Absolute Software Corp (ABST) 2017 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Fiscal 2017 Fourth Quarter and Annual Financial 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 reflects 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. Any forward-looking statements contained in today's conference call are being made as at the date hereof, and Absolute does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

For more information on the company's risks and uncertainties relating to these forward-looking statements, please refer to the appropriate section of its quarterly MD&A and quarterly financial statements, both of which are available on Absolute's website or SEDAR.

I would like to remind everyone that this conference is being recorded today, Thursday, August 17 at 5:00 p.m. Eastern Time.

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

Thank you, operator, and good afternoon, everyone. Welcome to our fiscal 2017 and fourth quarter conference call. Joining me is Errol Olsen, our Chief Financial Officer.

Fiscal 2017 was a very productive year for Absolute as we substantially elevated our ability to compete and to win in the enterprise information security market. We increased our investment in R&D with the objective of expanding our total available market opportunity, completing the establishment and staffing of our Vietnam development facility and our user behavior analytics team. We accelerated the development of new marketable features like Application Persistence, Security Posture reporting and Student Technology Analytics and leveraged this innovation to drive the expansion of existing customer deployments and the acquisition of new customers.

We enhanced the value of our technology by integrating it with other complementary applications, such as IBM QRadar, Splunk, ServiceNow and Microsoft Azure, making Absolute more valuable to large enterprise customers.

Finally, we completed the development of Absolute 7, a definitively compelling enterprise endpoint visibility and control platform which we announced last month.

From a go-to-market perspective, we strengthened our enterprise sales team and improved their performance across both existing customer renewals and expansion and new customer acquisition. Most importantly, we expanded enterprise ACV by 10% and distinguished the enterprise, which now represents 49% of our ACV base, as our fastest-growing business.

For the year, revenue of $91.2 million grew 6%. Adjusted EBITDA of $7.9 million declined from $10.1 million for the DDS business, resulting from investment in headcount additions in key areas, most notably R&D. Exiting the year, ACV was $87.8 million, up 6% from fiscal 2016, driven by a combination of new customer wins totaling $4.4 million and 100% annualized customer retention.

In Q4, revenue of $23.2 million grew 5% year-over-year, with recurring revenue up 8% year-over-year. While we added $800,000 of new customer ACV from hundreds of new customers, total ACV was $87.8 million, slightly lower than the previous quarter. This resulted from our ACV retention rate dipping to 99%, reflecting cyclical budget pressures in some education districts and softness in the Latin American and Asia-Pacific region. As our fiscal 2018 guidance implies, however, we expect ACV expansion to return moving forward.

We enter our new fiscal year with strength and momentum. Cyber security remains a top enterprise information technology concern, with the endpoint emerging as the most prominent focus and one of the fastest-growing investment areas. The expanding dark endpoint problem, defined as the inability of enterprises to see and control off-network devices or devices that are dependent on endpoint security agents that aren't working properly, continues to represent one of the most significant and impactful areas of IT vulnerability.

Highly publicized ransomware attacks like Petya and WannaCry have further brought into focus the consequence of outdated or unpatched endpoint agents that aren't being observed or remedied by organizations. The importance of being able to see and to remediate risk across an entire endpoint population, not just a subset, is beginning to supersede the value of traditional point-endpoint security and management products. The emergence of an endpoint visibility and control category recognizes this new reality and is forecasted by Forrester Research to be one of the fastest-growing endpoint markets. In the context of this emerging category, Absolute is uniquely positioned.

Our OEM embedded Persistence technology advantage will be powerfully enhanced by our recently announced Absolute 7 platform. Absolute 7 is truly a next-generation platform for Absolute, featuring a new integrated user interface, an enhanced self-healing capability that natively extends Persistence to any endpoint agent application and introduces most significantly our exclusive Absolute Reach technology.

Reach will enable enterprises to create and execute customized query and control scripts and to extend these commands to every endpoint everywhere, including off-network devices and devices whose agents have become damaged or disabled. The introduction of Absolute 7 and Reach represents the culmination of a multiyear stealth development effort and introduces an omnipresent, high-resolution endpoint visibility and control platform that is extensible into a broad variety of endpoint management and security use cases, limited only by customer requirements.

Examples of how this technology was deployed during its beta phase included a large service provider in Europe, using Reach to identify devices around the world that were communicating with known nefarious IP addresses and then automatically and immediately severing that vulnerability. Another use case deployed by a large North American retail enterprise leveraged Reach to identify endpoints affected by a recent critical Intel firmware vulnerability, sending a message to affected users and disabling affected devices until a firmware update could be executed. Finally, Reach technology was used by a large North American healthcare provider to identify endpoint devices that were exposed to the WannaCry attack by looking at and remediating versions of all endpoint agents and patch levels that were vulnerable across a broad variety of operating systems and endpoint types.

Reach puts Absolute firmly on a path to define and ultimately lead this emerging endpoint visibility and control market and compete successfully with prominent competitors in the space like Tanium.

From a go-to-market perspective, we enter 2018 with a strengthened enterprise team and business pipeline. Our enterprise opportunity portfolio was up over 50% year-on-year, and our pipeline of larger deals, which we characterize as deals with an ACV value of $500,000 or greater, has grown at an even stronger rate.

In 2018, we will extend our endpoint visibility and control platform into new and valuable customer use cases, including insider threat defense. We'll introduce new deployment options for our technology, including an on-premise version for those companies and countries that require localized delivery. We'll also continue to integrate our Absolute platform into other complementary technologies deployed within the enterprise to further increase customer value and Absolute stickiness. Most importantly, we will enable and activate our global enterprise field organization around our new Absolute 7 platform to drive upsell activity among existing customers and the acquisition of new customers, to distinguish Absolute as a leader in the emerging endpoint visibility and control category and to help enterprise customers confront and overcome their most prominent source of information risk, the dark endpoint.

In 2018, we expect to increase our revenue growth rate, to expand both EBITDA and cash margins and to remain firmly on our path to accomplish our long-term operating objective of 20% revenue growth and 20% adjusted EBITDA margins.

Errol, over to you.

Thanks, Geoff. Good afternoon, everyone.

Q4 revenue of $23.2 million grew 5% year-over-year. Commercial recurring revenue of $21.9 million increased 8% year-over-year, while commercial nonrecurring and consumer revenue was $1.3 million compared to $1.8 million in the prior year period.

Fiscal 2017 total revenue was $91.2 million, representing 6% growth over fiscal 2016 DDS segment revenue, with commercial recurring revenue up 8% year-over-year. Our commercial ACV base was $87.8 million at June 30, representing a 6% increase over June 30 of last year. Sequentially, the ACV base was down $400,000 from March 31, reflecting a 99% existing customer retention rate, substantially offset by $800,000 of new customer ACV. Existing customer retention was impacted by the cyclical budgetary pressures in some school districts, as Geoff referenced earlier, and lower renewal rates in emerging markets. Additionally, this quarter did not include any new or expansion deals with individual ACV greater than $500,000. However, our pipeline of these large deals is up significantly this year and is expected to contribute to growth in fiscal 2018.

The enterprise and healthcare ACV base increased by 10% year-over-year and was flat sequentially. The education and government ACV base increased by 2% year-over-year and was down 1% sequentially. At June 30, enterprise and healthcare customers represented 49% of our commercial ACV base compared to 47% at June 30 of last year.

From a geographic perspective, our North American ACV base, which accounts for 90% of total ACV, was up 6% year-over-year and unchanged sequentially. Internationally, the ACV base was up 1% year-over-year and was down 3% sequentially.

Turning to expenditures. Total headcount at June 30 was 517 compared to 445 at June 30 last year. In accordance with our plans, the majority of the increase in headcount was related to expansion of our research and development capabilities, with R&D headcount finishing the year at 235, up from 150, including Vietnam contractors, at June 30 of last year.

Total Q4 adjusted operating expenses, which exclude reorganization and noncash charges, and which are detailed in our MD&A, were $21.2 million, up 5% year-over-year. For fiscal 2017, total adjusted OpEx was $83.3 million, up 7% year-over-year and reflecting incremental investment in R&D.

Adjusted EBITDA for the fourth quarter was $2 million or 9% of revenue, and for the year was $7.9 million, also 9% of revenue.

Reported cash generated from operating activities during Q4 was $700,000, and for the year was $1 million. This annual number was net of $2.8 million of reorganization-related payments and $3.2 million of income tax payments. Fiscal 2017 cash generated from operating activities was $7 million prior to these payments.

Turning now to our outlook for fiscal 2018. We expect further growth in revenue and ACV by leveraging our existing product and go-to-market investments, leading to improved operating margins and cash flow generation. We expect total revenue of $96.8 million to $99.2 million, representing 6% to 9% year-over-year revenue growth. The primary driver for growth is expected to come from the North American enterprise and healthcare market, with modest growth rates in the North American education and government segments as well as from international business. We expect adjusted EBITDA margins of 9% to 11%, which includes a modest increase in headcount and related operating expense and an assumed negative impact of approximately 2% of revenue from a stronger Canadian dollar. Our forecast uses a Canadian dollar to U.S. dollar exchange rate of USD 0.78.

Cash from operating activities is expected to grow to 13% to 16% of revenue. This compares to adjusted cash from operation of 8% of revenue in fiscal '17. Capital expenditures are expected to be between $3 million and $3.5 million, relatively consistent with capital expenditures of $3.4 million in fiscal '17.

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

(Operator Instructions) Your first question comes from the line of Doug Taylor from Canaccord Genuity.

Can you talk about how you expect a release -- a platform release like Absolute 7 to impact the pace of upsells, resells or ASP for your product? Or is it more about improving the renewal rates of your existing customer base? Just talk about how you think that helps you address your -- the addressable market.

Yes, certainly, Doug. It affects all those things. So first of all, Reach will be included in the premium version of Absolute 7. Today, almost 2/3 of our existing customers operate a version of our DDS platform that is below premium, so there is a considerable upsell opportunity within existing customers that we intend to focus on. Secondly, we believe that Reach and [Absolute 7]

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also it makes the technology more sticky, so we do expect over time it will impact renewals. And the final consideration is with Absolute 7, we have integrated our self-healing endpoint, our Application Persistence offering, inside the platform. Historically, we executed Application Persistence through a light external professional services engagement, and customers had to access information regarding that function outside of the DDS dashboard. And so, by making it more integrated, by making it more native, we expect Application Persistence to be more obvious and accessible to both existing and new customers. And as you know, Application Persistence is an upsell and an opportunity for us to increase ACV per endpoint. So it really affects all of the dynamics: existing customer renewal, expansion, upsell and new customer ACV.

Okay. Was there -- I mean, looking at Q4 revenue, it seems like it was a little below the guidance that you'd provided even back in May. Was there something that's surprising? I mean, I know you mentioned a tough season for budgets for education vertical, but I mean, it would seem like that's something that you would have experience with in the past. Was there something, like maybe one deal or something that slipped out of the quarter or a nonrenewal that you were expecting, that caused that to be a little softer than you had forecast?

I'll elaborate. There were 2 dimensions: one was the ACV, the fact that ACV was flat or marginally down; secondly, there were some nonrecurring revenue considerations I'll ask Errol to elaborate on. But within SLED, really, what we saw was some budget pressures that were unusual in specific districts that are historically large customers, and really, we're expecting those to affect the timing of deals. What we're seeing is they're not spending all of their money in one volume purchase, but perhaps buying incrementally. There were some other unusual, anomalous dynamics within SLED. We had 3 of our top 10 education customers replace either superintendents or CIOs that disrupted the timing of renewals. We had some unusual factors that affected the SLED business marginally that we don't expect to repeat or impact that business considerably moving forward. With the enterprise business, really, Doug, what we didn't see in Q4 that was unusual were large deals. It was really a singles and doubles quarter. We didn't have a single new customer with ACV at greater than $100,000. That's unusual. And only 2 of our expansion deals with enterprise customers were valued at greater than $100,000. So we did a lot of deals, acquired a lot of new customers, drove $800,000 of new customer ACV, but it was on the back of a lot of customers and a lot of transactions. Now notable customers and some very prominent names included like PwC, Deloitte, Booz Allen, Facebook expanded again, Hilton, Centene, but we just didn't get the large deal leverage. The good news, as I referenced during the prepared script, is that our pipeline of large deals in that -- in all categories, greater than $100,000, greater than $250,000 and greater than $500,000 of ACV, increased substantially year-over-year. So we're in front of more deals, and we do expect those to play a more prominent role in future quarters, but it's just -- it's sporadic at this point. We're just not in front of enough of them to have one land or a couple of them land every quarter, but we expect that to change, certainly, moving forward. Do you want -- maybe I'll just ask Errol to comment on some of the nonrecurring items.

Sure, it's probably worth just speaking to that. Thanks, Geoff. So on our nonrecurring, our nonrecurring revenue was $1.3 million, and a year ago, in Q4 it was $1.8 million. That reduction is a couple of things. Half of that non -- we call it nonrecurring and other revenue. Half of that is our consumer business, which we have de-emphasized, which was down year-over-year. There are a couple of other components to that revenue segment, both of which were also down. And then that's really where we came in a little bit lower than what we had expected for the quarter. Our recurring revenue was in line with our expectation which, as you know, is really just falling off that opening ACV base.

Okay. Last question for me. You've laid out your -- a pretty compelling goal of 20% growth, 20% EBITDA margins. Obviously, this year is -- you're showing some positive steps towards that goal, but can you just remind us what you see as perhaps the biggest hurdles to getting to those types of numbers beyond time?

Yes, I think, it's execution, ultimately. Yes, I mean, we now have a product offering that we believe gives us access to upsell and new customer acquisition opportunities. Our enterprises sales team, under the leadership of our new North American enterprise leader, has been strengthened. It's more mature, and we expect to be more productive moving into the new year. And our pipeline is expanded in key areas, most notably large deals, as I mentioned earlier. And finally, we're starting to see some industry dynamics, some mega-trends that are favorable, just a recognition of the importance of some of the unique capabilities that Absolute offers. So really, that's the source of our confidence and optimism. And I'll just reflect on our enterprise business, which is the primary growth engine, grew 10% in 2017. And all of the fundamentals that drove that growth in the first 3 quarters -- remember, we expanded ACV at an accelerated rate -- are still relevant, and in fact, I would submit, strengthened, if you take a look at the product, if you take a look at go-to-market, if you take a look at market conditions. So moving into the new year, that's the source of our optimism. And really, it comes down now to just getting our global field team across our new platform, in front of enough existing and new customers and executing our plays.

Your next question comes from the line of Thanos Moschopoulos from BMO.

Geoff, you announced Absolute 7 last week. Did the sales cycle on that, effectively, just start now? Or have you been already pitching it to some customers? You mentioned some betas, for example.

Yes. We beta-ed it in Q4 -- starting in Q4, Thanos. We launched it internally at our global sales event in the third week of July. We announced it last week [in its TA] on the 28th of this month. So we're kind of ramping up, but we've started cultivating opportunities, really, in July at scale.

Okay. Going back to your commentary on education. September is obviously a key quarter for education as well, so should we look at maybe the new ACV growth being a little bit muted in the upcoming quarter as well given the dynamic you highlighted in that market?

Yes, not necessarily. Not necessarily. We're determining how that's going to play out across the education sector. What we did observe in Q4 is just traditionally, it's a harvest season where the majority of the opportunity is concentrated. We just saw some more incremental investments in education. Now once again, the education business is a strong business. It grew in '17. We expect it to grow this year. The number of total devices shipping into the education is increasing substantially from year to year. The number of Windows devices shipping to schools is increasing. So we're still very optimistic, but we just think that there might be a little bit of a change in the complexion of when and how that business lands. But in terms of how that plays out in Q1 and Q2, it's just -- it's not clear enough for us to provide any specific guidance.

Okay. And then on the international business, obviously, you mentioned some headwinds on the emerging markets, but I think your commentary was that international should experience some growth this upcoming year. So can you clarify that dynamic that you're seeing here?

So modest -- so remember, over the last few years, we've moderated our level of investment in the international business and our expectations of growth from those markets. I mean, we've really focused on concentrating our investment and energy on the North American market, which is obviously our largest market. And so with that said, historically, and currently, international business is feast or famine. If we get a large deal, it affects the business substantially, and if we close a large education deal, which we did in Australia and Latin America 3 years ago, that we don't renew in its entirety, it affects ACV but off a small base. Moving into this year, we will continue to concentrate our investment in really igniting the North American market, but we will continue to execute against the investments that we've made in very specific international geographies. And we do expect growth to accelerate throughout the year, but once again, at a modest rate, off a modest base. Our goal this year is to get really critical mass established in terms of North American business performance and moving into the subsequent fiscal year. We hope and expect we're going to be in a position where it makes sense for us to start shifting more investment and elevating our expectations around the international markets.

Your next question comes from Michael Kim from Imperial Capital.

So just going back to the pipeline growth. Can you expand a little bit on the drivers, whether it's around large deals or -- and broader coverage of the endpoint populations in the enterprise customers as well as maybe the early adoption of new products, features, things like EDD and Application Persistence?

Yes, I think it's a couple of things. First of all, with Todd's addition to the team, he's brought some of his top performers from a previous generation in the organization that have relationships with some large accounts. I think that's affected our business. He's also concentrated the field enterprise activity around a smaller number of larger accounts in an effort to kind of accelerate the development of large accounts and large opportunities. The other reality is we've got a very compelling use case for large, complicated global account around 2 particular use cases that I think are getting the most traction. One is always connected asset management, our ability to provide that complete current Absolute source of the truth around all hardware and software characteristics on global endpoints. And the second one is Application Persistence. Large enterprises typically deploy, as we stated before, a stack of endpoint agents, as many as 14 or 15 in highly regulated industries like healthcare and banking. And at any point in time, they know that a significant percentage of those aren't effective. And so the Application Persistence value proposition within a large enterprise seems to be particularly resonant. The other comment I'll make is the Reach concept was one that we really adopted from our largest customers. We saw repeated interest in, and ultimately, demand for the ability to customize both our query and control capabilities. They know that we give them access to every endpoint, but they wanted some more flexibility in terms of how they leverage that visibility. And so that was an idea that was originally conceived and ultimately driven by some of our largest enterprises, and we're hopeful and confident that we will see a high level of interest and activity through Reach within that large customer community.

And then behind some of these opportunities, you've talked a little about, let's say, the improvements in go-to-market. Do you have an early view on trends and conversion rates and sales productivity and how the field sales organization has ramped?

Yes. I mean, we're improving from quarter-to-quarter just in terms of the number of deals -- the number of large deals that our reps are in front of. The variable is how long it's taking us to close the deals. We now have a much more informed and experienced methodology that we're repeating across a large enterprise campaign that specifies what activity occurs at what point in the campaign, what function gets involved when. So we've got a playbook that is repeatable, that we're executing consistently. What's unpredictable around these large enterprises is just how quickly they move. And so one of the other things that we're thinking a lot about is, how do we increase the banded range of our core business so that we're not as dependent on these large deals being kind of make-or-break scenarios. So yes, we want to put the company in front of more large deals every quarter. Yes, we believe that through our enriched offering and the maturity of our go-to-market team, we're going to get better at winning them more quickly. But the other thing that we're thinking about is just how we continue to expand that core business, and so that when we do land a big deal, it drives the kind of growth outcomes that we believe that we're capable of.

And then you've talked a little bit about also ELAs. Did you disclose any ELAs in the fourth quarter, and how many for the year? And are you continuing to see a pivot to ELAs versus, say, the 3-year typical deals and less discounting?

Yes, it's a good question. We are. We saw an increase in ELAs in the second half. I think we did 15 or 16 versus a fraction of that in the first half of the year. What we didn't see in Q4 was a large ELA like the one that we saw in Q4 a year ago with that large pharmaceutical company. But Michael, we're driving ELAs. I mean, we like ELAs. As we've said in the past, it makes the technology more consumable by a large enterprise. It takes some of the pricing pressure off. It forces us to go back every year and upsell and expand our presence there. But enterprises buy differently. We've got some very notable large enterprises that we've quoted every quarter as having expanded their deployment like Facebook, for example, or Capital One. So it really depends on the enterprise, what their CapEx and OpEx scenario is, what their preference is. But certainly, we will continue to focus on ELAs, and we do expect they will play a more prominent role in our large account success moving forward.

And then one last one for Errol. As you look at the guide and the roll-off on ACV into Q1, is it your sense that fiscal '18 could be more second half-weighted or look very similar seasonally from just 2017 first half versus second half?

Well, I think the best way to look at it is -- you're right, we are rolling off a year-over-year ACV growth of 6%. So that's really the starting point, which means we do need to see some acceleration in ACV and corresponding revenue growth over the course of the year in order to hit the midpoint of the guidance. I'm not sure. Does that answer your question?

Yes -- no, that's make sense. And then I guess, also on the R&D side, you -- should first quarter see kind of the full run rate? Or how do you -- or was that largely baked into the fiscal fourth quarter?

The first quarter should see the full run rate. We were largely hired up to our plan for fiscal 2017. There's about a dozen heads in R&D that kind of tripped over into fiscal '18, but those will come on board early in Q1.

Your next question comes from the line of David Kwan from PI Financial.

Just to follow-up the last question on R&D. It looked like you were targeting [2 6] by the end of the year. You came up a bit short of that. Those 12 that were added, were those in Vancouver then? Because I think you talked about Vietnam being fully staffed.

Yes, that's right, David. We've got roughly 100 people in Vietnam. Now we're completely staffed in the Vietnam office. So these additional heads will be in Vancouver. The distribution in R&D, it's -- in rough numbers, it's about 150 overseas and about 100 -- sorry, 100 overseas and 150 in North America.

And in terms of kind of a run rate there, is it -- so the new additions, are we kind of looking in the, call it, $4.5 million to $5 million a quarter-type range?

Ballpark? Yes. Towards the higher end of that range.

Just in terms of the revenues, obviously, not -- I guess, from a growth perspective, not where you'd want to be this point. And you kind of talked about, I think, in the past kind of getting into double-digit range exiting this year. Where do you see that getting pushed out to in fiscal '18, I guess? Is it kind of a second half type of thing that you'd expect to get into that range?

I think that that's a fair perspective. Yes, I mean, we did -- we're entering the year with a revenue growth rate that's a little lower than what we had expected at the start of 2017. So it does imply that we start getting closer to this double-digit revenue growth rate in the back half of the year.

And if you think -- if, I guess, execution does kind of start to improve, like how quickly could we see the revenue growth really start to pick up here? Is it something that you could see solid double-digit growth for the year?

That's -- it's not out of scope, certainly. It will -- one of the nuances with our business, and I suppose with most subscription businesses, is that lag between building ACV and then revenue growth. But I think that we have -- from a product standpoint, from a go-to-market standpoint, certainly, we have the capabilities to do that as well as we come into the back half of the year and release the on-prem version of DDS, it gives us some opportunity to accelerate revenue further.

That kind of slides into my next question. Just in terms of kind of the product roadmap, can you kind of talk about some of the new releases that you guys expect over the (inaudible) 6 to 9 months (inaudible) people would be interested in?

Yes. I would say that the 3 areas that we will focus most significantly on are: a, the platform investments that expand our available market, and most notably, the introduction of an on-premise solution that gives us access to customers in certain geographies that require that localized delivery; secondly is the user behavior and analytics capability that enables that insider threat defense use case, which we are seeing very prominently across, in particular, large enterprises; and finally, the integration of Absolute 7 with other complementary technologies. We're really seeing a high level of interest among enterprises, in particular, to be able to consume our telemetry in other enterprise applications that they're using, whether those are asset management, IT service management, information security, security operations center applications. So being able to extend and connect our Absolute 7 both visibility and control capabilities to other applications will also feature prominently in our R&D roadmap this year.

Can you give any sense on timing of when we can see, I guess, these releases, I think?

Yes. Well, I mean, the on-premise, we're looking for an early second half release of that offering. The user behavior and analytics is really being introduced incrementally. We saw user device awareness announced in Q3 of this year. That was a component of our user behavior and analytics a roadmap. We saw the integration with Microsoft Azure Information Protection, which is also a user-centric security capability. So I think you'll see the functionality around the UBA enriching incrementally throughout the course of the year. I think it will really achieve critical mass in late this fiscal year. The enterprise integrations you will also see incrementally. I mean, in 2017, we announced a new enterprise integration every quarter and our intention is to continue with that cadence in 2018.

Sure. Last question. How seriously are you guys really looking at using your balance sheet, looking at acquisitions to help possibly accelerate the growth, given that we -- the growth has been relatively stagnant over the last 3 years?

Well, we intend -- we did, in 2017, bring the strength of our balance sheet to bear through an increase in organic development, and we will continue to look to do that and consider opportunities to accelerate and derisk our organic development plan through the acquisition of talent and technology combinations. So that -- our position on that is unchanged. It's just a function of finding the right target and the right circumstances at the right value.

And how do you guys see the landscape, I guess, especially as it relates to valuations, which I know has been a challenge?

Yes, I mean, we -- the market sees what we see. I mean, this is a very relevant segment with a lot of investment flowing into it. So -- and we'll have to be very thoughtful about finding that -- the right combination of talent and technology and valuation, but we've got some very experienced people, including Christopher Bolin as a member of our executive team, focused very largely on that. But I mean, it's just a function of finding the right target under the right circumstances, but it is a priority of ours to look for those types of opportunities.

Your next question comes from the line of Richard Tse from National Bank Financial.

Geoff, is there a specific go-to-market strategy for Reach?

Well, we've really been building it, Richard. I mean, everything that we've been doing around creating our go-to-market structure over the last 2 years has been designed to enable us to take an offering of Reach's materiality to market. This has been a development effort that's been underway for about 2.5 years. We haven't talked a lot of it. We've talked a lot about visibility and control, but the ability to extend it, virtually unlimited visibility -- query and control, script capabilities to customers is very significant. And everything that we've been doing around enterprise go-to-market preparedness over the last couple of years was really designed to enable precisely this type of offering.

Okay. And then with respect to Absolute 7, is it a fairly easy migration path for your existing customers if they choose to adopt that new platform here?

Very, very easy, seamless.

Okay. And then with respect to -- obviously, you have a number of new products that are coming in the market. When you go forward here, are you in a position to provide color in terms of portion of revenue those new products are going to generate relative to some of the older products here?

Yes, we will endeavor to provide some resolution. I'm not clear on how we'll measure or report those, but I mean, we do want to give indicators of adoption and monetization of new features and functions. So yes, it's our intention to do that, but we're not clear exactly on how we'll do it.

Okay, and then the last one for me. With respect to pricing of Absolute 7, can you share with us what that would be relative to some of the existing products?

Yes. We're not changing our pricing structure for the good, better, best or the different versions of Absolute 7. And so the premium version, which includes Reach, is still priced at $120 for a 3-year license per endpoint. And the Application Persistence extensions beyond the Microsoft extension -- the Microsoft applications like SCCM and BitLocker are priced incrementally. So if a customer wants to extend Persistence to other agents, then that is an additional expense over and above the Absolute 7 license fee.

Your next question comes from the line of Blair Abernethy from Industrial Alliance Securities.

Just a couple of things, Geoff. The on-premise option that you're bringing out, is that something that has been more -- has there been customer pull involved there? Have they been looking for it? And is there any opportunity for you to wrap any pro services around that as well?

Definitely. I mean, we think there are pro services opportunities around both the hosted version and the on-prem version of our technology just in terms of kind of optimizing Reach, for example, in a customer environment based on their asset management and security objectives. But certainly, with the on-prem version, there will be an additional implementation opportunity. We're not clear on how significant that will be. I don't regard that as a material opportunity, but the answer is yes. To your original question, it is largely being customer and geography driven. I mean, there still are customers in certain segments: defense, intelligence, aerospace, banking, to a lesser extent healthcare, that just require for -- in order to comply with their own policies, in some cases government-imposed policies, they require an on-prem solution. There are certain countries in both Europe and Asia, for example, that, because of data sovereignty laws, require a local delivery capability. So yes, it is being market driven. Not that we're constrained today in terms of the available market opportunity, but by having an on-prem solution, it does expand our TAM considerably.

Okay, great. And in terms of your go-to-market -- and traditionally, you've worked with the hardware partners to lead generation and so on. Is there any -- any partners on the enterprise software integration side here? Is there any other ways that we can see you indirectly drive your funnel?

Yes, and it's a good question. And I think it's related to the question that Richard asked earlier. I mean, the OEM partners continue to feature very prominently. The second thing we think about is now that we're integrating and extending our platform into other complementary enterprise technologies, we're looking in 2018 to extend those integration partnerships to partnerships that actually involve go-to-market collaboration, whether it's RSA, whether it's Splunk, whether it's ServiceNow. Because of our capacity to enrich their offering, their value to an enterprise customer, we do think there are some opportunities for us to collaborate and get leverage, which we'll explore. The other thing that we will focus a little bit more intensively on this year are the information security-specific VARs. Those are VARs that we have been working with for some time. We have signed agreements with companies like Optiv and the Herjavec Group, but we're really working very opportunistically with them. We expect that with Reach and the enrichment of our product portfolio, that we'll represent a more compelling partnership opportunity for them this year. And so we will increase the level of effort and investment around those partners, very likely moving into the second half of the year. The primary focus in the first half is just getting an increased level of leverage around the go-to-market capabilities that we've invested in. That's our sales team, that's our system engineering team, that's our professional services team, the OEMs and the enterprise application partners.

Okay, great, very helpful. And just one last for me. Any thoughts on the M&A front? You guys have been doing a lot of work internally on your product development and broadening your platform. What -- are you also looking externally at all to fill holes?

Yes. As I said earlier, our primary focus to date has really been on organic investment. We've got and have significantly expanded an outstanding development team, and that's reflected in the cadence and the quality of the features and functions, most notably, the Absolute 7 launch. And so we haven't felt constrained by our ability to bring new marketable features to market. But now that we're starting to center in on a category that's being recognized that is growing significantly around endpoint visibility and control, and starting to bump into -- or have the potential to bump more frequently into competitors like Tanium, we do think that there's going to be an opportunity for us not only to enrich our organic R&D capabilities, but yes, to acquire some talent and technology combinations. As I said earlier, I mean, the trick is just finding the right combination at the right time at the right value. I mean, there has been some irrational exuberance. I think reality is starting to set into some of the companies that we might be interested in. But it's just -- it's got to make sense. And when it does, then we'll do the right thing. But it is a priority. Thank you, Blair.

Your next question comes from the line of Kevin Krishnaratne from Paradigm Capital.

I'm wondering if you can elaborate on the 5-year educational contract that you closed in the quarter. Any details on that? Was there any upsell, expansion there? And just curious if that might have had any sort of impact on ACV in the quarter.

Yes. It was a renewal and expansion. We can't offer more details than that. But it was a renewal and expansion opportunity and it did affect, I think, because of its materiality, both term and to a very limited extent, ACV.

Okay, so then following that, with regards to the billing expectations for the year. Can you just talk about what the cash flow guidance is implying for billings growth, kind of what the renewal opportunity is looking like? Are there any big renewals up due? And any elements of working capital you're thinking about with regards to that cash flow guidance?

Sure. So the implied billings growth for the year is in the mid-teens. And there is a quarterly distribution that will impact cash flow. Most of the growth in billings happens over the first 3 quarters, with the fourth quarter being relatively flat year-over-year. So you'll see the majority of the cash distribution really coming in the second, third and fourth quarters.

Okay, great. I think we were chatting about the reasons for the ACV being down sequentially. We talked about the educational side of things, but can you elaborate a little bit more on the Lat-Am and the Asia? Was that -- why might that have been softer? Was there anything competitive happening there? Or it might have -- just have been because of the focus for you guys have been more on North America? Any thoughts on what happened there?

Sure. So outside of North America, especially in developing markets like Latin America, and to a large extent, in Asia-Pacific, a lot of that business has been more historically what I would characterize as more transactional in nature. It's been large government education tenders, which just by their nature, are not necessarily renewable just because they're so politically dependent in those regions, in those specific countries where we've done those deals in the past. It's also, I suppose, a little bit impacted by the fact that we have reduced our investment a little bit over the last 18 months as well internationally. So we're not picking up replacement deals for those.

Okay. And I guess, just the final one for me. I'm just curious on what you're seeing with -- let's take a new customer in regards to the device mix. Are you seeing more of the activations skewing towards mobile phone, tablet or is it still predominantly laptop with the new ACV?

It's still predominantly laptop. It's -- and, in fact, from a product perspective, 98% of our new business is from the professional and premium versions of the product, which is the highest level of functionality.

There are no further questions at this time. Mr. Geoff Haydon, I turn the call back over to you.

All right, operator, thank you. Thank you to everyone on the call for your interest and support. And we look forward to speaking with many of you over the coming days. Thank you again.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.