traditional, static, precedent-based reactive technologies to a persistent, contextual, analytics-based predictive approach that Absolute is uniquely positioned and determined to lead. We will accelerate revenue growth in fiscal-year 2017 and put the business firmly on a path to accomplishing our long-term operating objective of 20% revenue growth and 20% adjusted EBITDA margins.

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

Thanks, Geoff; good morning, everyone. Q4 DDS segment revenue of $22 million grew 7% year-over-year. Recurring revenue in Q4 grew 5% year-over-year, with 97% of this quarter's DDS revenue derived from recurring licenses and services, as compared to 99% in Q4 fiscal 2015. Year-to-date DDS segment revenue was $86 million, a 4% year-over-year increase.

Our commercial annual contract value base, which is a predictor of future recurring revenue, continued to increase over the course of fiscal 2016. ACV was flat over the first quarter, followed by a 1% increase in Q2, a 2% increase in Q3, and a 3% increase during Q4. For fiscal 2016 as a whole, the commercial ACV base increased by 5%.

From an industry vertical perspective, the combined corporate and healthcare ACV base increased 3% during the quarter and increased by 10% in fiscal 2016. The combined education and government ACV base increased by 2% in the quarter and increased by 1% in fiscal 2016. At June 30, 2016, corporate and healthcare customers represented 47% of our commercial ACV base, and education and government customers represented 53% of the base.

From a regional perspective, the North American commercial ACV base increased 2% during Q4 and increased 6% in fiscal 2016. Internationally, the commercial ACV base increased 6% in the quarter and decreased 2% in fiscal 2016. At June 30, 2016, North American customers represented 89% of our commercial ACV base, and international customers represented 11% of the base.

Our adjusted EBITDA for the fourth quarter was $1.9 million, which was down slightly from $2.1 million in Q4 of last year. Fiscal 2016 EBITDA of $11.1 million was down from $17.1 million in the prior year.

The decrease is reflective of the divestiture of the endpoint and service management segment and associated revenue, while adjusted operating expenses -- which are defined in our press release and MD&A -- were up 2% year-over-year in fiscal 2016.

During the year our cost base was affected by a full-year impact of sales personnel hired at the end of fiscal 2015 and increased research and development headcount. This was partially offset by a reduction in support and development costs associated with the Manage and Service operations as well as foreign exchange related savings on Canadian-based activities. The Manage and Service segment contributed $1 million to our annual EBITDA.

Our total headcount at June 30, 2016, was 445, which was flat compared to 444 at June 30 last year.

Turning now to cash flow, Q4 cash from operating activities was negative $1.6 million, compared to positive $2.7 million in Q4 of last year. At a high level, cash flow for the quarter is reflective of prior-quarter billings of $20.1 million, which were largely collected in Q4, offset by $20.1 million of adjusted OpEx in the quarter, with other changes being related to working capital.

Total operating cash flow for the year was $4.9 million, which was net of tax payments of approximately $2.1 million, transaction fees on the Manage and Service divestiture of $1.3 million, and restructuring payments in Q1 of $700,000. DDS segment billings in Q4 were $30.1 million, a 19% increase over Q4 of fiscal 2015.

Shifting now to our forward outlook. During fiscal 2016, we completed the final stages of our transformation, which involve significant changes to our leadership, go-to-market, and product functions in order to position Absolute to capitalize on the significant information security market opportunity. The impact of these changes was demonstrated through major rapidly adopted product releases in Q3 and Q4, accompanied by accelerated ACV and new customer growth in the back half of the year. Additionally, we demonstrated our ability to sell to increasingly larger and more sophisticated end customers.

Based on this demonstrated success, as Geoff has mentioned, we intend to increase our increased our investment in research and development capabilities in order to accelerate our time-to-market of new DDS features and functions and to accelerate the migration of all of our product offerings to our next-generation service platform. This investment, combined with go-to-market initiatives, supports our objective of continuing to accelerate revenue and realizing on our long-term growth and profitability targets.

In terms of top-line results, we expect total fiscal 2017 revenue of $92 million to $94.6 million, representing a 7% to 10% annual DDS segment revenue growth. We expect revenue to grow at an accelerating rate as we move through the year, driven by increasing new customer acquisition and continuing sales productivity improvements.

We expect adjusted EBITDA margin of 5% to 8%, reflecting relatively stable spending across most departments and increased investment in research and development capacity as we have just discussed. This compares to an adjusted EBITDA from the DDS segment of $10.1 million in fiscal 2016. I want to point out, however, that our increased investment in R&D will be incremental over the year and it will be aligned with improved sales performance.

We expect cash from operations, prior to payments for income taxes and restructuring charges, as a percentage of revenue to be between 8% and 12%, reflecting a double-digit year-over-year increase in DDS billings. This implies relatively stable cash from operations compared to fiscal 2016, prior to payments for taxes, restructuring charges, and transaction fees, as outlined earlier. Tax payments for the year are expected to be in line with our June 30 balance sheet accrual, with the payment allocated roughly equally between operating activities and investing activities in the statement of cash flows.

We also expect to report a restructuring charge in Q1 of approximately $600,000, this being related to a small reduction in force at the start of the fiscal year. We expect fiscal 2017 capital expenditures to be between $3.9 million and $4.4 million, with the spending largely related to upgrades and expansion of our hosted data centers, office expansion, and ongoing hardware refreshes.

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

(Operator Instructions) Thanos Moschopoulos, BMO Capital Markets.

Good morning. The implied R&D spend is, I think, higher than many of us were expecting. You alluded to where that will be directed in your prepared remarks, but maybe you could clarify.

How much of this was about adding new functionality to expand your TAM, versus maybe addressing some plumbing issues you may have uncovered? You talked about performance and scalability improvements. Does that imply that there were some issues that you identified there which require (technical difficulty) investment?

No; it's a great question. Thanos, there will be efficiency improvements, as I alluded to. We do expect that the conclusion will result in a much more cost-efficient operation and the ability to repurpose dollars that are currently being spent to maintain our current infrastructure to focus on innovation.

But this is almost entirely about expanding our TAM. It's designed to create the infrastructure piece, a platform that will enable the execution of our Persistence platform vision -- once again, to extend that persistent functionality to any endpoint agent in any geography and to offer customers a variety of deployment capabilities.

The other component of the investment on R&D is, once again, entirely about TAM creation. We're seeing this, as I referenced, tectonic shift away from traditional endpoint protection to capabilities that are much more focused on resilience, providing context, predicting emerging threats and confronting them before they become consequential. And we're seeing some substantial investments in these emerging technologies within the large enterprises that we're selling to.

We think that with our Persistence platform and our current awareness capabilities and our balance sheet and go-to-market strength that we've got a real head start on some of the emerging, early-stage innovative companies that are starting to accelerate the development of this segment. And we intend to bring our collective mass to bear to accelerating the creation of that category and really distinguishing Absolute as the de facto leader of it.

So this is really about igniting this next generation of endpoint security that is uniquely enabled by some of Absolute's technology and go-to-market capabilities.

And can you maybe provide some color as to how we should think about operating leverage longer term? Clearly in 2017, we're going to see EBITDA margins come down relative to 2016. I think you've talked in the past about striving for a high teens EBITDA margin level.

How far out in the future might that be? At what point should we start to see some of that potential operating leverage kick in?

Hi, Thanos; this is Errol. In terms of the operating model, you're right that with the additional investment in fiscal 2017 that margins will be lower than they were in fiscal 2016. We do expect margins to improve actually even towards the end of fiscal 2017 and certainly improve over time.

Geoff mentioned in his prepared remarks a 2020 target, which is 20% revenue growth accompanied by 20% adjusted EBITDA margins. The timeline for that is -- it's very difficult to pin an exact date on that timeline. That's what we're striving and building our model towards, but you can think of it as a three- to five-year time horizon.

Okay. And as far as restructuring, you've been hiring a fair bit lately, and so -- a little surprised to see that. Can you clarify the areas in which that will be focused on?

Sure. At the start of this fiscal year, it was a headcount of about 30 and it was across departments. And this was really just a factor of starting the fiscal year, retooling and repositioning, which is not atypical for us.

Okay. Maybe one last one for me. As far as the seasonality of billings, anything we should be aware of?

Consistently, Q4 and Q1 are your strongest billings quarters. Should that remain the case? And how does that look heading into the education selling cycle?

It's a good question, Thanos. As you know, our billings are highly correlated to our expiring contract opportunity. The expiring content opportunity for the year as a whole is up mid-single digits but there is some seasonality to it. In Q1, the expiring contract opportunity is down mid-single digits, and then it's up for the remainder of the year and highest in Q4.

Okay, so Q1 has a tough comp, but Q2, Q3, Q4 should be fine in that regard?

That's right.

Okay. Thanks. I'll pass the line.

Paul Steep, Scotia Capital.

Great; thanks. I guess the first thing to start with maybe is, Geoff, if you could talk a little bit about the new product. It sounds like you're taking the Company towards an entirely new category, away from where the Company has traditionally been.

How much are you leveraging any of the base technology? Or is it you are just starting with a clean sheet of paper?

No, listen, we're leveraging all of it. The two functionality dimensions that we're really doubling down on are Persistence, which is a core technology, and our awareness capabilities, which is our DDS agent, which represents our entire revenue base right now, with the exception of a very small amount of Persistence services which was a new offering that we launched in Q4.

So this is really entirely about strengthening and applying core technologies in new, innovative ways, just to clarify. This is about monetizing Persistence as a means of ensuring the effectiveness of endpoint agents beyond our own agent. And that core Persistence technology has been fundamental to our value proposition for as long as Absolute has been around.

DDS today offers, as I mentioned, very rich awareness capabilities on multi-dimensions: around device, around data, around user, around applications. And really what we're looking to do is enhance that telemetry, introduce an analytics capability that enables us to present that telemetry to an enterprise in a more intelligent and actionable form, and to enrich our investigations tools so that when an incident or a risk event is identified we can enable an enterprise to really understand and remediate that in very predictive ways.

So, this is entirely about strengthening and applying our current core capabilities in new, innovative and market-expanding ways.

Okay. Just to shift gears for a second, to hit the double-digit billings growth that's implied by the CFO number, what has to go right in 2017? Are there any major headwinds in terms of big rolloffs? I don't believe there are; but anyway, that would be great to hear.

No, there aren't, and we will continue to focus on precisely what we have focused on and accelerated during the course of this year. And that is ensuring that we're optimizing our existing customer opportunity both through renewals and expansion. We do expect to see an acceleration of expansion as we move through the year. We've introduced some features that are really optimized when they are deployed broadly across an entire enterprise endpoint population.

We've also created a sales organization and go-to-market capability that is more focused on igniting devices that have already been deployed. So that expansion opportunity is substantial.

But the primary driver of growth will continue to be the increase in new customer ACV. That's going to have the most direct and material impact on accelerated revenue.

But we do not see any fundamental headwinds. To us this is all about continued fundamental execution, Paul.

Okay. Fair enough. And then I guess the last one for me is, Errol, you alluded to it, but if -- back-of-the-envelope, I'm playing around with the numbers here, it looks like a significant add to the R&D spend. I guess, twofold.

One, you talked about it being tied incrementally. How much have you front-end loaded in Q1 as we're walking in the door here in terms of higher R&D spend?

And then the second part of that would be: What's preventing you from repurposing a number of the staff that have presumably finished other projects in the base? Thanks, guys.

Sure. In terms of the R&D ramp, to put it into some context, at the high end of our plan -- and I'll reiterate that the spend will be matched with our revenue growth over the course of the year. But at the high end of our plan we'll hire as many as 100 additional people in our R&D group.

Those would be split about half in our Vancouver dev center and about half in Vietnam, where historically we've used a third-party outsource developer in Vietnam. And we are building our own office in Vietnam as well.

So that's the ramp. The ramp will happen steady throughout the year.

And as to the question of repurposing, one thing to put things in context is that Absolute has historically -- if you compare us to other software companies, other SaaS companies, and particularly other information security companies -- we have invested in R&D at the low end of the range. In the information security industry the average R&D spend is somewhere between 19% and 23%; Absolute historically has spent about 12% of revenue on R&D.

From a competitive standpoint you could say it has put us behind the curve and there is some catch-up to happen within that. But also we just expect to continue to innovate and to deliver functionality to the market, so we can't -- it's not as though we can deliver one piece of functionality and then walk away and put tools down.

This is a constant innovation effort both from a competitive standpoint against other companies in our space and also competitively against the bad guys, right, in information security and the funding that's being applied to the hacking community. So it's highly competitive, and hence the reason for the higher overall R&D spend in the info sec industry.

Now having said all of that, part of the incremental spend is accelerating our movement onto a single platform. We released our next-generation platform partway through fiscal 2016. Our new functionality is being deployed on that platform, but we still need to move our historical functionality over to that single platform.

Once that exercise is complete we will be able to redeploy resources. So what that means for us is I think that going forward into fiscal 2018 we should not expect such a large increase in R&D spend.

Great. Thanks, guys.

Kevin Krishnaratne, Paradigm Capital.

Good morning, guys. Question for you. I just wanted to get your thoughts on uses of cash, decisions and priorities for 2017. Just taking a look at your historicals, yes, it had -- there have been times you were in the $15 million, $20 million range. Just wondering; I know you're giving guidance for 2017 and don't probably want to talk too much about 2018 and 2019 going forward.

But what does your cash profile look like going forward? What do you think? Do you think you can get back into those type of numbers?

And to that point, I did notice that unlike I think the prior two years the dividend decision was kept on hold with regards to an increase. So just wondering how you are thinking about cash, the dividend, and how the cash profile should look like moving forward.

And also a follow-on on CapEx levels. I think it was about -- what? -- $4 million in the year 2017. Wondering how that looks out going forward.

Yes, this is a business that fundamentally continues to have very strong cash-generation potential. 2016 was a unique year, with a transformation of our business almost entirely with the divestiture. With this dismantling and the rebuilding of our sales organization we had a depleted expiry base, all of which affected billings and cash performance.

As we move into 2017, we're looking to ignite some new market opportunities by accelerating investment and innovation and the release of features that we expect we'll be able to monetize quickly. But our medium-term expectation is this will continue to be a very strong cash-generative business.

Now with respect to the dividend, we review our capital allocation strategy constantly in the context of our evolving strategy and our evolving situation. In Q4, we had an NCIB, but we used it very modestly, primarily for defensive purposes. We don't expect that position will change.

We declared a dividend. But as we move into the new year, what you're seeing is us bringing a very strong balance sheet to bear in the spirit of accelerating innovation and laying the foundation for a much more exciting revenue growth story.

As we continue to demonstrate growth and to improve the strength of our platform that will enable us to execute against that growth opportunity, we will continue to orient capital towards the acceleration of that growth.

Great. Just follow-up on that point there, the acceleration of R&D, does the stepped-up R&D, your staff increases, does that preclude you from pursuing any unique M&A that's here? I know you previously talked about looking at maybe acquiring technology. What are your thoughts on M&A?

No, not at all. Not at all. We just think there is a very important opportunity for us to introduce this new feature set, and we are pursuing a combined build-and-buy strategy.

So we're accelerating investment in organic development in the spirit of releasing the next generation of this functionality through that effort, but we're also very interested and actively looking for opportunities to acquire talent and technology that will accelerate the materialization of our product roadmap.

Okay; thank you. Maybe just one quick follow-on -- or switching gears a little bit. Just with respect to the revenue guidance, wondering if you could maybe dig a little deeper into how you build that out and how you think about that.

How much -- you've got quite good visibility on your existing base and maybe the conversations that you're having with existing clients with regards to any upside opportunities. But what kind of visibility might you have for the year, sitting right now, with regards to some of -- a brand-new customer that might be taking EDD and then pulling in Persistence as a result? It seems like there could be potential for even upside to your revenue outlook if you think about the fact that you are still very early days in these product launches and your discussions are probably still early. So just wondering what kind of visibility you might have in that regard.

Sure. You're right, a lot of our revenue -- and I think in fiscal 2016 it was about 75% of our revenue -- actually came off the opening balance sheet, and we expect something similar for fiscal 2017.

In terms of the elasticity of the guidance that we provided on revenue, certainly we are optimistic that there is upside to it, definitely. We do expect a ramping of revenue over the course of the year in hitting that guidance of 7% to 10% year-over-year DDS revenue growth. It should just be a steady increase through the course of the year, and we're optimistic that by the fourth quarter we will be hitting a double-digit year-over-year revenue growth rate.

Okay. Thank you very much, guys.

Michael Kim, Imperial Capital.

Hi. Good morning, guys. Just wanted to see if you can talk a little bit more about how you are addressing the problem of shadow IT. Do you think you need to compete or partner with some of the cloud access security brokers and some of the ID-as-a-service vendors as well? And how do you see the data loss prevention capability being maybe integrated with some of those other partners?

It's a great question. We're very excited about this new offering. It reflects, as I mentioned earlier, really an extension or a repurposing of capabilities that we already have.

Shadow IT, as you know, has emerged, as I said earlier, as an epidemic source of risk for enterprises as users start to send confidential information to and from these cloud sites. Cloud storage, most notably, but it obviously extends to just about any cloud application.

So our ability to observe persistently to a device that's on or off the network, the use of a cloud application in conjunction with being able to determine the type of data that's being exchanged with that cloud application is a very powerful combination. At the end of the day, the challenge with these types of cloud applications is visibility, is awareness. A lot of this interaction is occurring outside of the scope of IT, very often without their approval, and beyond traditional security and compliance capabilities.

So our ability to observe a device, to be able to enable an enterprise awareness around the presence and use of cloud applications, in conjunction with the type of data that's being exchanged, is once again a very unique solution. And it does leverage a company that we acquired for their DLP capability several years ago, Palisades.

We've expressed that technology in the form of our Endpoint Data Discovery offering which we released in Q4. But it's that addition that really makes this offering so compelling.

We've been able to inform enterprises about the use of cloud applications for some time, but being able to actually highlight the extent to which sensitive data is being exfiltrated, that's the big bang. And we think there's tremendous opportunity not only for us to monetize that in an enterprise context, Michael, but to your point, we do think there are partnering opportunities that that introduces.

Is this capability an opportunity to increase ACV with some existing customers as well as drive maybe larger deal sizes with net new logos?

Precisely, precisely. So in order to access EDD, which is a critical component of that offering, users have to buy the premium version of DDS which obviously represents a higher ACV per unit than the other two basic and professional offerings.

And by the way, we've seen the impact of EDD very substantially in the short time that it's been in the marketplace. In Q4, over 50% of our new customer licenses were premium licenses, up from less than 10% in Q1. So as we start to apply that EDD capability in combination with other telemetry elements to enable these type of innovative use cases, we expect that we're going to continue to see a very substantial adoption of that premium offering.

Great. And then one question for Errol with regards to the large deal with the Fortune 50 customer. Is that $2.4 million linear over four years from a revenue recognition standpoint? And was all that $2.4 million billed and reflected in the DDS billings for Q4 of $30 million?

It was entirely billed and reflected in the Q4 billings number. And there is about $100,000 to $200,000 that is not going to be recognized as recurring revenue within that number; it will all be recognized in fiscal 2017. But the remaining $2.2 million will be recognized ratably over the 48-month contract term.

Okay, great. Thank you very much.

(Operator Instructions) Ralph Garcea, Cantor Fitzgerald.

Good morning, gentlemen. Just following up on that large contract, at the start of the sales cycle, did you have all the feature sets that the customer wanted? Or did you have to release the new product releases through Q3, Q4 to close that deal? And did that (multiple speakers)?

It's a great question. I would say that the conversation initially centered around asset management, but as the engagement evolved we started to cultivate interest in some other capabilities that were either released or on the product roadmap.

Ultimately, their MVP or minimum viable product definition spanned multiple capabilities, not just asset management but the ability to consume our telemetry in their SIM platform, which was something that we announced last year, the ability to persist SCCM, which we announced last year. They also had an interest in Endpoint Data Discovery.

So I would say that the conversation started with a functionality that was available earlier in the year. But as the conversation evolved and as we introduced new features and functions, it started to make the conversation much more compelling and substantially expanded the opportunity both to a larger number of endpoints and to a more premium version of DDS.

If these were 12-month sales cycles before, are they accelerating? Can you close some of these larger deals in six months from initial discussion?

Well, we highlighted some large wins last year that we closed within two quarters. Ralph, we're just trying to determine what an average sales cycle is for these large enterprises. Wins of this caliber are a relatively new domain; we're starting to see much more of them showing up in the pipeline, and we're certainly featuring these more prominently in our earnings call announcements.

But there is still a lot of variability in terms of how long it's taking us to get them done. It does range from three to six months to nine to 12 months depending on the size of the organization, the complexity of the campaign, and just the nature of the drivers -- the importance and urgency of making a decision quickly. So we'll keep you posted as we learn more about the average term, but they are still quite variable.

But we think as we continue to enrich the feature set, we're going to see more of these. We're going to see larger versions of them. And we do think the business cases that we will build will be compelling and urgent, ideally collapsing some of the sales timelines.

Okay. Then for Errol, on the R&D headcount, what was the number at the end of June, I guess, for Q4?

Sure, R&D headcount at the end of June was 132.

Then on a previous question, you said you were going to add 100 through 2017. What's the split between -- I don't know if you gave a split between Vancouver and Vietnam; and the Vietnam headcount would obviously be much, much cheaper than Vancouver.

Much lower, you're right. Much lower cost in Vietnam. And the split is 50-50.

Does that revenue line -- you've been running in that $3 million a quarter run rate. What should we be modeling that going forward through 2017?

In terms of the R&D ramp? Is that the question?

Yes. Well, yes.

You should model it will be spread very evenly over the course of the year.

Okay, thank you.

We have no further questions in queue at this time. I'll turn the call back to the presenters for closing remarks.

All right. Well, listen, I want to take this opportunity to thank everybody for their interest and their time this morning. And we'll look forward to speaking with many of you in the coming days. Thank you.

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