Absolute Software Corporation (ABST) on Q3 2021 Results - Earnings Call Transcript
Operator: Good afternoon, ladies and gentlemen, and thank you for standing-by. Welcome to Absolute Software Corporation's Third Quarter Fiscal 2021 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 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 any obligation to update publicly or 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 security laws.
Christy Wyatt: Thank you, operator. Good afternoon everyone and thank you all for joining us for Absolute Software’s Q3 fiscal 2021 conference call. Joining me on the call today will be our CFO, Steven Gatoff. In addition to announcing a solid quarter, we are very excited to announce that we have entered into definitive agreement to acquire NetMotion to provide our security solutions to the world's growing remote workforce. With the combination of Absolute's Endpoint Resilience, NetMotion Network Resilience and our collective data and intelligence capabilities Absolute will create a first of its kind solution that will deliver always on connectivity, unmatched visibility, control and resilience. Today, we'll first take you through our strong Q3 results and the continued positive trends in our business. And then I'll review the rationale of strategic fit for acquiring NetMotion. I'll be joined by NetMotion's CEO, Christopher Kenessey who will share with you a bit more about the company. And then Steven will take us through the financial benefits of the transaction. Q3 was another strong quarter for Absolute, reporting record ARR revenue and adjusted EBITDA for the third consecutive quarter. We had a $2.9 million of ARR in Q3 and exited the quarter with ARR of $120.4 million, up a record 19% year-over-year and driven by an 18% increase in active devices. We reported record revenue growth of 18% with continued strength in adjusted EBITDA margins and solid cash flow. These consistently strong numbers are a direct reflection of our ability to execute and the strong demand for Endpoint Resilience's capabilities as organizations across all industries are under pressure to adapt to the new remote and hybrid working models. Growth in Q3 was driven by a series of new customer wins as well as expansion across our existing customers, notably across insurance, healthcare and manufacturing industries. Our investments and innovation continue to payoff enabling our customers with solutions that provide intelligence and resilience for the application that are running across their organization.
Steven Gatoff: Thanks, Christy. Good afternoon everyone. We appreciate you joining us. We're very excited about both our Q3 results and the compelling addition to our platform of the NetMotion acquisition. It's a terrific business and fit. And we look forward to going through it with you. With that, let's first look at the solid results being driven by our SaaS model in the third fiscal quarter ended March 31, 2021 beginning with ARR. Our record results this quarter were driven by strong growth in our education sector, which was up 35% year-over-year. The growth reflects the trend that we've seen developed over the last few quarters as our education customers continue to execute their digital transformation strategies on top of the robust support that the sector is getting in funding. Performance and enterprising government remain solid in Q3 with ARR growing approximately 12% year-over-year consistent with last quarter. As we've noted during our last few calls, there remain some lingering COVID related headwinds and a few enterprise verticals including healthcare, prop services and retail. We continue to experience solid growth and financial services and government. And we remain focused on accelerating our overall growth trajectory. And so far as our global presence, we continue to see strong demand where international ARR comprise approximately 30% of our year-over-year growth. We also saw strong results in net dollar retention, that continue to expand and came in at 110% in Q3, versus 101% in the prior year. This all culminated in a strong top line result, as Christy mentioned, with total revenue coming in at $30.7 million, up 18% year-over-year. Looking at spend and profitability, total non IFRS operating expenses in Q3 was $19.2 million, up modestly from the prior fiscal Q2, as we invested in sales headcount and go-to-market activity, as well as increased costs associated with being a U.S. listed company, as we expected. This all culminated in an adjusted EBITDA margin of 25% in Q3, ahead of expectations on both the timing of hiring, and some good fundamental expense management. We ended the quarter with 530 employees, up marginally from the December quarter end. Finally, we generated $7.3 million in cash from operations in Q3. And we exited the quarter with $132.4 million of cash and no debt.
Christy Wyatt: Thank you, Steven. The past 12 months have been transformative in so many ways for our industry. One of the most visible among these is the impact on how companies look and how they work and how they secure their enterprise in the face of broad mobility. According to Gartner, 90% of businesses are preparing for employees to work remotely even once COVID-19 vaccines are widely available. To support the new hybrid work paradigm businesses continue reimagining endpoint access and network security to support the new Work from Anywhere Era. Another long standing effect of the past year is the need for greater operational agility. As workers were sent home on a moment's notice, IT organizations globally were tested in ways we've never seen before, to mobilize the workforce at scale and with velocity.
Christopher Kenessey: Thank you, Christy. I'm extremely excited about the opportunity that this combination presents. As we embarked on this process of identifying our next partner for this new chapter of accelerated growth, it was important that we found someone who shared our vision for security and compliance in the Work from Anywhere World. Absolute immediately stood out from all the other suitors based on their myopic focus, providing next generation solutions to better manage endpoint security without impacting the user experience. It's been a pleasure working with Christy and the team these past few weeks. It has underscored our belief that joining Absolute is the best next chapter for NetMotion. Let me tell you a little bit about our company. NetMotion Software is a Seattle-based organization with 185 employees around the world. Our vision is to secure enterprise perimeters, while optimizing network performance and most importantly, improving user experiences. NetMotion is the only secure access platform that combines security, visibility, and policy management to provide the best most secure customer experiences. NetMotion is a leading unified SASE platform combines three key elements. Zero Trust Network Access, otherwise known as ZTNA, digital experience monitoring, and a highly optimized enterprise VPN, delivering uncompromising and secure network access in the most rigorous customer environments. Our platform successfully supports over 1 million workers and 3,000 organizations. We are particularly proud of our Net Promoter Score of 91, which has led to one of the best growth retention rates in the industry. Additionally, four out of five, the largest U.S. airlines are customers, two out of three of the largest logistics providers, and 85% of all first responders across North America. I'll take a moment to explain exactly how NetMotion works. NetMotion allows enterprises to allow to access critical enterprise resources, whether they are in the cloud, on-premise, or third party hosted applications like Salesforce, Office 365, et cetera. Our platform not only provides the access, but actively optimizes the network traffic to get more out of the network than anyone. Users immediately notice an improved user experience going about their daily tasks based on these network optimizations. Here are a few examples. A large financial service provider decided to send their global call center employees home when COVID hit. And almost immediately noticed a degraded user experience and employee satisfaction had due to the drop calls and poor voice quality on their laptop based smartphones. With our network optimizations, we immediately improve the user experience and more importantly, employee productivity. Another example, one of the largest law firms in the world recently deployed us and as senior partner was able to access and download content from their document management system while on an international flight. The partner could never do this before, it's a great example of our ability to optimize the most poor performing networks. Finally, based on our distributed architecture, we have unprecedented visibility into the device, the network, and more importantly, the user experience. This allows IT teams to better understand user experience concerns, user behavior, and the performance of critical IT assets. The unique dataset that we collect is extremely complementary to the unique dataset that actually collects and the future potential of mining the combined data set is tantalizing. In summary, our technology drives, improve security, user experience, reliability, and enhances the ROI of modern edge networks. NetMotion is well positioned for growth in this Work from Anywhere Era. First, we bring compelling value to multiple buyers, the SMB IT manager, overcoming connectivity issues, upgrading Secure Access Solutions, and enabling remote working or enterprise network infrastructure leads looking at adopting Zero Trust Solutions, but would love to get a quick win along the way with the next generation VPN to actually improve the end user experience. All of this while beginning the journey is SASE. Second, we have a highly efficient channel model tied to the inside sales and corporate and enterprise Salesforce. We have core strategic partnerships with leading network providers in NetMotion's core geographical markets, a well established presence in the resort community, and extensive integrations enhanced by hardware, UEM, identity and other technology alliances. Third, we have a clearly defined customer value proposition. Our technology delivers a better mobile experience, better visibility across the mobile networks, and perhaps more importantly, it is perfectly positioned to enable a VPN to SASE transition. I'll close by saying all of at NetMotion, are incredibly excited to join the Absolute team. Our shared vision and complementary technology make this the perfect combination. And now, I'll hand it back to Christy.
Christy Wyatt: Thank you, Christopher. All of us at Absolute are thrilled to welcome to NetMotion team to the Absolute family. Sorry, we had a small delay in the system here. I'd like to share a little bit more detail about how the addition of NetMotion to the Absolute family of products creates a truly unique offering in the emerging evolution of modern Endpoint Resilience. Absolute is an endpoint centric security company and is the leader in Endpoint Resilience Solutions. Most importantly, we have the industries on the undeletable defense platform embedded in over a half a billion devices. This gives organizations complete connectivity, visibility and control with an ability to self-heal mission critical applications so that they remain healthy and deliver intended. For customers this firmware embedded connection enables us to capture data intelligence on the device ranging from its location and usage to its health status and security posture. We also offer real endpoint remediation and control tools such as Reach to help configure and maintain endpoint security posture. And finally, but most importantly, we are able to deliver Endpoint Resilience, a connection that can sell fuel critical applications and enable the device to heal itself. When you think about it from a user standpoint, our solutions really focus on productivity. We try to keep the employees device running securely and effectively to optimize the user experience. One of the things that we got most excited about when we were getting to know NetMotion was how philosophically aligned our two companies are. As we talked about visibility and control of devices and applications, NetMotion has been focused on visibility and control of your connection. And as we think about self-healing applications, they think about self-healing connections leveraging their unique traffic shaping IP. They too are solving customer problems in remote working by prioritizing focus on intelligence, control and resilience. As you've just heard, they offer incredible data on network connectivity, user experience and location, along with real granular policy control that can enable Zero Trust access under restrict applications. And much like us they have a similar resilience capability and their network connection continuity. NetMotion really solves the modern user access challenge. And if we're solving for productivity, the NetMotion is solving for connectivity, trying to keep the user herself safely and consistently connected to the network to optimize the user experience. Based on the momentum we discussed in this quarters earnings that won't surprise anyone to see how both of our companies are meeting the near term imperatives of our work from anywhere world, and that we've seen that in our results. And with this transaction, we position ourselves to deliver solutions that address many of the key customer pain points that we discussed earlier. As we get into the new Work from Anywhere Era, this transaction is about creating something new that meets the demands of what's next. That is next generation endpoint resilience. Endpoint, and its health and status and security have become central to any successful organization. But in this new hybrid Work from Anywhere Era, the endpoint is always on the move, always under attack and always changing. We can simplify the complexity of this dynamic by extending all the work we're doing on endpoint and connecting it to the network. With NetMotion, Absolute will deliver the next generation of Endpoint Resilience that maximizes security with uncompromised productivity. We'll dive a little bit more into Zero Trust and SASE in a second, but I really want to underscore the potential scope of the solutions that we can collectively bring to bear critical customer problems. For example, organizations will need to collect, visualize and analyze data about all aspects of their end users digital work experience. Together with NetMotion, Absolute will be able to offer a unique view into the remote work experience by delivering deep insights into the device, the applications and the network. And with firmware embedded control paired with granular network policy control, the organization can significantly enhance its security posture, improve the user experience, and enhance overall compliance. As we discussed, this SASE transition is coming as organizations catch up to the sudden work from anywhere resolution, but we recognize that while SASE is the future, most organizations will have to adopt a thoughtful multiyear project process to move from the traditional VPN to SASE position. With NetMotion, we are positioned to offer a rich suite of solutions to guide that transition all within one platform. According to Gartner, by 2024, at least 40% of enterprises will have explicit strategies to adopt SASE. To really understand how our combined products could deliver unique value into the rapidly growing ZTNA and SASE markets, let's spend just a few more minutes on our differentiated approach. Zero Trust and SASE center around how you can establish trust with an endpoint, and especially one that is on the move and accessing a mix of corporate assets in the cloud, on-premise or in a data center. Your standard Zero Trust model right now enables access to corporate resources by authenticating the user based on meeting certain policies and context requirements. And that context is typically some combination of location and identity. I think it's an oversimplification to say that an endpoint access solution that goes offline cannot facilitate access. Therefore, the first step for us is really to make the ZTNA client itself resilient to the self-healing. In a world where an employee could be anywhere being able to simply connect to the network is critical. And by integrating application persistence with NetMotion's endpoint assets, we can ensure that the end users ability to connect is not compromised. Additionally, once connected, maintaining that connection and ensuring performance even as the employee moves around networks and locations is one of the strong differentiators of the net motion product. This is exactly what NetMotion does and is one of the drivers behind their high customer NPS scores and net retention. As I mentioned earlier, Zero Trust solutions also rely on context or details or data about the endpoint status to establish trust. Frequently, this context is somewhat limited to things like identity and location, which on their own could be a relatively low bar from a security standpoint. But given our unique position on the device, there is a lot more data and context we can contribute to that equation. With the unique data sets provided by both Absolute and NetMotion, details like device health, security posture version of security solutions, or many others can become factors in providing a better context for establishing trust. And if the security posture of the device can be context or access, and by leveraging application Persistence to ensure that applications are installed and effective will mean that more users with greater security compliance we'll be able to simply connect, does better security, better user experience and more and less work for IT. Putting it all together, let me give you a quick hypothetical situation that I think can really bring home, how compelling this offering could be. It's Sunday night and the employees devices being updated with a number of patches pushed out from IT earlier in the week. And as it so often does, something bad has happened in the patching process which has impacted the antivirus software and left encrypted. What's more, because the patch process was unsuccessful, the device failed to re encrypt, and the laptop now represents a high level of security risk. In this scenario, if the Zero Trust network access with the endpoint connection knows the laptop is compromised, it can prevent access to corporate applications until the device has been successfully remediated. And what's more, with application persistence, we can actually restore the missing security controls on the laptop automatically by repairing or reinstalling the antivirus or encryption, protecting the data and restoring the user's ability to connect safely. In this situation, instead of having to bring the laptop to an office for repair or even to coordinate with IT at all, the endpoint is self-healing and resilient to the event and the user is back online. I want to switch gears for a moment and talk a little bit about how we plan to approach this market opportunity. We have identified clear go-to-market product synergies that will provide near and long term growth opportunities for the combined company. We expect to accelerate NetMotion's bookings momentum through leveraging Absolute large existing enterprise and government customer base and leveraging our channels. Additionally, we expect to bolster Absolute's growth profile through selling through NetNotion's channels and approaching NetMotion's installed base of IOS and Android devices. As we've talked about today, we see compelling long term product synergies between our two companies. And our plan is to have our teams quickly work on projects related to these two areas. And as we approach that opportunity, bringing together Absolute and NetMotion's broad and complimentary channel partnerships, expands our market reach significantly. Absolute brings relationships with major laptop and tablet OEMs while NetMotion has strong relationships with mobile carriers, and resellers worldwide. These two channels will be powerful partnerships in the ongoing evolution of securing the Work from Anywhere Era. We both bring a complimentary land and expand strategy with direct sales teams that work with channels to enhance retention and support improved renewals. You heard from Christopher earlier, but I really want to underscore how excited we are to have the NetMotion team join Absolute. The potential of this combination is going to be unlocked through the collaboration of these teams. And I couldn't be more encouraged with how well our teams have collaborated even just in getting to this moment today. I'm going to turn it over to Steven in a moment. But I want to wrap it up by where we started with our four key themes for today. I hope you can see what we gain in the edition of the NetMotion acquisition and how it's really remarkable and how it will it lines up to the future of our space. First, acquiring NetMotion and adding network access capabilities is critical to achieving our endpoint resilience strategy based on the exciting new dynamics of the Work from Anywhere Era. Second, we were positioned to accelerate into delivering endpoint resilience solutions that can create incredibly compelling SASE and Zero Trust Solutions for these high growth markets. Third, we are positioned to approach a highly relevant and differentiated position in mobile as our customers manage a multidevice world. And fourth, we are positioned to create a platform with the data and control capabilities to significantly improve the ever changing hybrid work experience, a huge benefit for organizations as we start down this journey into the Work from Anywhere Era. This is a company that we perfectly suited to meet the incredible challenges and opportunities in front of our customers. And this combination is about resilience secure endpoints and resilience secure network access, to ultimately create a happier hybrid employee a more effective IT department in a more secure organization. And so with that, I'd like to hand it back over to Steven.
Steven Gatoff: Thanks, Christy. Let's, let's get right into the financial impact of acquiring NetMotion. We benefit immediately by creating a scale business with $175 million ARR book of business and revenue. As Christy talked about the acquisition of NetMotion positions us in new, compelling and high growth markets to further support our revenue growth trajectory. The acquisition also provides us with meaningful revenue diversity that helps de risk and drive our long term growth profile. Our already solid profitability gets further bolstered by the attractive profitability profile of NetMotion. We expect that to flow through to cash generation that will enable flexibility in our capital allocation to further create stockholder value. And finally, the acquisition fundamentally strengthens our rule of 40 execution as we will be a stronger, more diversified business with improved revenue scale and growth. And we will be delivering that revenue growth from a strong foundation of profitability. We wanted to provide some visibility to Netmotion's financial profile. Over the last 12 months ended March 31, 2021, NetMotion generated approximately $60 million in revenue and ended the period with an ARR base of approximate $55 million. Add into this nice revenue profile, they delivered strong profitability of 30% adjusted EBITDA margins, and $15 million in operating cash flow. These results are on a standalone and U.S. GAAP basis and do not include any potential closing adjustments, GAAP to IFRS or purchase accounting adjustments. Two of the key drivers of NetMotion's compelling financial profile are the company's strong net promoter scores from customers, and its solid net dollar retention that's in excess of 115%. This is a testament to the stickiness of their product and high customer satisfaction particularly seen in their premium price product in the market. We also wanted to note that NetMotion is in the process of two important expansions of their business that will further support the scalability of their model, and that also has an impact on revenue accounting. The first evolution is that the company has begun moving as customer base from a historical software license and maintenance model to a recurring subscription model. NetMotion team started this important journey right before the pandemic and migrating existing on-prem customers from license to on-prem subscriptions. While they pause a bit on moving customers this past year as everyone dealt with the pandemic, they have turned now to only selling the subscription model to new customers. The second transition naturally follows a dynamic of selling subscription offerings, and is one of the strong core engineering and operational skill sets that Absolute brings to the story. That is, that NetMotion is beginning to transition its product delivery to the cloud from a historically on-prem installation. Absolute obviously has a lot of prowess as a cloud business and our management team is particularly experienced in these migrations. And so we look forward to driving these transitions and growth initiatives together with the NetMotion team. A final point on these business model migrations is that there's some specific accounting associated with these transitions. The revenue recognition treatment for an on-prem customer involves some level of upfront revenue recognition of the subscription commitment under the relatively new 606 guidelines. This contrasts with the typical ratable revenue recognition of cloud subscription arrangements, or even the ratable treatment of on-prem maintenance revenue recognition. We of course, look forward to sharing more with you on this as the transaction closes. One thing that we did want to share with you though, on the financial side of the acquisition is an early view of what Absolute software is expected to look like on an initial pro forma basis around some of the key metrics. Based on a trailing 12 month basis, we expect to be a $175 million ARR platform with about the same scale of revenue, notably gaining scale and an important revenue diversity and acquiring that motion. As Christy noted, we expect reduce reliance on the education space. While it has certainly been a terrific driver of growth this past year. Going forward, we're pleased to diversify our growth and revenue portfolio and more enterprise offerings. And importantly, the pro forma business is also expected to deliver significantly higher levels of adjusted EBITDA, and operating cash flow. While these metrics, as I mentioned, don't include any adjustments for purchase accounting or adjustments for the company's U.S. GAAP accounting to our IFRS translation. What you can see clearly is the scale, revenue diversity and the foundation of profitability of Absolute Software going forward. We look forward to sharing more of that, as I mentioned, with the close of the acquisition. What we did also want to provide you with is some color on what we see as the financial impact of the acquisition on a go forward basis from a macro perspective, a dynamic that reflects our enthusiasm for the asset and what we believe we're uniquely able to do together with NetMotion. In a nutshell, we're excited about the NetMotion business and are bringing our unique firmware embedded resiliency to it. Following the close of the transaction, we expect this acquisition to be accretive on a forward looking basis to ARR growth, revenue growth and adjusted EBITDA margin. Again, more on this more details after the transaction closes. With that, let's briefly overview the economics of the overall transaction. As noted, the transaction as a $340 million all cash acquisition of NetMotion and through which NetMotion will become a wholly-owned U.S. subsidiary of Absolute Software. The transaction is subject to standard closing adjustments and mechanics, which we anticipate could happen toward the end of June. We're financing the acquisition through a $270 million term loan from Benefit Street Partners, and $65 million in cash from our balance sheet. The term loan is a six-year tenor, there's a coupon of LIBOR plus 600 basis points. It's callable at one-on-one in one year, and contains reasonably standard covenants and terms. Importantly, we believe that the strong profitability profile of the combined pro forma business supports approximately 4.5 times leverage at closing, and enables us to deliver going forward with our target to attain a net debt to adjusted EBITDA ratio that's below two times in a two-year timeframe. On the topic of return of capital, our ongoing cash dividend payments remain in place. We believe the acquisition financing and capital structure strategy offers us the ability to finance the transaction quickly and efficiently from a cost of capital standpoint, and helps reduce stockholder dilution while comfortably allowing for de-leveraging as we move forward, all to the benefit of stockholder equity value. As we've talked about today, we're very excited about the NetMotion business. The terrific team of people who will be working with and the strategic and financial merits of the acquisition. We think this is an obvious adjacency for us to accelerate our Endpoint Resilience strategy and meet customer needs, and the new Work from Anywhere Era. Absolutely Software benefits meaningfully in bolstering our market and growth opportunity, the diversity of our revenue and our overall scale, all on a foundation of profitability. We see Absolute providing a highly attractive investment profile, starting with a proven leadership team and adding a balanced path of revenue growth and profitability. Historically, we've delivered key and compelling solutions to drive Endpoint Resilience, and we've benefited from long term durable tailwinds as a result. With the addition of NetMotion we'll be able to compete an additional emerging high growth market segments like ZTNA and SASE, and even further enhance our growth and profitability profile and value to stockholders. With that, we appreciate your time and support. And we're glad to open the call for any questions. Operator?
Operator: . Our first question comes from Adam Tindle from Raymond James.
Adam Tindle: Okay. Thanks. Good afternoon. Congrats on the results and the acquisition from a position of strength here. Christy, I just wanted to start. We had previously thought that there might be more tuck-in type acquisitions, but this is certainly bigger than that. Is there something that changed to drive you to do something a little bit more meaningful? And specifically wondering, you've partnered with SASE vendors like a NetSkope, for example, whether some learnings in those partnerships that got you more confident to make this big move here?
Christy Wyatt: Now, it's a great question. And thank you. So, I think this past year has really been unprecedented. And I realize that's a highly overused word. If you remember the very beginning of the pandemic, one of the first areas where we saw organizations struggle was keeping their employees connected. And we made application persistence for VPN, available for free to our customers. I do want to be really clear, there's no backing away from the partnerships we already have with Netskope and others. We're still very much committed to working with those vendors under the application persistence program. But what we did see was this really integral link connected to Endpoint Resilience. If we're really going to make devices self-healing, and deliver great security with great user experience, we can't ignore the network piece. What we saw more often than not was it really was the network that was affecting not just the user experience, but whether our device could connect to actually heal or be able to remediate what's going on. So I think that's the first. I think we saw an acceleration in the market and a tremendous amount of opportunity around the space, especially as we've seen organizations really lean in towards this margin.
Adam Tindle: Got it. And maybe just as a follow up. You talked about how it strengthens deployment to a Rule of 40 company. I'm wondering if you could maybe outline a little bit more detail on the plan investments in synergy expectations post acquisition. You talked about around 15 million of trailing 12 month EBITDA, but with those expectations, would you expect that to grow at a rate of ARR higher or lower based on the plan investments of the combined entity?
Steven Gatoff: Yes. Hey, it's Steven. Good question, indeed. As Christy talked about in our view of this, right, was that, it's a really compelling acquisition for us in so many ways, particularly on their synergy side, mostly on the revenue and go-to-market synergy side. And so, we've been excited to do that. We been digging into it with CK and Justin, the CFO and team and will definitely provide more visibility and color rather to that when we issue our guidance for the full year. And then obviously, it goes without saying, after we close the transaction, that's when we actually own the asset. But we are pretty bullish on the combination and the ability to get value from our own cross-selling of products on each side, as well as the combination of the two capabilities into new products. And so, it's a multi vector support to the synergy growth over time.
Adam Tindle: Understood. Thank you very much.
Operator: Next question comes line of Mike Walkley from Canaccord Genuity.
Mike Walkley: Great. Thanks for taking my questions. Congrats on strong results. And the acquisition certainly transformative. Just trying to get a better feel for NetMotion. Who do they see as the most direct competitors? And are they more Zero Trust or they also providing SASE features such as secure web gateways, cloud firewall, CASB, some of those type offerings also?
Christopher Kenessey: I can answer that. From the NetMmotion perspective, we have a couple different competitors, based on the different products that we're taking to market. On the ZTNA side of things we'll often run into to Palo Alto or, or Zscaler. On the VPN side of things will many times compete against a Cisco AnyConnect or a Pulse Secure. And as you start looking at kind of what SASE really is, which is the convergence of networking and security. There's a bunch of different elements to it. And in between the VPN to ZTNA transition some of our features that that help from an endpoint firewall and endpoint secure web gateway perspective. And then also kind of our in-depth experience monitoring perspective, we've got some pretty compelling value add for the journey to SASE. And so we do consider ourselves a SASE vendor. And we speak to it from a couple different perspectives, as I've just outlined.
Mike Walkley: Okay, great. That's very helpful. Thank you. And just a follow up question for me. I guess, maybe for Steven. Just given NetMotion to 55 million in ARR. With the transition from perpetual to SaaS, is it a very early innings, so this would be a headwind for year-over-year important revenue growth as they go through the transition. Are they pretty far along in that process already?
Steven Gatoff: Yes. Hey, Mike. Good, good question. So there's two migrations, right? There's the migration to cloud and the migration of their on-prem customers to subscription. And the short answer is, we see this as a creative to our revenue growth and ARR growth on a go forward basis that we'll get into next year. And that's the function of the growth profile, as well as the accounting that we talked about.
Mike Walkley: Thanks. Just want to clarify one more thing, I think Christie answered the earlier question. But this doesn't impact at all any of your persistent partnerships. Do you think they'll all be fine with that, given NetMotion will likely compete with some of your Persistence partners?
Christy Wyatt: I think that from our perspective, the core of resilience, it's very similar to kind of some of the feature overlap we see with, for example, other endpoint management solutions. Our commitment to Resilience is to create self-healing capabilities, no matter what stack you have. So if you're using one of our partner solutions, and you want to leverage our platform to make that solution, self-healing as well, we probably wouldn't have the same level of data and visibility that we would have on an integrated solution. But we know that this is a very early phase within this market. And so we're going to see a lot of diversity. And that really is just a part of kind of being foundational within an ecosystem. So again, similar to what we see in UEM, where our approach is great, let's make that UEM persistent, let's, figure out how we can do better integration with those vendors. Our approach into other partners in this space would be exactly the same. I don't think we ever approach a customer assuming that we're going to sort of own the complete stack, and that's why being easy to integrate into the enterprise has got to be incredibly critical.
Mike Walkley: That makes a lot of sense. I'll ask one more question. And maybe just going back to the strong quarter, I guess, on just the education market, very strong 35% ARR growth and realize that the acquisition will become a smaller piece of your market. But how do you see kind of that business growing as you're starting to lap, the COVID, or School from Home Era, just been a great growth driver, and just wondering how we should think about that going forward?
Christy Wyatt: It's a great question. And I've said, we continue to see a lot of strength in that market. I don't think we've seen that change in the past quarter clearly as demonstrated by our results. We have said, at some point, when these educational institutions get to the other side of their digital transformation, we would expect to see some leveling off, but from where we sit today, we continue to see stable and building point in that segment.
Mike Walkley: That's encouraging to hear. I'll pass on.
Christy Wyatt: Thank you.
Operator: And our next question comes from Scott Berg from Needham.
Scott Berg: Hi. Congrats on the good quarter and interesting acquisition here. I guess, let's start with the acquisition really quick. Is -- Christy, you call the endpoint access market is highly competitive. I know -- I think, Christy, you have talked about some of the competitors that they compete with out there. If you were to look at NetMotion, what's the kind of the one feature functionality component to their platform that you are most impressed with and say, hey, this super differentiated relative to that competitive end market?
Christy Wyatt: And I think, there's two pieces unfortunately, there's not one. I think the first is, the unique IP they have and the ability to save the traffic that really impacts the user experience. So in the past year we've all been at home. You've been on a Zoom Call. You have a bunch of applications running. The ability to actually optimize the traffic that goes to the application you need at that moment, especially when some of them are in the cloud and some of them are behind the firewall and they are in ready to completion. It's not an easy thing to do. And honestly that's where lot of -- what I just call legacy VPN solutions fall flat. And I think the second part of -- second but connected part of that is really the resilience piece. There is some unique IP around how you move between networks, and even if you not leaving your home, depending on what's going on in our your home, other people are jumping on and off the network, you could be changing network connections, the network quit out for a moment. The ability to survive that and actually keep a seamless user experience, and a seamless security experience, I think was incredibly compelling. And so, it would be a mistake to think of this as kind of going backwards into the VPN market. I think we're really going into this facing forwards and saying listen, it's going to take the industry a couple of years to kind of get to what's next in modern connectivity strategies. And we're looking at building blocks. We think enterprise resilience is about creating controls that don't fail. And we can make controls that don't fail from an application and device perspective. And they bring a lot to the table with creating that same resilience on the network.
Scott Berg: Got it. That's helpful. And then Steven, as a follow up, if you look at your net revenue, retention of the quarter, obviously fantastic at 110, especially relative to where the company's been in the last couple of three, four years. Can you help us understand where the improvements are coming from? Is it more better retention drive net number up? Maybe you're having better upsell or cross-sell? Successes in those customers? Maybe any color there would be helpful?
Steven Gatoff: Sure. Hey, Scott, good question. The dynamic is really what we have talked about probably the last quarter or two, which is the improvement really has come from a solid fundamental singles and doubles type of thing improvement in the core renewal rate. The expansion side of the business, the economic model of land and expand continues to be fairly robust this quarter, last quarter. Now -- and that part of the model is working really nicely. And what we've done and we've talked a little bit about this with you, obviously, and others, that we really restructured how we cover customers, how we incent our sales force, how we partition our sales force, between bringing in new logos and upselling customers versus renewing our customer base. And we're just getting more time under our belt and more experience with our teams in covering our customers, so that we're seeing steady eddy increase in core renewal rates little by little. And that's continues to bump up the total net dollar retention sequentially quarter after quarter.
Scott Berg: Great. Thanks for taking my questions.
Steven Gatoff: Thanks, Scott.
Operator: Your next question comes from the line of David Kwan from TD Securities.
David Kwan: Good afternoon. Congratulations on a great quarter. And it looks like a great acquisition here as well. Wondering if you could maybe talk about the integration that's involved with acquisition, whether it be from a platform perspective, or just the company's overall employees, et cetera?
Christy Wyatt: Hi, David. Sure, we're happy to. Clearly, we're only in the integration exploration conversation. So I just have to caveat with that. I think we -- we're clearly not directly connected to one and others businesses. But I think our philosophy as we go into this is that they're doing a really great job with their business. For at least from a selling and marketing perspective, we want them to continue to do a great job with their business. And so, we'll use the first couple of quarters to really focus on driving performance in the market, while our back end product teams are working on some of these early product projects that I talked a little bit about earlier. So you wouldn't expect to see sort of a big integration on day one. We're very lucky that we have a team that is been through a fair number of these and understand a lot of the risks around them. And so, we're taking a very pragmatic approach, I think, on both sides, to really be thoughtful about how we work our way through this.
David Kwan: Okay. And then, can you be talking about cost synergies. Are you expecting much in terms of cost savings, we talked about kind of a pro forma numbers, which I assume just kind of one plus one. Is there anything beyond that in any meaningful way that you think we can realize with the combined company?
Steven Gatoff: Hey, David. Yes, it's a good question. And there certainly to be some cost synergies right, at the base level of putting two functioning companies together. Dare I say, there are certain positions that you don't need to have, right. And so we'll work through that together in the most efficient way. But as Christy and CK both talked to the adjacency of these two businesses, and the synergy of the product, and value prop to customers, makes us much more of a revenue expansion and synergy story than it does put into massively overlapping things together, and you can rip a whole bunch of cost out. Like this is not really that movie. There's definitely some cost synergies and efficiencies to be extracted. But that's not the driver. It's more a driver of the revenue top line synergy.
David Kwan: Well, that makes sense. I guess last question for me. Just on the enterprise in the government, vertical, the growth has been kind of steady there. And there's a low double digit range. I know, COVID impacted some of the verticals like healthcare and retail and professional services. Could you see that growth getting up upwards into kind of the mid to high teens and even 20% at some point over the next couple of years? Or should we be kind of expecting kind of low double digit type growth rates?
Christy Wyatt: I can start that with talking a little bit about what's going on in that market. And then Steven, feel free to chime in. So we're in a very unusual period. I think we were seeing growth rates of 14%, 16% on enterprise a year ago. I think, as we talk about on each of these calls, we've seen a number of segments that flow down retail and a number of others that it's sort of one off hits here or there. But that hasn't dampened into our sort of view on what the long term outlook is. We've talked a little bit about some of the new product introductions and some of the new innovations we're working on, that are affecting that space, the investments we're making on net retention, as Steven announced some of the additional international markets that we've been hiring and standing up and sending people into. So I don't think our view on the on the post COVID world has gone down in any way, I think we still strongly believe that long term, the right place in the Rule of 40 for us is 2020. And that's independent of whatever we would do from an M&A perspective.
Steven Gatoff: Yes. And to add, that's a good question, David. Christy's good point is that the growth that we've seen and that we expect to have and that we invest in is around some of our enterprise customers as well. Obviously, we cover the gamut of enterprise, mid market and SB, small business customers. And we've seen some nice traction in the enterprise, as you said, overall, and by sector. And so at some point, we do expect some of the pressure that is pulling down some of the sectors in general and then maybe even offsetting some of the large growth sectors to abate so that we can start seeing lift in the overall portfolio.
David Kwan: Okay, great. Thank you.
Steven Gatoff: Thanks.
Operator: And the last question we have comes from a line of Thanos Moschopoulos from BMO Capital Markets.
Thanos Moschopoulos: Hey, guys, congrats on the quarter and on the deal. In terms of the license to SaaS transition, can you just clarify will existing NetMotion customers be required to move to a subscription models than the license model? And then just in terms of typically a 12 month contract term and what is the average look like?
Steven Gatoff: Sure. And we can tag team on this with CK for sure. But my learning, understanding and spending a bunch of time with their CFO, who's a great guy. As they approached the transition pre pandemic, it was really more of a work with customers constructively to move them over. And then as a lot of first responders, healthcare organizations, government organizations and large enterprise, we're dealing with a pandemic, the view was let's not force people over. So it's being done in a very thoughtful, collaborative way with customers. And I think, as I mentioned, the view is that the on-prem, no longer sold to new customers. And so it's really a story of how that gets migrated over the next year going plus going forward.
Christopher Kenessey: And just to add. As Steven highlighted, we've had to sell a lot of organic momentum, people moving from their traditional perpetual maintenance, perpetual licenses to subscription. And since momentum has been there, we've just been encouraging it. But in conjunction with the Absolute team we will look to see if we want to accelerate that or keep it as is. But either way, it's certainly heading in the right direction.
Thanos Moschopoulos: And in terms of terms are typically people going to use 12 month terms on their deals or what does that look like?
Christopher Kenessey: Yes. It is traditionally for one terms.
Thanos Moschopoulos: Okay. In terms of go-to-market, you mentioned that there's the high channel element. But what does the mix look like as far as channel versus direct within NetMotion?
Christopher Kenessey: So currently, today, Steven. I don't know if you want us to speak to the exact percentages, but it's -- we're heavily channel focused organization. It's one of the decisions I made five years when I joined the business to decide whether want to be channel organization or not. And so we've invested heavily in the channel. And I think it's one of the things that makes us unique. And it's one of the things that when Christy and I started speaking early on, I think that she got quite excited about. Because it’s not only do we have this kind of traditional value added resellers, like the CDW's of the world. We've got a really global channel, go-to-market around carriers as well. And so we've got really trusted channel partners like AT&T, like Verizon, like Rogers, Deutsche Telekom, and a variety of others in those markets. And so not only is that a great go to market for NetMotion as we were standalone, but we also look at kind of the broad platform that Absolute has, as well. We think that's where we'll be able to bring quite a bit of value to the table.
Thanos Moschopoulos: Okay. And then, finally from a vertical perspective, meaning, clearly a lower level of education exposure. But just otherwise, any key vertical differences to call out is a total used profit distributed across other verticals or any specific verticals just to dilate in terms of NetMotion's current mix?
Christopher Kenessey: Yes. So when it came to the verticals, first, I'd like to speak to kind of the vertical overlap and that's one of the things that what Christy and I talked about right away that. And Steven, that we thought was pretty exciting is one of our core markets is his first responders. And so that's a market that both organizations have a lot of strength, experience and then great customers in. And then the other was legal, which is one of our fastest growing markets. And one of the examples I referenced before with the wire that's on the international flight, trying to download that file. And so we think that's an area that we're both able to uniquely benefit each other. And then outside of that, we've got a lot of great customers in the airline industry, in logistics. So we feel that that's some additional to the value add that we can bring over. And as you mentioned, we haven't traditionally done a lot in the education space.
Thanos Moschopoulos: Great. Thanks.
Operator: At this current time, there are no other questions in queue.
Christy Wyatt: Alright. I want to thank everybody for spending a fair amount of time with us this afternoon. And we'll look forward to speaking with you all very soon.
Operator: This does conclude today's conference. You may now disconnect.
