Absolute Software Corporation (ABST) on Q2 2023 Results - Earnings Call Transcript
Operator: Good afternoon, everyone and thank you for standing by. Welcome to the Absolute Software's Fiscal 2023 Second Quarter Financial Results Conference Call. All participants are in a listen-only mode. I would also like to remind everyone that this conference call is being recorded today February14, 2022. I would now like to turn the floor over to your host Joo-Hun Kim, Vice President of Investor Relations. Please go ahead.
Joo Kim: Good afternoon and thank you for joining us today. With me on today's call are Christy Wyatt, President and Chief Executive Officer of Absolute Software; and Jim Lejeal, Chief Financial Officer. Before beginning our formal remarks, Absolute Software would like to remind listeners that certain portions of today's call may contain forward-looking statements that reflect current views with respect to future events and conditions. Any such statements are subject to assumptions, 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 made as of today's date, Tuesday February 14, 2023. And Absolute Software undertakes no obligation to update or revise publicly 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 security look. For more information on the assumptions, risks, and uncertainties relating to these forward-looking statements, please refer to the appropriate section of the Company's most recent MD&A, which is now available on the Absolute Software's website and will also be available on SEDAR and EDGAR. I would now like to turn the call over to Christy Wyatt. Please go ahead.
Christy Wyatt: Thank you to everyone joining us today for Absolute Softwareâs Q2 Fiscal 2023 Earnings Call. During today's call, I will focus my remarks on three areas. First, I will recap our Q2 results and how they're reinforcing our growth strategy. Next, I will touch on where we are seeing growth and how that's bolstering our go-to-market momentum. And finally, I will close by talking about our outlook for the remainder of fiscal 2023 amidst the current economic headwinds. Before I step through the results, I want to take a minute to welcome Jim Lejeal to his first earnings call with Absolute. Jim has only been with us for a short time, but he brings a wealth of financial and operating experience to the company. And I'm very pleased that he has hit the ground running. We're really excited to have someone of his caliber as the leader of our finance organization. And I look forward to introducing him to more of you over the course of this year. Now let's get to the results. Q2 was a solid quarter, we delivered stable growth to increase ARR to $225 million, representing a 15% increase year-over-year, driven by growth of 18% in enterprise and government, with wins across key verticals including health care, transportation and public sector. Enterprises and Government accounts for approximately 80% of our ARR, Education grew 6% year-over-year, we had some nice wins there that should help growth going forward. The sequential increase in ARR of $9.3 million was the largest in Absoluteâs history. This performance came despite broader macroeconomic headwinds and illustrated the critical role Absolute placed to protect corporate networks in the new remote and hybrid work world. Adjusted revenue was $57.7 million, a 9% increase from the same quarter last year. We on boarded almost 2,000 new customers this quarter, bringing our total customer base to close to 20,000. Our pipeline is strong and we're seeing growing interest in our cross-selling collaborations and with our partners. I'm also pleased to report that our efforts to win wider recognition in the marketplace are taking hold with recent accolades from leading industry analysts. Before I turn to our profitability, I want to first acknowledge the modifications to our guidance for the balance of this fiscal year. While our customer retention and NPS scores remain very strong, we did see a reduction in the average contract length and we saw some slippage in a small number of high value secure access signings to later in the year. We believe both circumstances are attributable to the more cautious macroeconomic environment as customers seek to limit or defer large cash expenditures. While these issues only impacted our revenue by approximately $1 million in the quarter. We expect the trend to continue and for it to have some cumulative impact on the revenue recognition in the second half, and that's reflected on a revised outlook. We are also seeing more customers adopting our secure access cloud offering evidence of our solid position in the ZTNA market. However, those contracts are recognized ratably and have no upfront revenue component. One of the hallmarks of Absolute is that we have a strong track record of delivering healthy revenue growth with strong margins. We posted an adjusted EBITDA margin of 22% in our fiscal Q2, we've taken steps to manage our cost structure to deliver to our original adjusted EBITDA dollar target. Jim will provide more details but I want to be clear, we are continuing to invest in building our awareness and our go-to-market initiatives and remain confident that our growing funnel of opportunities and our ability to close on them will lead to some improvement in ARR growth for the remainder of fiscal â23. I want to provide more context on that last point. So let me highlight some examples of the customer momentum we are seeing in enterprise and government across a selection of industries. Healthcare is an important vertical for us as the industry places a high value on safeguarding patient data, and we are well equipped to meet the stringent security requirements of this industry. We are increasingly recognized as a core component of the security fabric and keeping devices applications and data secure with our self-healing differentiation. Reflecting that increased awareness we had a healthcare customer expand their deployment of our visibility and control capabilities, and transitioned us into their security and compliance team from within their IT Asset Management Team. Additionally, a large California managed care provider is now using ABSOLUTE RESILIENCE to help identify, assess and self-heal their critical security applications like CrowdStrike, BitLocker, and Zscalar. This deployment is a great demonstration of how we are complementary to the broader security ecosystem. We are also making inroads in the financial sector. A Tier 1 global bank adopted our ABSOLUTE CONTROL and ABSOLUTE ASSIST software with nearly 24,000 licensed purchases. This design win was a great example of a PC OEM partner leading with standalone software deals. And in transportation a cross-selling momentum continued this quarter with a nice win at a European Public Transportation Authority that added secure endpoint licenses to their existing secure access deployment. This customer was already providing the remote workforce with a resilient ZTNA solution ensuring secure network connectivity wherever those employees are working. Now this customer is also utilizing our self-healing capabilities to deliver greater resilience, visibility and control for their mobility and Sophos applications. We also signed a widely recognized global ride hailing provider. This firm has a widely distributed workforce and was looking for a solution to manage a fast growing fleet of mobile endpoints. With the capabilities Absolute Control provides them they can now re-architect their security compliance and audit program, thereby greatly improving remote device lifecycle management. And we have good news in government as well. We increased our penetration in one of Europe's largest police forces, supporting always on secure connectivity across the 39,000 mobile devices, improving resilience and coverage across the forces entire patrol area. And finally, I am thrilled to share with you that we achieved our FedRAMP ready designation. While it will still be a couple of quarters before we receive a full authorization. The designation is already opening doors with partners and federal agencies who need the highest level of cloud security in the market. Our relationships with OEM partners who have large federal practices will be an important resource to building our awareness. And we look forward to updating you on this market as we move forward. Let me now touch on the growing awareness we are gaining in the industry. G2 continues to recognize Absolute as a leader for the 12th consecutive quarter in their winter 2023 grid reports for endpoint management. But what I'm really excited about is that they named Absolute as a leader in their Zero Trust Networking category for the second consecutive quarter. Other industry analysts are also increasingly recognizing the unique capabilities we're delivering to our customers. Omdia named Absolute Software an Endpoint Security Vendor to Watch. IDC recognized Absolute as a leader in European and user experience management, citing our strength and ensuring resilient network and access performance. And Forrester is now recognizing the increasing value of firmware level protections to ensure that software agents are functioning properly. They have included Absolute in their new research category for firmware embedded persistence in their end user computing tech tied. Lastly, we're collaborating with more of our OEM partners that view software and services as an increasingly attractive way to enhance the value they offer to their customers. Lenovo is an example now includes Absolute Secure Access in their Thinkshield suite of products, reflecting growing customer interest for always on self- healing network connections. The key takeaway is that despite a decline in PC hardware attached sales in our education and mid-market verticals, we are growing our revenue through OEM partners by generating a higher penetration of standalone software sales. We continue to see PC OEM partnerships as strategic and a significant opportunity to drive growth and awareness for our secure access products and greatly contribute to expanding our cross-sell initiatives. Moving to Education, we've seen some temporary headwinds to ARR growth. As we've seen a mix shift from PCs to lower priced Chromebooks. The good news is that overall unit growth this quarter remained low to mid-teens with expanded adoption for resilience for Chromebooks solution. One of the nation's largest school districts had chosen not to use Absolute as they migrated to Chromebooks last year. However, they quickly realized the value that we bring to the table and have now installed us on nearly 200,000 new Chromebooks. As a result, they were able to improve their device loss prevention KPI by 10%, bringing them into compliance with our board's mandate. While Education is now approximately 20% of our ARR it is still a very attractive business with expected solid high single to low double digit growth over time, strong margins and free cash flow. Before I hand it over to Jim, let me close by saying we are pleased with a solid quarter on ARR growth and remain confident and our long term plan to enable a reliable work from anywhere experienced that ensures maximum security and uncompromised productivity. You have heard me highlight our commitment to the Rule of 40 as a framework for how we manage our business. And specifically, we have always stated that we are committed to balanced growth and to achieve over time what we call our 20:20 model, which means 20% revenue growth along with 20% EBITDA margins. As I mentioned earlier, while macro headwinds will impact our near term growth, we are actively managing our business to deliver on our EBITDA margin commitment. However, based on our guidance, we will not fully achieve the Rule of 40 this year on revenue, though on an ARR basis, we remain on track. With that, I'm going to pass it over to Jim to provide more details.
Jim Lejeal: Thanks, Christy. Good afternoon, everyone. I've had the opportunity to meet a number of you over the past couple of months and often the first question I am asked is, why did I choose to join the Absolute team? I don't think it will surprise you that it is likely the same reason many of you have invested in our company. Our unique position in the firmware of over 600 million devices gives us a unique and unassailable market position with a very large and growing addressable market. And our expanded portfolio opens up opportunities for accelerated growth. And I like the fact that we can balance attractive growth with strong margins and free cash flow. What I bring to the table is experience building a robust financial organization that positions Absolute for success, which enables Christy and her team to continue to build awareness of the company and to accelerate our growth. As I settle into the CFO role, I'll be prioritizing enhancements to our finance operations, and taking a broad view of our capital structure. We'll share more on these topics and coming quarters. I'm really excited to be part of Absolute, if we do our jobs well, and I'm sure we will, Absolute will soon no longer be the best kept secret in cybersecurity. With that introduction, let me move to our Q2 results. As a reminder, we are reporting revenue and year-over-year comparisons on an adjusted basis that excludes any IFRS purchase accounting impact on deferred revenue. We believe this adjusted revenue metric provides a more meaningful and transparent view of the combined business. Adjusted revenue was $57.7 million for Q2 fiscal 2023, up 9% from the prior year, reported revenue in Q2 was negatively impacted by approximately $1 million attributed to a reduction in the contract length of our secure access offering. These reflected customers exercising more caution in their purchasing actions due to macro concerns, particularly late in the quarter. As a result, a higher than expected mix of customers chose to sign one year contracts to reduce large upfront payments and manage their long term commitments. And we also saw some timing slippage and a small number of large pipeline deals. To give you a sense of the impact on contract length. We ended the June quarter with average contract length across the entire business at almost 1.4 years. Since that time, this metric has decreased to 1.2 years. This shift has an impact on revenue due to IFRS accounting but does not have an impact on annual recurring revenue, which looks at the annualized value of our contracts. Total Annual Recurring Revenue or ARR was $225 million representing growth of 15.1% year-over-year. The $9.3 million sequential growth in total ARR is a record for Absolute and up from $6.2 million sequential growth in our first quarter. The ARR growth was driven primarily by continued strength in enterprise and government, which grew nearly 18% in Q2, at the higher end of our growth rate recorded over the past year and a half. While Enterprise and Government was strong, Education ARR growth was moderated and it grew to 6% year-over-year, down from 7% last quarter and 12% in Q2 of last year. At the end of Q2, approximately 80% of our secure access ARR portfolio was on subscription agreements, up from 77% at the end of Q1. Net dollar retention of 107% is largely consistent with prior quarters. Enterprise net dollar retention remains strong despite some of our customers slowing or reducing headcount. Education net dollar retention declined year-over-year in part a hard comparison due to the higher COVID remote classroom purchasing dynamics we experienced during and throughout the pandemic. Moving to margins and cash flow, adjusted gross margin of 88% was in line with the prior quarter but down slightly from prior year as we absorbed higher costs during the migration of our data center to AWS. We expect gross margin return to historic levels of 100 to 200 basis points from current levels next fiscal year. Adjusted EBITDA was $12.8 million or 22% of adjusted revenue. As mentioned on our last call, we moderated hiring in Q2 and expect headcount will be relatively flat for the rest of the year. Given our revised revenue outlook, we are also managing our costs more aggressively for the rest of the fiscal year by reducing discretionary spend, we will continue to invest in building awareness and our go-to-market initiatives. Operating cash flow was approximately $1 million due to lower deferred revenue and other working capital related items. We ended the quarter with a cash of approximately $50 million. The decline from the prior quarter was primarily a result of the lower cash flow from operations which I just touched on, our dividend payment, off cycle debt payment and certain settlement costs associated with our stock-based compensation program. With regard to our debt, our coupon increased to 142 basis points from our prior quarter, resulting in a sequential increase of $800,000 in additional interest expense. For our Q3, our coupon has increased another 106 basis points, which will result in a $650,000 sequential increase in our interest expense. Our expectation is for higher profitability and cash flow for the remainder of the year. And that gives us confidence in our ability to service the debt while continuing to invest in our business. Turning to guidance, we expect continued strength in our sales pipeline and higher levels of secure access renewals result in an acceleration in both our adjusted revenue and adjusted EBITDA for the remainder of the year on a year-over-year basis and compared to our Q2 performance. That said, we are mindful of the macroeconomic environment and the impact that we discussed. Therefore, we are updating our guidance to incorporate these parameters. We now expect adjusted revenue for fiscal year 2023 to be in the range of $231 million to $235 million, representing growth of approximately 10% to 12%, respectively. There are two primary factors in our revised revenue outlook. The first is the lowered contract term assumptions for secure access, which will result in a reduction in revenue of approximately $6.5 million for the full year versus our original expectation, inclusive of the $1 million we already felt in Q2. And second, to a lesser extent, the slippage of a small number of large deals out of Q2 previously mentioned. We currently expect all of these deals to sign between the current quarter and the end of the calendar 2023. As a result of these factors, we also have slightly moderated our ARR growth assumptions for the remainder of fiscal â23 to reflect the macro factors we've described, and now expected to accelerate only slightly above our 15% year-over-year performance in Q2. I'd also note as Christy cited in her prepared remarks that an increasing number of customers are evaluating and opting for the cloud version of our secure access product. It's important to call out that secure access cloud revenue is recognized ratably over the entire contract term with no upfront revenue recognition. So to the extent this mix shift continues, that can also impact near term revenue recognition, but does not impact ARR and therefore is a positive development relative to our longer term revenue trajectory. Moving to adjusted EBITDA, while we see our top line growth moderating, we are aggressively managing discretionary costs and expect adjusted EBITDA margins to expand almost 200 basis points versus our prior expectation and range of approximately 23% to 25%. When you put it all together, we believe we will achieve our prior adjusted EBITDA dollar targets, while maintaining our initiatives to build our awareness and enhance our go-to-market, which we believe are important to our success. We remain confident in our long term commitment to the Rule of 40 as a framework for how we manage the business. Given the macro pressure we see across the industry, we believe our time to achieving our 20:20 model will be extended. For that reason, we are taking our growth expectations down for this year and focusing on driving profitability. We remain committed to our balanced growth strategy. And while our guidance doesn't call for a Rule of 40 on a revenue adjusted EBITDA basis, we believe ARR Rule of 40 is still achievable given our expectation of improved ARR growth for the remainder of the fiscal year. With that, let me turn the call over to the operator for Q&A. Operator?
Operator: Our first question comes from Mike Walkley with Canaccord Genuity.
Mike Walkley: Great. Thanks for taking my questions and providing the clarity on the updated guidance. I guess just first question, I guess for you, Jim, welcome aboard. And just with a lot of the upfront hiring that happened at the beginning of the fiscal year, how should we think about operating costs for the remainder of the year? I know you're doing some cost controls, but are there any increases in the March quarter just with the start of the calendar year? Or should we think of OpEx flat or maybe even down to hit your updated guidance?
Jim Lejeal: Yes, thanks, Mike. I'm brand new. And it's a fun position to be in, in terms of the team and taking over the helm from Ron who led us pretty effectively up to the point where that I joined the team. From an OpEx standpoint, I think the way to think about the Q3 and Q4 and the past two end of year is looking at our profile for Q2 and expecting that that's so to speak to the high mark, we're going to be discipline with regards to discretionary costs, we are going to be disciplined with regards to headcount. And as I said in the prepared remarks, be thoughtful about our balanced growth profile.
Mike Walkley: Thanks, then follow up questions. Now pass line for Christy, just on the secure access side. I think you've might have some easier growth comparisons in the second half of the year. But it sounds like some deals are shortening. So is it -- is the updated guidance mainly just to deal short and secure access? Or is there kind of broad based strength across or broad big weakness maybe across the whole business? If you could just maybe touch on what you're seeing for the second half of the year.
Christy Wyatt: Hi, Mike. Thanks for the question. Actually, we're seeing strength in the SA business, anything --solid quarter. We did have a small number of fairly sizable deals in the very late end of the quarter that pushed as Jim said in his comments, we see those coming in this year. So I don't think we're seeing a trend in the overall strength. I think we saw a little bit of timing in the last moments. But I think the bigger component is really around the contract terms. And we've talked quite a bit about ultimately wanting those contractors to come down so that our revenue lines sort of smooth out. I think we had signaled one of the things we work closely as we looked for macro impact, and we certainly started to see it, so I think this is more us reflecting that in the second half of the year.
Operator: Next question comes from Scott Berg with Needham.
Scott Berg: Hi, Christy and Jim, thank you for taking my questions. I have three. I guess starting off with a changing contract term, I obviously get the IFRS impact of shortening those terms. And as Christy just mentioned, that's actually kind of favorable for you in the longer term because it'll align rev rec a little bit better with ARR. But those customers that are changing those terms, is the concern there primarily just the cash outlay of say two years upfront versus one year.
Jim Lejeal: Hey, Scott, this is Jim. Yes, I think a quick answer is that is one concern is cash outlay, clearly, customers are thoughtful out their upfront commitments. That being said, our net dollar retention is very strong. In some cases, we have a program where we stand a customer with what call it coterminous action. This is a renewal that's coming up in the next six, nine months, the customer entertains and uplift in their engagement with us. And rather than adding a year to the current contract of nine months, we process their add on over the remaining term, let's call that the six or nine months. And so what we end up with is an effect of an add on to the customer relationship. But a term length that coterminous with the existing run out of the contract. These are all dynamics that play out in the context of engaging the customer, obviously, we'll do the extra term, the add on to the year if that's possible. But what we'd like to do is engage the customer and work with them with regards to what it is they'd like to do to put in place. So therein lies some of the dynamic.
Christy Wyatt: Yes. And just to add on to that, when the original expiry date comes on, then the customer will renew the entire estate. But like I said, add a couple of more points to that. Scott, I think that, a couple of the things we mentioned on the call are, our NPS scores actually were at another record high this quarter, sort of mid to high 70s, which is astounding for something we're very, very proud of. And our dollar retention remained strong and stable. And so as they said, we have the revenue kind of recognition mission components, but I don't think it's being, not interpreting it at this moment as any overall sentiment across the SA business as a whole.
Scott Berg: Got it, helpful. And then for the second question, the education segment, kind of the second quarter in the row where you've had unit growth be strong, but customers or at least more customers choosing the Chromebooks versus the PCs for their device choice. Do you think this is a long term change? Or is this really just reflected to the short term supply chain issues within the PC end market still?
Christy Wyatt: It's a great question. I actually think that the supply chain issues maybe led some customers to try Chromebooks for the first time. I don't see any reason why they would go back. But there are areas where we see it more concentrated. So we see it more concentrated, for example, in the lower grades, maybe not so much in sort of the advanced grades. The other thing we've done quite a bit of work on and I think maybe I've mentioned this in the past is that education as an industry tends to be more run right buyers. So they're one of the few parts of our business that still does kind of hardware and software purchases more combined, and they take longer term licenses. And so if they're doing that with Chromebooks, the churn, or the refresh rate of Chromebooks actually tends to be about 18 months shorter than that of a PC. So we'll see that sort of renewal if you will, a little bit sooner on the Chromebooks as well. So while we're seeing this shift, yes, we see some compression on ARR. It's why I am a little, I share a little bit more about the unit volume growth, just to sort of you can sort of see the delta between those two dynamics, but run rate, that's what gives us confidence that this is a high single digit, low double digit stable business as we settle out.
Scott Berg: Got it, thank you. And then for my last question, just recently, a week or two ago, you announced two new application persistence as a service partner, ISV partners. I know that's very early in that lifecycle. I believe that brings you to four partners there but any kind of update to how that's progressing, what you're seeing about interest or take rates, through those ISV partners for your solution. Thank you.
Christy Wyatt: Yes, absolutely. Thank you for asking. So the, I think we're getting close to a dozen. I don't think we have the final number of APAS partners. We are starting to see some of them go into commercialization as we said, this is a sort of a slow roll for us as we're standing those partners up and kind of getting ready to sort of help them enter into market. So we're feeling quite good about how that's taking shape. As I said, it's something you'll continue to see us update everybody on over time.
Operator: Our next question comes from Thanos Moschopoulos with BMO Capital Markets.
Thanos Moschopoulos: Hi. Good afternoon. On the secure access business, remind us what proportion of that business is currently on a cloud model versus being on, under IFRS 15 revenue recognition.
Christy Wyatt: I am trying to think of what we've put out publicly, I think in -- what we've said publicly is that the shift to term is, I think we said above 70%, I think it's approaching 80%, which is what Jim shared in his comments, the percentage that's gone to cloud is actually incredibly small. So they were just starting on their cloud journey at the time of acquisition, what is very exciting to us as the number of new customers, especially, and especially some of the larger customers that are starting to look at cloud adoption. So we are starting to see an uptick in interest on that. But at the current percentage of the overall portfolio, it's still very small.
Thanos Moschopoulos: Okay. And then in terms of the deals that were delayed, just to clarify, was that entirely on the secure access side, and on the endpoint business, any change in sales cycles there as a function of the weaker macro?
Christy Wyatt: And they were on the SA side, there was three of them, actually, I think we see them all coming in this year, two of them in the half. And actually, some of them have kind of grown in value. And so now the part about the secure access business is that it is a little bit lumpier in that way, it does tend to have sort of some of that lumpiness as sort of traditional enterprise stuff, as opposed to the SE business, which, it's got a lot more small, medium business and sort of diversity across the install base. And so I don't think we've seen or observed anything unusual on the SE side outside of the PC hardware attached comments that I made earlier, which was relatively small.
Thanos Moschopoulos: Okay. And then finally, Christy, if could you remind just in terms of the FedRAMP opportunity, you alluded to it, recognizing that, it'll take a few months to get the final certifications, and then to go through sales cycles and so forth. But how should we think about, quantifying what this will mean, as far as your addressable market?
Christy Wyatt: I mean, it depends on whose numbers you're going to believe. But I think that overall federal security spending budget is in the billions on its own. And so I think that you've heard this past year, executive orders from Biden talking about the shift to Zero Trust. So we see it as a significant market expansion opportunity, and not just within the US. Already, we're having conversations with some of our international government customers where certifications in the US, there may be sort of loosely affiliated or similar certifications or structures or controls that we can sort of work with within those regions. And so, we're working closely with our partners to look at how we introduce that both on sort of Zero Trust and software opportunity side, but also opening that conversation about how we make federal devices more resilient as a whole and how we make all of the security happening within that -- within those environments work better.
Operator: Our next question comes from Mark Cash with Raymond James.
Mark Cash: Thanks for taking the question. This Mark on for Adam. I just wanted to look at the updated guidance and decreasing by 4.5% to midpoint revenue and the commentary about duration slippage, but also having confidence in closing those deals. Where do you feel you'll be exiting the year now versus previously thinking that 20% growth in 4Q?
Jim Lejeal: Hey, Mike, this is Jim. I think the way we think about it is what I said in my prepared remarks. I alluded to the notion that there would be an ever so slight modest increase as we execute to yearend on our total ARR performance. And then, setting against that a disciplined oversight on our spend to achieve our ARR Rule of 40 goal post. With respect to the, I'm losing the point, sorry. As the second part of your question again, because as I was looking at my notes.
Mark Cash: I mean, the question is, if you had yields slipping out of, from 2Q and you have confidence in signing them, you previously, the commentary at last quarter was exiting 4Q with that 20% growth. So, I guess I'm getting at is 2Q kind of the trough of revenue growth that you'll expect for fiscal â23?
Jim Lejeal: Yes, thank you. That's helpful. Yes, I think the quick answer is yes. And that therein lies some of the framing of I were notably focusing on ARR as the right reflection of the growth of the business, but we're being disciplined with respect to how we set expectation on the revenue side.
Mark Cash: Okay, that makes sense. And then a question on sales productivity, and kind of the focus for right now. So if I recall, the quota carrying hiring was completed early in 1Q. So I guess how long does it typically see -- typically take see growth take hold, we look kind of people ramping, getting trained up. And then if I kind of think about looking at 2Q and as endpoints declining while new global ARR increasing. Is this at all a reflection on sales more folks and hunting new accounts versus renewals?
Christy Wyatt: That's a great question, Mark. So first of all, yes, I think from the beginning of the year, we said that the majority of our selling capacity we attempted to get in place as we came into Q1 with the expectation that they be hitting their stride in the second half. And so it's going to vary a little bit by which team in which product set, et cetera. But generally, yes, our expectation is that, a lot of that sales capacity is coming online. And another investment we made in was around demand generation and some of the investments we made in FDR, for example. And so while we set expectations as well that investment we made intentionally in the beginning, but you'd expect to see us bring expenses, or sort of curtail that hiring and bring costs in line in the second half of the year. And that remains to be true. So I think you should expect that capacity is sort of coming online.
Mark Cash: Okay, thanks. Just one more. Just how did customer behavior trend throughout the quarter? Did it start out kind of as you expected and got worse as the weeks and days progressed? Or what you guys see in your end?
Christy Wyatt: Yes, I mean, I think as we come into this quarter, even right, we see stable growing pipeline. I think that a lot of the customers, customers they have still have very real problems they're trying to solve within their environment. In some cases, that's only amplified by the other parts of the organization that may be undergoing stress within their environments. And so that's why I say don't think on the ARR side, we're seeing a significant impact on demand. In some cases, as Jim pointed out, you may opt for a one year contract as opposed to a three year contract, because as opposed to optimizing unit volume, they want to sort of optimize for sort of cash flow management. And so that's one of the pieces, I don't know that I would say we saw any sort of inflection point, I think it's not unusual for some of our large opportunities to happen in the last couple of weeks of the quarter. And this was just a case where a handful of those moved around.
Jim Lejeal: Mark, one thing I'll add is, recall that it in the last quarter, when Ron was acting CFO, he gave a stat on the performance of the business, which was a reflection on the revenue growth. And what he did is he described if we ratably recognized our revenue from the NetMotion acquisition, from the time we purchased to the time that we reported last quarter, and he gave a, what would our ARR growth be if everything was ratably recognized? We did the same exercise for this quarter. And what we've reported as our Q2 performance is 9% revenue growth, adjusted revenue growth. But we ran the same exercise this quarter to get a sense of what would our ARR have been? Had we enjoyed this ratable recognition dynamic? And the analysis said that the growth would have been around 13%. So 30% if everything was ratable and on an ARR perspective, we performed at 15.1%, which is actually pretty good. So your question about the profile of the quarter did things get worse? And the answer is I think it was a steady state of business with this dynamic of shortened term based on just a buying pattern. And I wouldn't, I don't know that I would characterize it as worse. Clearly, it has an impact on the revenue. And it's the reason that we reframe, if you will, the guidance we're setting from an adjusted revenue perspective, we feel good about repeating the performance that we have in this quarter on an ARR perspective, Q3 and Q4.
Christy Wyatt: Yes, and just to want to make sure I heard that correctly, it was 13% would have been the ratable adjusted revenue growth, if you ran that same calculation, 15%, 15.1% ARR growth.
Jim Lejeal: Yes. That's right.
Operator: Our next question comes from David Kwan with TD Securities.
David Kwan: Goo afternoon. And you talked about I guess, the much larger renewal base in the second half that you expect for secure access. Can you talk about what the contract length were that are coming up for renewal? Because it sounds like many customers that you're talking to are maybe looking to sign shorter contracts?
Christy Wyatt: Hi, David. Yes, so what we had talked about was that a lot of the early contracts when NetMotion was making their first move from perpetual to subscription, prior to the acquisition had multiyear terms, and that in time, we wanted to bring those, the average term right back down to closer to one year, so that we'd smooth out that revenue line. And so the renewal period doesn't always reflect what the original term on the contract was. We will sort of work to sort of balance that out with the field organization. But our, we've long said, the ideal place for us is probably in that sort of 1.2, 1.3 space. And sometimes what's going on with the customer will kind of move that up or sort of move that down. And just a reminder that it is very specific to the SA side, right? Question on the SE side, it does have an effect on cash flow, but it doesn't really have any effect on --.
David Kwan: Yes, so it sounds like I guess, it sounds like the majority, maybe these contracts are coming up for renewal. The customers are kind of giving indications that they're looking to sign maybe one year contracts versus a multiyear that they'd signed previously.
Christy Wyatt: Yes, I don't think so. I don't, I guess the way I would rephrase that is with an eye on what's going on in the economy around us, we're taking a position and managing the business in a thoughtful way that says if we continue to see through the second half the contract terms on SA are looking like they did in this past quarter that we've sort of thought that through. I wouldn't go so far as to say customers are giving us that signal yet, because I think some cases we're talking about expires that end in Q3 and Q4.
David Kwan: So maybe a better way to put it like what do you guys assuming in your guidance? Like are you assuming that the vast majority of the renewals that are coming up are going to be for a one year term?
Jim Lejeal: Yes, I think the right way to frame it is we looked hard at Q2 and the fact pattern that emerged, and we apply that on a go forward basis, given the condition of the macro market, it's wise for us to be prudent here and be thoughtful about what to expect. And we have, obviously, there's a spectrum here, you can have a spectrum of optimism and pessimism and we tried to be balanced about where we fell out on that. The key here is the ARR component of our business. And that as you know, is the normalizing factor of all of the mix of various contract types that we sell. And so that if you want to peer into the business and get a real sense of the momentum, we're executing end market ARR is the key to do that.
David Kwan: I appreciate the color, Jim. Last question. I was just looking at some, the presentation and seeing all the metrics come out. But there's a slide in there that indicates that the number of SE endpoints dropped sequentially from 14.1 million to 13.9 million. You're not just kind of cleaning up the data, or was there something else going on?
Christy Wyatt: Yes, it's not unusual. So remember, just for folks who aren't familiar with that number. That's the number of devices actively calling in to our cloud hosted services. So what it doesn't include, it's not necessarily a reflection of the seats sold. These are licenses already purchased and what's being sort of activated. And so what's not reflected is if you have on-prem customers who are not connecting to the cloud, so that would be an SA specific piece while they're not in that number. And it's also just not unusual for that to flow down during the end of the year, you're talking about a quarter with Thanksgiving and the holidays and a lot of IT programs sort of freeze deployments as they go through their end of year. So it's not unusual to sort of see that slowdown.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Christy Wyatt for any closing remarks.
Christy Wyatt: All right, thank you. Let me close by thanking everybody again for joining us today. And again, while we weren't new to the macro environment, we are very pleased with the progress we're making and with a solid quarter on ARR growth. And we feel very confident and continuing to deliver against our long-term plan. Thank you, everybody.
Operator: The conference is now concluded. Thank you for attending todayâs presentation. You may now disconnect.
