Absolute Software Corporation (ABST) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon, everyone and thank you for standing-by. Welcome to Absolute Software’s Fiscal 2021 Second Quarter Financial Results Conference Call. Before beginning its formal remarks, Absolute Software would like to remind listeners that certain portions of today’s discussion may contain forward-looking statements that reflect their current views with respect to the 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 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 laws.
Christy Wyatt: Thank you. Good afternoon and thank you all for joining us for Absolute Software’s Q2 fiscal 2021 conference call. Before we get started, I would like to welcome Steven Gatoff, our Chief Financial Officer who joined us in November and who is joining me on this call. On today’s call, I’ll highlight the continued positive trends in our quarterly results and we’ll review the past quarters development. Then we’ll touch on some of the market drivers that are contributing to our ongoing success. And finally, we’ll wrap up with some commentary on our direction and then the unique opportunity we see ahead of us. Q2 was a strong quarter for Absolute highlighted by further acceleration in revenue growth, coupled with solid EBITDA margin. Revenue grew 16% year-over-year and we delivered adjusted EBITDA of 27%. We added $5.7 million of ARR in Q2 and exited the quarter with AR of $117.5 million, up a record 17% year-over-year driven by an 18% increase in active devices. Our Education sector grew 30%, while our Enterprise and Government sector grew 12% year-over-year. Q2 was driven by a mix of new – Q2 growth was driven by a mix of new customer wins and expansion within our existing customer base. Notable customer wins included Western Alliance Bank, Cypress-Fairbanks School District, Westgate Resorts and the Royal College of Art in the UK. This was another strong expansion quarter for us with a continued strength across products. In Q2, we delivered a number of significant product enhancements focused on enabling deeper management capabilities and enhanced ease of use. A few notables deliverables included, flexible modern reporting as well as a new mobile application designed to help IT and security teams manage endpoint devices and protect sensitive data easily and efficiently, no matter where they are. Our web usage application, which we successfully launched in our Education segment in Q1 was integrated more broadly across our enterprise offering, enabling advanced insights into software usage and employee productivity, as well as a number of other key features. As a result, we’ve seen 108% increase in the number of accounts that have enabled this feature.
Steven Gatoff: Thanks, Christy. Good afternoon, everyone. We appreciate your joining us. We’re glad to provide some details and color around the business that drove our Q2 financial results and walk you through our guidance for the full fiscal year 2021. We’ll of course, wrap up by opening the call to your questions. With this being my inaugural earnings call here with Absolute, I wanted to frame this out into three areas. One, my personal bullishness on the large and growing endpoint resilience opportunity and Absolute Software is uniquely positioned to monetize, two, our SaaS model that’s driving solid increases in year-over-year ARR and revenue growth and strong continued profitability and three, the compelling path in front of us to drive continued revenue growth and increasing stockholder value. First off, I’m thrilled to have joined Christy and the team here. After 90 days or so on the job, I can say that I’m more bullish on the opportunity that’s sitting in front of us at Absolute and when I first started. Absolute Persistence technology, which is embedded in more than 500 million devices globally by the OEMs, along with our leading technology platform puts the company in a unique position to disrupt the $68 billion TAM. In the early signs are that we’re doing just that, as we continue to make progress and drive growth. Having joined the company just after our listing on NASDAQ, I’ve taken the opportunity to talk with many of our new and long-standing investors. There was a recurring message that I kept hearing.
Operator: Our first question comes from the line of Mike Walkley with Canaccord Genuity. Your line is open.
Mike Walkley: Great. Thanks for taking my question and I hope everybody’s healthy on the call, and congrats on the record ARR and execution. My question is on post the SolarWinds hack, it’s really helping demonstrate, I guess, increased security spending cannot help stop some of the breaches that happen out there. I was curious, if this is just helping generate increased awareness for your Persistence technology, both from your enterprise customers, and then from companies maybe come into your ecosystem, such as some well-known companies you added such as Netskope and Palo Alto during the quarter?
Christy Wyatt: That’s a great question, thanks, Mike. So I would say that we definitely had a lot of inbound increase around the recent breaches. I do think that it did highlight on a pretty global scale, the value of retaining those security controls on the endpoint and making sure that they’re the right version. But number of companies that I spoke to that said that the reason they were saved from being targeted was because they were too many versions behind. So therefore that’s how they – I’m not sure, well, it may work in their favor this time, there’s probably more times than not it would work against them. So I think it definitely has increased the focus on endpoint hygiene and making sure that that the resilience of those controls is there an in place. On the ISV side, I think we continue down that journey, both from the Application Persistence, as well as the Persistence as a third attorney, I think we continue to grow that catalog. And I think that the awareness is definitely growing on the customer side. And from the ISV partners, what we’re hearing is, is a lot of enthusiasm around the data. We can share about how are their controls may be going offline. So it’s unfortunate, but interesting focusing moment.
Mike Walkley: Great. Thanks. And just to follow up on that, Christie, just in terms of adding companies like Netskope and Palo Alto Networks to the ecosystem, are those companies coming to you or are there your current customers asking you to add them to your ecosystem and how does this add to your sales cycle as you had more and more well-known companies to that ecosystem?
Christy Wyatt: Yes. So generally the list of applications that we’re adding to the Application and Persistence library is customer-driven. So these are the solutions that our customers are using, where they’ve messaged to us that these are critical controls that they want to make sure are there and they’re all working. We – the list is a long in terms of the targets and the potential opportunities. And I would say that the collaboration is only increased in the past year, mostly as a result, we’ve gotten a lot better at showing data to, with our partners about what we’re seeing about the performance of our applications, and that’s really sparking the interest.
Mike Walkley: Great. And last question from me, probably for either Christy or Steven? You guys have a very large TAM to pursue and appreciate the updated fiscal 2021 guidance. But as we think longer term to investors, is there a certain balance that you’re trying to reach between growth and profitability? I mean, are you trying to stay near that rule of 40%, like a 20% growth, or what do you need to add maybe in sales and marketing to take the growth up even higher than it’s currently running? Thank you.
Steven Gatoff: Mike, thanks, it was a great question. And as we talked about it, I think fairly consistently in the past. Yes, we believe that the rule of 40% is a relevant and helpful measure and parsing out how we think about growth and profitability and the bogey, if you will, that we’ve said we are aiming to get to as a blend, right? And there’s a blend literally down the middle of 2020 eventually looking at 20% growth – revenue growth, 20% profitability. And so when you look at the trajectory we’re on, from the revenue standpoint, we continue those ship away and slowly accelerate growth to that level. And on the profitability side, you’ve seen in the first half of the year, EBITDA margins that are on the higher end of that. And so we’ve been fairly explicit in managing expectations that we have it. Profitability is a very important metric to us. But that we’re also looking to invest some marginal amount of profitability back into growth, into growth product and go-to-market. So that we would expect to see the profitability not hanging out in the upper 20s over time, but it work its way towards the 20%, as growth comes up with it. It won’t be a perfectly linear, beautiful quarter-by-quarter sequential trade-off, but that’s the goal that we have all time.
Mike Walkley: All right. Let’s go back to get on the results and thanks for taking my questions.
Operator: Our next question is from Thanos Moschopoulos with BMO Capital Markets. Your line is open.
Thanos Moschopoulos: Good afternoon. Looking at the Enterprise segment, the e-growth there has been kind of comparable, which we’re doing pre-COVID, and I think you called out the dynamic where you’re seeing softness in certain verticals and presumably that’s being offset by acceleration in other areas. Maybe as you look at pipeline, as you think about the coming months, how do you think that dynamic plays out? Do you think the softness sort of remained sustained in the weaker verticals? Or are there signs of that getting mitigated? What’s your outlook there?
Christy Wyatt: Thanos, I’m happy to take a shot and then of course, Steven can jump in with anything he sees. We have continued to see, as we said both the strengths and the weaknesses of the Enterprise space. We overall see the positive strengths, and I think that the continued stability at that space, we do think that the growth is in somewhat tempered by the softness in some of those other verticals, which is why we see the difference between Enterprise and Education. I think so long as we’re in this pandemic, we’re going to see some continued puts and takes on that. The one thing I would point out is that quarter-to-quarter. It’s not always consistently the same ones. It has some amount of seasonality to it. I don’t think that there’s – we have any growing concern about what’s coming in front of us. If anything, I think we’re moving towards what looks to be, stabilization as we’re making progress with the growth of the broader pandemic set of conversations. So there’s nothing unusual in this quarter that we hadn’t been seeing in previous quarters. And I would say, we continue to see healthy demand for the categories, just offset by some of these other areas where they have sort of their own things going on.
Steven Gatoff: Yes. Thanos, your premise was about on thought there, when we look back at Enterprise and call it a year before the pandemic, the growth rate was actually inching up sequentially quarter-by-quarter. So it was going kind of probably now, 9%, 10% to 11% or 11%, 12% to 13%, and working its way up from a bunch of progress in a few sectors, and then the pandemic hit. And it was interesting that some of those sectors were the ones like healthcare, that’s the challenges in it. And as Christy made a really good point, there are still some sectors and enterprise we’re seeing really nice growth, but one or two that are under pressure. And so we’re bullish on the overall space. And when those pressures lift, we would expect to see grow – overall growth benefit from that.
Thanos Moschopoulos: Okay. That’s helpful. And then in terms of the FedRAMP certification, I’m almost surprised, you didn’t have that. Given that I know you have a significant public sector business, so maybe help us understand better what that really means and what kind of opportunity might makes them on the back of that?
Christy Wyatt: So FedRAMP is, we’re actually very excited about this. I think that FedRAMP authorization, I think that’s the one you’re referring to. There’s a couple of different ways you can approach that certification. It is a very long process to get through it. One way is you can go in with initial sponsor specifically against their requirements and the others. You can work with this joint authority board to work more broadly on the program. And I think we were very excited. We were one of the very small numbers, many apply. We were one of the very small numbers that was prioritized in that queue. So we’ve always had a very healthy federal business. I think that we’ve seen a lot of opportunity there and it’s been one of our better growing segments. We do think that there’s a lot of additional opportunity if we can go deeper into that segment. It’s one of the growth strategies we’ve talked about in previous conversations. And this is honestly an opportunity that’s somewhat opened up to us because of the move we’ve been making towards the public cloud. So it makes it somewhat more accessible. And when we’re sitting on a public cloud infrastructure, that’s already got through that certification, we get a lot of additional benefit as a result of that. And so I think we’re very excited about this. I want to sort of set expectations it is a long standing process. It takes a period of time, but it is a very transparent one. And we’ll be able to give updates as we go through.
Thanos Moschopoulos: But ultimately, this helps reduce the procurement turtles that a new government agency might face as they look to bring you on part, right. Is that the fundamental principle?
Christy Wyatt: Yes. Essentially they’re sort of assessing against a risk framework and set of security capabilities. So that other agencies will have to sort of certify on an independent basis, or wouldn’t be required. They can leverage that certification more broadly.
Thanos Moschopoulos: All right. Okay. And then last one for me, in terms of the EMEA investment, any specific countries of focus as you think about where you’re spending your incremental dollars for hiring?
Christy Wyatt: We’ve done very well out of the UK. And so we’re going to continue our investments out of there. We are starting to – and just to be clear, we have been – we do have many customers across EMEA, across the business. But we are starting to sort of stand up additional selling capacity. As I’ve touched on before, the place that we start is really with our partners. There’s an easy way and a hard way to kind of open, go into new markets. And so our strategy is not to land a bunch of headcount into a new territory, and start with sort of the demand generation on our own. We really are going into the call centers with our partners and leveraging a lot of the same selling motion that has made us successful in North America and in the parts of Europe where we are so far. So we haven’t laid out sort of a country-by-country plan, but it is a highly leveraged plan. And I think we are well on our way.
Thanos Moschopoulos: Great. Thanks, guys. Nice quarter and I’ll pass the line.
Operator: Our next question is from Scott Berg with Needham. Your line is open.
Scott Berg: Hi, Christy and Steven, congrats on the great quarter. I guess. Yes. Two for me, let’s start off with the Education segment, obviously, really strong growth there, big boost in ARR, seeing some positive trends there. But how should we think about the longevity of what you’re seeing there? Is this – that’s a much bigger core or a bigger spike than what we saw in the June quarter? Is this something that’s kind of a one-quarter trend? Or is there an opportunity to have something more sustainable as the pandemic hopefully subsides?
Christy Wyatt: Scott. Thank you. It’s a great question. I spent a little bit longer than normal talking about sort of the color around Education on this quarter’s call, because we do see it’s fundamentally shifting. I think that what we’re seeing is really this increasing complexity. And so I think that sets us up for longer term success with Education. And again, it’s not simply a result of distance learning and it’s not simply a result of additional funding. It’s a result of kind of these educational environments are very large. They’re very complex. In many ways, they’re more complex than an Enterprise because the mobility and because they’re using lists. They have younger users. They have a lot of challenges that many enterprises don’t also have. And so this is really kind of a turning point. When we talk, I gave the data point on the call about the number of unique applications. Just to give you some perspective and this is information that’s actually up on our website in our COVID insights dashboard. Before COVID, we saw just over 1.5 million unique applications and versions across our enterprise estate. And in the education side, it was – on the Education side of the business, it was just a fraction of them. I think it’s several hundred thousand at this point, so it’s much, much smaller. And that’s the kinds of applications they were using and the amount of security controls. It was a very simplified environment. If we look at the new applications that are coming into that environment, there are certainly – there are some student supports in distance learning tools for sure, but you’re also seeing a lot more mainstream enterprise security controls. And so that increase in complexity, that increase in the number of devices in the complexity of managing those devices and the diversity of the kinds of applications and security that they’re having to put them on those devices really means that it’s starting to kind of get closer to an enterprise. And the use cases start to converge. So a little bit why we’ve seen such great response to things like the web analytics and the web usage, which we initially put out in Education, but are equally relevant in Enterprise, right? The use cases between the two start to get very, very similar. So our belief is, now I don’t want to set the expectations that you should take a look at this quarter and assume that it’s run rate. But I do think what we’re seeing is not kind of a blip in a flurry of activity. What we’re seeing is sort of a market going through a pretty significant transformation.
Scott Berg: Excellent. Quite helpful. And then a follow-up question, Steven. If I look at your guidance here for the – effectively, the second half of the year, it’s implying a 12% revenue growth rate at the midpoints. Given the company has come off about a 17% ARR growth quarter in the December quarter and that was after a 13% number in the September quarter, sales obviously seemed quite strong, but your guidance seems a little bit on the conservative side relative to that sales trend. How should we view the guidance in the second half? Is there some dynamic or component around rev record? That’s the length from the revenue on these contracts, maybe some assumption on churn or is there anything else that we should kind of read into that number? Thank you.
Steven Gatoff: Sure. Yes. That’s a very fair question. And I think on the surface, we would offer to not read too much into it in so far as changes in rev record contracting or any type of fundamental business shift. There is the overall dynamic that while we are very bullish on the business and the market and we like everyone else are getting used to living in this pandemic environment and are adjusting ourselves to it. For example, we understand a little better how hiring works. We understand a little bit better how engagement with customers works and so we’re now looking to spend and invest some more in that. But on the revenue side, we really just wanted to be thoughtful and consider it in laying out something that we were comfortable with, probably nothing more involved in that.
Scott Berg: Great. That’s all I have. Thanks again and congrats on the great quarter.
Operator: The next question is from Adam Tindle with Raymond James. Your line is open.
Unidentified Analyst: Hi, thanks for taking my question. This is Alex on for Adam. I was wondering if you could provide some color, maybe quantify some of the numbers around the COVID-related free trial you had that expires in October, kind of just what was the uptake on that? And what was the conversion rate related to that?
Christy Wyatt: Hi, Alex, it’s a great question. So we e haven’t published the conversion rate on a specific campaign, we don’t publish sort of campaign by campaign results. But what we have seen is increased acceleration on resilience with – we’ve talked about 60% of our ARR sitting in resilience, and I think that’s continued to grow. So the motivation behind the campaign was really first and foremost, really to help our customers where they were struggling, especially around areas like VPN or web usage or reach. And then in doing so, we introduced them to a lot of the capabilities of resilience. And so we did see a healthy conversion up to the higher tier package whether they took it out on a sort of modular license or whether they just sort of went to resilience as a whole. It did also help shape our thinking about kind of the next class of application persistence applications, which ones were most critically needed. And I think you see that reflected in some of the new AP modules we’ve been adding. We just added the Palo Alto solution, then of course, the CASB solution as well. So I think that if we consider it to have been a successful campaign, because it really raised the awareness of how we could be more helpful to our customers.
Unidentified Analyst: Okay. That’s helpful. And then sort of on that topic as well. I think you mentioned in the past about thinking about reconfiguring your product offerings based on modules for vertical specific applications. Have you done any more work on that? What are your thoughts on kind of moving forward with that?
Christy Wyatt: We have continued to do more work on that. We have been continuing to take a deeper look on sort of performance by product line taking a look at the modularity of our product. As I’ve commented on before, behind the scenes, the product itself, the configuration of the product and the capabilities is pretty flexible. So it makes it relatively simple for us to be responsive to customers who want to look at different stacks and combinations. We haven’t announced any new bundles or pricing or any changes. I think that we – it’s one of the areas that we’re continuing to dig in and do work as we go through this quarter.
Unidentified Analyst: Okay. Thanks. And then one final one, just housekeeping question. Taking a dive into the Fresno School District deal. I think that was 100,000 devices expansion deal from 20,000 devices with resilience, if you think kind of ASP of $40 with around $20 of net revenue per year. Am I correct in thinking that’s around $1.6 million of incremental annualized revenue for you?
Steven Gatoff: Yes. I apologize. Your map is not orders of magnitude off, but we just haven’t commented on the revenue profile with customer, but your number is down like reasonable stakes.
Unidentified Analyst: Perfect. Are there any other ways you can monetize a relationship or have they already taken kind of the – just through expanding the number of devices? Or are there any other products you can kind of upsell or across?
Christy Wyatt: I don’t want to – we published, I think then as a representative case study, we’ve been doing a series of case studies on sort of customer success. And so, we’re very excited about the collaboration we’ve had with them. When we think about upselling expansion with customers, we have talked a little bit about the opportunity to do some new product introductions as we go later into this year and sort of early into next year. We’ve talked quite a bit about the work we’re doing with data and analytics. We’ve talked quite a bit about some of the work that we think is interesting around what I’d call, proactive health monitoring. So how do we actually prevent devices or applications from falling out complaints, as opposed to just fixing them when they break or sort of go offline. So without commenting on any specific or individual customer, I would say that we’re always looking at the customer journey and we absolutely think even for a customer is sitting on resilience there’s much more we can do to be helpful.
Unidentified Analyst: Okay. Thanks. That’s all for me.
Operator: The next question is from David Kwan with TD Securities. Your line is open.
David Kwan: Hi. Congratulations on the quarter. Just want to jump into the FedRAMP or back into the FedRAMP? The question is related to the timing of when you expect to get the certification there? And then also any type hiring you might need to do to pursue that opportunity? And when we could actually start to see material revenues being generated from FedRAMP?
Christy Wyatt: So thank you for the question. The FedRAMP process itself is actually pretty long. I wouldn’t hazard to guess when the finish line is, but I don’t think it’s unrealistic to think, it’s longer than six months. And some have taken sort of much longer. It has a lot to do with – it’s a little bit like SOC 2. It has a lot to do with sort of documenting controls and processes and kind of navigating your way through that process. The process is very and the requirements are very public and documented. We’re happy to sort of share them more broadly. In terms of the resourcing required, this is something we’ve been working up to this point. So across our CIO, Dianne, and with the R&D organization and with our cloud operations team, so this is something we’ve been working towards with our customers. We have a number of customers who are also a huge supporters of us kind of going through this process. I’m not envisioning a whole host of new head count required. There are some contractors and consultants that we hired have been through the process before who are sort of coaching us in and supporting us as we go through it. But I don’t think you should view it as a significant investment from an R&D perspective. From this point forward, it’s sort of within what we’re already doing. We have been building out our federal team over the past couple of quarters. So we have been sort of beefing up the support to our federal customers. And you should continue to see us do that. But it’s already in line with our hiring plan. There’s nothing additional as a result of this announcement.
David Kwan: That’s helpful Christy. I guess, the Canadian dollars been moving here over the last couple of months. Can you comment on how much of an impact it might’ve had on your Q2 results? If you change the FX assumption for your guidance and kind of roughly what the breakdown and expenses are Canadian dollars versus U.S. dollars? Or I guess, obviously the two key countries that you’re in.
Steven Gatoff: Sure. So we – as we disclosed, we do hedge our Canadian exposure, we’re a U.S. dollar functional company globally. And what we hedge against is our payroll based expenses in Canada that head count is roughly 70-plus-percent of our overall expense worldwide. And then in Canada, it’s probably the more, it’s probably upwards of 80% of our expense base. And so we’re hedging the majority of that, and we haven’t hedged out two quarters as of now. And so that is not a factor for the current quarter that we reported or for Q3, so far as the P&L impact per se. Good question.
David Kwan: That’s helpful. I guess, last question for you. Maybe on the gross margin side, it’s been at the high end, I think where it’s been over the last few years around the 89% range. I think initially it was kind of viewed as – it may be temporary here, but maybe can you talk about how you see the gross margins playing out over the next six to 12 months?
Steven Gatoff: Sure. I think you’re spot on and not to the acute, we have not yet laid out a target model. We will be doing that at some point. We look forward to that. What we have talked a little bit about is as we move more to the cloud and less way from an infrastructure based model we would expect some movement of costs on our geography from gross margin to OpEx. And so you may see some of that as we invest more in cloud operations away from CapEx and depreciation. So probably a little bit, not a lot of pressure in the outer quarters, nothing material in the near-term.
David Kwan: Okay, perfect. Thank you.
Steven Gatoff: Yes, sure. Good question.
Operator: Our next question is from Richard Tse with National Bank Financial. Your line is open.
Richard Tse: Yes. Thank you. Just one question for me, if you sort of look – I don’t know, on a year-over-year basis, or maybe a trend over the last three years, maybe talk about sort of the average deal size trends with your existing business.
Steven Gatoff: Sure. We’ll tag team on that Richard, Christy and I. In a nutshell we’ve seen some favorable dynamics customers in aggregate, right? There’s always the topic of lower marginal pricing offer higher volume based deals. But we’ve seen an expansion – success and expansion of our customers. And so we’ve been glad to see deal sizes. Now, if you look on it, two ways to look at that TCV basis and an ARR basis. If you look at TCV basis, that’s really influenced by the – how many years, the last time of the contract. So that’s not a fantastically helpful view in our opinion way to look at it. But we have been able to garner greater economics from customers over time. And one of the metrics that’s probably the asset test on that is net dollar retention, which is expanded nicely on a sequential basis over the past several quarters.
Richard Tse: Okay. I guess, can you also maybe give us a sense of the split here between the new wins and expansions in the quarter?
Steven Gatoff: Sure. I’ll take the new guy hit. I’m not sure what we’ve discussed in general in the past, so I’ll just walk through…
Christy Wyatt: Okay, Steven, I’ll jump in and then you can build on stuff. I think the metric that we’ve always – first of all, hi, Richard. The metric, we’ve always talked about is the net new logo number, which we’ve – and I’ll just sort of go back to our land and expand model. So, I think about $1.5 million this quarter, and it was about $1.3 million last quarter, and that’s true net new logo. So that’s the true new ARR from a brand new customer. Much of what we do everything after that is an expansion, but it has a lot to do with the way we meet new customers. If you remember, we often attached with our OEM partners and then our direct sellers are really focused on that upsell and expansion. And so when we look at that net new logo number, quarter by quarter, it remains very small, we’re very focused on internally as sort of the analysis of how it grows over time. And I don’t think we’ve published kind of those cohorts. We gave a little bit of a context around it at the Analyst Day, but it’s something that we are spending a lot of time looking at, and hopefully we’d be able to provide some more color on in coming quarters.
Richard Tse: Okay. That’s great. Thank you.
Operator: Ladies and gentlemen, this does conclude the Q&A session. I’ll now turn the call back over to Ms. Wyatt for any closing remarks.
Christy Wyatt: I want to thank everybody for joining us this quarter and we’re looking forward to catching up with all of you in another couple of months.
Operator: Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.
