Q1 2021 Absolute Software Corp Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the absolute software Corporation first quarter results Conference call.
At this time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone please be advised that todays conference is being recorded.
Before beginning its formal remarks absolute would like to remind listeners that certain portions of today's discussion may contain forward looking statements.
It reflects the current views in respect to the future events.
Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these forward looking statements.
Any forward looking statements contained in today's conference call are made.
As the date hereof, and absolute does not undertake any obligation to update publicly or to revise any of these include forward looking statements.
Whether as result of the Reformation future events or otherwise, except as may be required by applicable security laws.
For more information on the company's risk and uncertainties relating to these forward looking statements. Please refer to the appropriate section of its quarterly M. In the end of D.A. <unk> quarterly financial statements.
Which are available on absolute website or SEDAR.
I like to remind everyone.
At this conference call is being recorded today Monday November night at five o'clock PM Eastern time.
I'd now like to turn the call over to Christie Wyatt Chief Executive Officer. Please go ahead.
Good afternoon, everyone and thank you for joining us for actually Q1 fiscal 2021 conference call.
Joining me on this call today as leveraged as our vice President of Finance and interim Chief Financial Officer.
Before I begin I want to thank Lee for the tremendous amount of support he has offered in the past few months as you know, we recently announced that Stephen data will be joining absolute as a CFO starting tomorrow well.
We're very excited for his arrival and for his experience, which tend to be less public markets in several high growth businesses, including methods other pages duty anyway.
Stephen is a welcome addition to the absolute team as we embark on her next chapter.
We'll be working out for you then as he comes in and then we'll be moving on to join the executive team up and exciting vocal start up we will be available to us for your ongoing support and a seamless transition through the end of March.
We wish Lee continued success and thank him for his long tenure at the absolute.
Let me also touch briefly on our U.S. a recent U.S. listing on NASDAQ in the 69 million equity issuance that we completed.
Over recent years, we have seen growing investment and significant interest from U.S. sure Holden.
Our objective in pursuing the cross listing was twofold increase liquidity for the U.S. investors, who make up a sizable portion of our shareholder Register and an enhanced profile in coverage, which should result in greater visibility of the absolutes Rolling information security ecosystem over time.
With our successful transaction, we believe we have accomplished both of these objectives.
On today's call I'll briefly review, our Q1 results, which are consistent with the preliminary figures, we announced on October 26.
Well then focus my comments on the trends that have developed in our business and how we believe absolute is positioned for continued success in the rapidly evolving endpoint security market.
Q1 was another strong quarter for absolute.
Steady focus on accelerating growth, while maintaining healthy cash flows continued to deliver improved business performance.
Q1 revenue of 28.5 million was up 11% compared to the prior year period.
We added 3.4 million a day, our our Q1 and exited the quarter with a total here are of 111.7 million.
A record 13% year over year.
Growth in air our this quarter was driven by demand from both new and existing customers across the enterprise and government and education sectors.
Adjusted EBITDA in Q1 was 8.1 million or 29% of revenue EBITDA margin was above our full year target due to continued disciplined cost management and some delays in hiring.
Cash flow from operations was 14.7 million was extremely strong representing a 97% increase from Q1 fiscal 2020.
Strong fourth quarter EBITDA, our billings growth as well as an increase in longer term contracts, primarily in education contributed to the strong level of cash generation.
We exited Q1 with 58.2 million of cash and short term investments with no debt, including.
Including the proceeds from our recent financing absolute now has over 120 million of cash to support future growth initiatives.
Through the quarter, we continued to see significant increased activations, but the number of active devices going from 9.4 million at the end of Q4 to 10.6 million at the end of Q1.
Additionally, we added a number of new customers notable among them being CNBC Petsmart, Lionsgate Entertainment Cypress Fairbanks Independent School district, but.
The third largest school district in Texas just to name a few.
In April we initially made available to cope with 19 related office to existing customers both free of charge until the end of August.
Application persistence for they'd be tens as always absolute reach a library of automated workflows.
[laughter] deadline approached we continue to see new customers relying on these capabilities, while also managing budget constraints.
In response, we announced that our COVID-19 offers would remain in effect until the end of October and in parallel for the first time, we also announced.
Licensing per application persistent and that's.
Operator.
Please stand by.
And you're right everyone I have.
All right everyone I apologize I have no idea, how we became disconnected from the audio line.
[noise] hopefully this is not redundant, but oh started again at a in April. We initially made available to COVID-19 related offered to our existing customers both free of charge until the end of August Apple.
Application persistent for the V.P. hands as well as absolute reach a library of automated workflows.
As that deadline approached we continued to see customers relying on these capabilities, while also managing budget constraints.
In response, we announced that our COVID-19 offers would remain in effect until the end of October.
In parallel for the first time, we also offered separate licensing for application for sisters, absolutely each module.
These are limited time offers and they when customers with access to these capabilities.
Which were previously only available with a top tier resilience addition.
In the quarter. We also continued our successful efforts with our intelligence offerings, leveraging our unique dataset to share actionable insights with our customer.
The part of these developments, we published our second annual education endpoint trends report the influence of which underscore the device data security complexities.
On teacher told device held to maturity and usage in remote and hybrid learning environments.
This was also a strong part of a quarter for partners. There's a number of apart and focused investments came to market.
In September we announced the new absolute partner program on multi tier reseller partner program designed to increase revenue opportunities across the company's global network of channel partners.
Resellers distributors managed service providers and systems integrators.
We also saw several new markets successes with our OEM partners, including strong online promotion and new product bundles with Lenovo.
Strong growth in emerging markets, specifically, Latin America education, with Hewlett Packard, and we launched blueprint for success program with Bell designed to build pipeline opportunities across K through 12 and higher education.
Program, we will look to scale across all of our partners.
In our enterprise and government business, we've established a multiyear track record of double digit growth continue to focus on further accelerating this growth.
Well the near term macro net economic environment still uncertain, we've seen small pockets of weakness across some enterprise sectors, such as retail and professional services.
We believe we are managing this dynamic well and are positioned to take advantage of the need that organizations have to stay connected into their service to service their entire endpoint to state.
Overall, we're seeing accelerated demand as businesses, what turns or offices in schools and begin to reopen campuses and we believe these trends will continue to be positive for absolute.
Education is a sector has structurally changed in a way that is aligned with the investments we've been making in this area.
Currently we have enjoyed a short term benefit from customers needing to stand up distance and hybrid learning initiatives for students teachers and administrators.
However, our momentum in the education sector slightly predated dependent mek and we have now had three consecutive growth quarters, reversing a multi year trend.
We will continue to focus on driving stability and further growth in this segment as we believe that education settles into a new hybrid learning model post covet.
COVID-19 has caused a massive disruption to the world economy and created a backdrop of uncertainty for several quarters.
Well no organization is completely immune from this we believe we've been able to manage the inpex well and we've also seen a unique set of tailwinds from which our business benefited in the second half of fiscal 20 and into fiscal 21.
Well it is too soon to understand the long term effects of coded on enterprise computing endpoint resilience is emerging as a critical capability.
Our industry is redefining modern endpoint computing.
Being loaded interest in leveraging our unique persistence technology, and our resilience and intelligence capabilities we.
We enable customers to stay connected sell fuel critical applications and ensure the visibility and control of their endpoint to state no matter, where those devices maybe.
With a massive installed base, leading edge product platform.
And with an enhanced balance sheet, we remain confident that we will be able to continue to grow and pursue market opportunities and nimble and disciplined way across a large and growing market opportunity.
Our unique partnerships and our pure SaaS platform have enabled us to capitalize on opportunities of scale the business efficiently.
Accelerating our revenue growth as proof points.
As already mentioned, we continue to see healthy and strong demand across all segments of our business given macro economic factors and seasonal patterns across multiple verticals, we remain cautiously optimistic in our outlook.
That said, we have seen a strong start towards the school year instead, he pipeline coverage and so as a result, we are adjusting our annual it's like 21 guidance as Lee will outline in his prepared remarks.
Our focus in the coming quarters will be on continuing to accelerate top line growth, while maintaining a balanced profitability.
We have previously discussed some of our ongoing investments to help achieve this growth, including our continued focus on operational efficiency and expanded focused on international markets and global strategic accounts broadening.
Broadening our channel and partner program.
And new product offerings that leverage our rich data platform and secure channel embedded and over half a billion devices.
With that I'll now turn the call over to Lee.
Thanks, Christy and good afternoon, everyone.
Q1 was another strong quarter for absolute highlighted by the continued rebound in the education vertical sustained double digit they are girls and the combined enterprise and government goals and continued healthy EBITDA margins.
At September Thirtyth totaled $111.7 million, which represents record growth of 13% over the prior year, an increase of $3.4 million or 3% in the first quarter.
The growth we experienced in the first quarter is the second highest quarterly girls. We have experienced since we began measuring the business in this way trailing only our proceeding records or school 2024th quarter.
We saw continued strength in both the upsell and expansion of existing customers as well as initial sales to new customers, particularly in the education vertical.
In Q1, not a our retention from existing customers was 102% up from 100% in the first quarter of the prior year.
In addition, we added $1.8 million or they are from new customers up from $1.1 million in the prior year, but down from $3.5 million in the fourth quarter.
The sequential decrease in error from new customers was due primarily to seasonal factors.
First quarter of our fiscal year has historically been the softest for enterprise and government verticals.
In the first quarter, we continued to experience increased demand for our solutions and services, resulting in part from the shift to remote work and distance learning.
Speaking generally the macroeconomic disruption being experienced globally is you have to have any significant negative impact broadly across our business.
However, the potential future impact on our customers remains unknown.
The combined enterprise and government portion of total <unk> increased 12% year over year with these customer segments, representing 67% of total air Our September 30.
We achieved error from new customers I'm zero point $9 million in these segments compared to $2.5 million in the fourth quarter and $1.0 million in the first quarter of fiscal 2020.
The overall trends, we are seeing in enterprise and government remain positive with I.G. and security professionals increasingly under selectively having to manage and secure devices on and off the corporate networks.
However, we have also seen some headwinds in particular sectors, such as professional services and retail.
The underground government portion of our total are remains well diversified, which we believe will help us withstand any particular sector or seasonal weaknesses.
Yeah, Jason vertical which represents 33% of total air are at September 30 was up 14% year over year and increased 7% from the fourth quarter.
You acceleration we saw in this market in the fourth quarter continued throughout the summer months.
As Christie mentioned, while we have enjoyed a short term benefit from educational organizations that have had to quit we stand up just in some hybrid learning initiatives.
We believe that our targeted product and other investments in this market will also drive further growth in this segment.
In the first quarter, we achieved errors from new customers of $1.0 million in education compared to $1.1 million in the fourth quarter and zero point $2 million in the first quarter fiscal 2020.
The $2.4 million sequential increase in total air or in the first quarter represents only the fourth quarter in which we have experienced a sequential increase in education in the past four fiscal years.
Turning to our geographical performance International total air was up 34% year over year and 13% from June 30.
Our performance in the quarter was bolstered by continued large customer expansion and the Latin American theater.
Year over year growth in international total air or $4.2 million is a record for us and it's the first time it has been greater than $3 million since we began measuring total error.
In North America. The increase in total we are our was also strong at 10% year over year also a company record and accounted for 85% just where we are at June thirtyth.
Revenue in Q1 fiscal 2021 was $28.5 million up 11% compared to Q1 fiscal 2020, which represents the highest year over year increase in our commercial recurring revenue since we began reporting that revenue will not separately in fiscal 2017.
Our revenue growth is primarily driven by trailing year over year growth in total they are which was also 11% as we entered the quarter at June 30.
Adjusted EBITDA, which is defined in our press release, and M. unit was $8.1 million or 29% of revenue in the first quarter.
Continued strength in EBITDA is the result of consistent revenue and gross margin growth helped.
Coupled with the impact of smaller increases in our expense base as compared to the prior year.
Our gross margins remained strong at 89% in the first quarter compared to 87% in the prior year.
Compared with the first quarter fiscal 2020, our expense base reflected the impact of increased headcount expenses throughout the business, partially offset by lower travel and entertainment expenses.
In addition, the first quarter in the prior year included a $700000 positive benefit to our R&D expenses, resulting from an adjustment to our MSR and EDI and tax credits, which occurred upon the successful assessment of historical claims.
Total headcount at September 30 was 520 compared to 470 at the end of Q1 fiscal 2020 and 499 at June Thirtyth 2020.
Now turning to cash flow the first quarter saw continuation of the strong cash generation from operating activities, we have been experiencing the past few quarters.
We generated record cash from operations of $14.7 million up 97% from $7.5 million in the prior year.
Our operating cash flows were positively impacted in the quarter, we increased billings in the fourth quarter of fiscal 2020. In addition to the impact of improved operating results and working capital changes, which will fluctuate based on collection and payment cycles.
Our average prepaid contract term in the first quarter was 19 months in line with our trailing four quarter average.
Finally, I'd like to shift to our updated financial expectations for fiscal 2021.
Please be reminded that the following expectations constitute forward looking information and financial under qualified in their entirety by the cautionary statements contained in today's press release and on DNA.
We are updating our expectations for fiscal 2021 as follows.
We are narrowing our expectations for revenue and now expected to be between 116 and $118 million, representing 11% to 13% annual growth.
From 112, and $118 million or 70% to 13% annual growth previously.
The narrowing of our expected range of revenue results in a similar narrowing of our expectations for adjusted EBITDA, which is now expected to be 21% to 24% of revenue compared to 20% to 24% of revenue previously.
In addition, we are similarly, narrowing the range of our expectations for cash from operating activities to 25% to 34% of revenue previously 22% to 34% of revenue.
Finally, we continue to expect capital expenditures to be between 3.0 and $4.0 million.
This concludes our prepared remarks for today.
Operator, please open up the call for questions.
As a reminder to ask a question. Please press star one on your telephone.
Thats Star one to ask a question.
We'll pause for a moment to compile the <unk> roster.
And your first question comes from Mike Walkley.
Canaccord.
<unk>. Please go ahead.
Great. Thanks for taking my question I Hope Everybodys healthy on the call and congratulations on the strong quarter execution and the raised guidance.
Christy I thought I'd start with you just on the education segment.
Now that we're well into the school year, you do believe school boards have deployed cares ex funds and have what they need for remote learning or do you think the positive trends continue I guess I'm trying to get as just determine if education might return to kind of low single digit declines on post coded.
<unk> or some of the Tailwinds, you're talking about on the call can continue longer term.
I'd like to take question. So so I think what we believe is what we see is that the the pipeline in education continues.
So I don't believe that we're all the way through.
Education institutions kind of preparing themselves for this new new reality, a new normal and then the other thing I would say that a lot of our conversations with those customers are really long term focused so you shouldn't view these sales sort of a large splurge and hardware and then we revert back to the.
The old way I think that there was a lot of learnings and a lot of infrastructure that is getting deployed and into these environment, that's going to have a longstanding effect.
Where and when we see that start to settle out you know I do think that we will see it normalize at some point in time.
Oh, but I don't think we've seen that moment, yet and from what we can see in the pipeline I think that this continues to be a lot of demand.
Great. Thanks, a follow up question just congratulations on the NASDAQ listing could you just kind of update us on the thoughts for the timing of the process and with the increased cap I think you said over 120 million in cash now just just what are some of the priorities in terms of fostering growth of head count additions.
Hey, just how do you plan to use the capital to help the growth profile of the company. Thank you.
No problem I think that's a great question so.
So I think as we've touched on before we don't have an immediate.
Target or or identifiable investment I don't think nothing has really shifted it or in our annual operating plan or our priorities or the way we're executing the business as we said.
And when we started going down this path, we really had two objectives you know really one was.
Being more available and accessible.
Across the listener katri with shareholders.
Men and some connected coverage as a part of that for too to help folks understand who absolutism, what we're doing.
And I think the second is really just to position ourselves to be able to respond to opportunities as we see them. We do see a lot of demand in endpoint resilience, we see it emerging as a category in a set of capabilities and there may be some interesting ways to accelerate our plans, but we have no. There's no sort of immediate project sitting right in front of us as we speak today.
[music].
Great. Thanks last question for me and I'll pass on just just let's see the record a our our growth at 13%.
Are there any any areas just concerning you on the guidance. So you know tighten it up to the high end, but there any.
Areas. It sounds like you have a very good pipeline, creating but are there any areas of caution built into that guidance just given some uncertainty still for the pandemic. Thanks.
[noise] not not as I sit here today I think that we in our comments we touched on across the enterprise, we do see pockets of our vertical markets that have been affected more than others and we talked about specifically this quarter retail and professional services I think last quarter, we talked about from <unk>.
Yes within health care, although we we didnt see that in Q1.
So I think this is a place where the diversity of our customer base really served us well I think we are going to continue to see some of the the.
They have been flow as customers are managing budgets to get through this fiscal year, but I think overall, we believe the trend is positive.
We tend to view those these last couple of months really more as a focusing event for our capabilities that we don't think that you know what.
Customers. They again are setting up a sort of long term plans for how they're going to manage their endpoint the states.
In some cases, they may be taking shorter term contracts of moving those licenses around.
But overall, we see the long term commitments continue to be strong.
Okay. That's helpful. Thank you and thanks for taking my questions.
Thank you.
Your next question comes from Dana.
This would be in the capital markets.
Hi, Good afternoon, a couple of congrats from the U.S. listing and read and financing.
Christy could you maybe dig into.
The strength in the international market sounds like Latin American Education was keep part of that's anything else you'd call out and maybe more.
More specifically within Latin America, you mentioned HP partnership or has that been the key driver or are there I think your point you in that region.
I don't know if.
So we've talked quite a bit about international expansion as we've come into the fiscal year I think this past quarter. We did see a fair amount of activity in a number of international theaters. I think you know we commented specifically on on education within Latin America, I think we're continuing to see strong demand in that region and I would say.
In education, more broadly, but even within the enterprise space I think we.
I continue to see a nice trajectory a nice momentum within EMEA as well and we've talked quite a bit about as we come into this fiscal year.
EMEA growth in international expansion is one of our focus areas as we go forward.
Okay.
And you briefly touched on it but can you expand a bit further on health care. So you mentioned that this quarter held up better than them and we can sell last quarter since one of the market like right now.
[noise], Yeah health care actually has done quite well this past quarter and we continue to see strong demand across our health care customers, both new and existing.
Last quarter, we commented a little bit we had seen some softening of our.
Fixed sectors within healthcare, so things like hospitals are areas, where they were really sort of managing budget impact of the pandemic as they went through I don't think we saw a lot of that in fact as you know this was a pretty good quarter for health care and we're continuing to see strong demand as we go through I think it's just some of the seasonality in both.
You know the different vertical markets adjusting to to the pandemic and working their way through it.
But as we sit here today, I think health care looks like it's going in a good direction.
Great and then finally can you extend a little bit on your hiring plans I.
I think I heard you say, you're a little bit behind so in what areas are you behind where you would hope to be and as you look at your guidance. It implies a pretty significant opex ramp through through the balance of the year, what we've targeted areas and nothing for that.
[noise]. So we touched on some of the targeted areas in the earlier comments that we talked about international expansion strategic accounts.
We've talked about some of the investment we're making in the product some of the new product introductions were working on for later in the year round data and intelligence we.
Weve touched on some of our move to the cloud and the work we're embarking with.
Our onshore said ramping and reaching more broadly with or without a public cloud initiative <unk>.
In terms of the previous quarter I don't think there was a specific area, where I think it's it's.
Relatively old to say not unusual within the first quarter of the fiscal year I think folks head.
Pretty ambitious goals for for where they were bringing in head count to watch some of the new initiatives and.
And I think I don't I don't actually attributed it very much to the pandemic I don't think hiring for US has slowed too much as a result of dependent we're still doing a pretty good job of bringing in new talent and and onboarding folks and ramping them up but I haven't seen sales. We've we've filled we're almost a complete capacity. So we sold almost all are selling head.
Which positions us well for the second half of the year.
Chris I think one other one other item just to note, yes, sorry to chime in there so.
One other item to note is just on the G and H side, we do have some increased costs with the U.S. listing. So those are reflected in the backdrop severe.
Well.
Charles.
[noise], sorry would you be able to quantify those.
Yeah, there in the you know.
Mid 100, thousands of dollars range per quarter, it's primarily.
Primarily.
Insurance expenses.
[noise] Britain.
[noise] [noise] once again to ask a question. Please press star one on your telephone.
Our next question comes from David Kwan.
Hi, John.
Good afternoon.
I was wondering if you could talk about I guess when looking at the number of devices that you activate into over the last quarter. It looks like it was up quite sharply by.
By my numbers, roughly 15% quarter over quarter, which is much stronger than what we've seen I think in a few years now, especially when you look the same and the net adds over the entire year and you look at that relative to say, where the revenues growth is in the area growth is so is it fair to say that you're seeing.
A lot more increased interest in L. Eight and site wide licenses and or maybe there was a lot of sales towards the backend of the of the of the quarter.
[noise] Hi, David It's a great question. So so one of the things we track very closely is.
License overhang. So you know I think where are we do pretty well in sort of ensuring that what is being filled all this pretty closely connected to what is being deployed so I think that increasingly seen over the past couple of quarters in activations growing as a function of both it's a function of.
The accelerating there are but it's also a customers are using more broadly the the license of the licenses that they already have so we've talked in previous calls about them mobilizing devices and getting more devices out into the hands of users and so some of that is connected to the new licenses and some of that is connected to licenses.
They already have I I don't think that there's that there was any significant change in enterprise licensing activity this past quarter. So.
So I don't think we're you know we don't have a lot of what I'd call. All you can eat kind of plan out there that have untapped activations connected to them. So I think it's more closely connected to the growth in air or that you've been seeing from the business.
Okay. That's helpful. Christie and then I guess when you look at your PC OEM partners, just seeing that some of the commentary coming out of them as it relates to I guess on the shoulders and they've had an inch challenges they've had getting devices into customers hands.
Consistent with what you're hearing from them and ultimately be center customers like are there a lot of customers are still having trouble trying to get a hold of devices.
Particularly I guess, maybe on the education side.
[noise] I think it varies a lot by by vendor and it varies a lot by region. So so I think that what we've seen on our own forecast and our pipeline is demand continues to be.
Strong and a lot of that is in conjunction with her OEM partners, but remember a lot of our sales are not directly connected to new hardware, So where do we see that strong correlation isn't a lot of net new logo attach.
But a lot of our up sell and expansion happens with existing devices that are already within the enterprise.
Okay, and then have you seen I guess with I think the past typically like these upfront sales you know right. How do you account for a much smaller portion of the overall opportunity have you seen that pace accelerate thinking kind of talked about that last quarter, but any color you provide to be great.
Sorry, Lee you made some comments about the new way or or or in this quarter and maybe you want to respond to them.
I'm sorry, David can you repeat the question.
Oh, Yes, I guess it when you look at you know.
In the past and there's a lot of the upfront sales were relatively small proportion of the total opportunity with a customer and I think in last quarter, you kind of talked about it in particular, given the pen down like that you've kind of seen some maybe larger upfront deployments and customers in general does kind of accelerating their plans as opposed to waiting for that.
I knew all that I guess multiyear refresh cycle that they have on their devices I just curious to get an update on commentary on that.
Right, Yes, sorry, I misinterpreted the first time you asked it yes, the last quarter, we did comment on some of the significant new new customers that we have achieved and there was no similar commentary none none of the new customers. We acquired this quarter were more than approximately half a million dollars. So there is still.
Got a really solid new customer acquisition activity, but nothing individually significant so to your point, we would expect to see that provide a larger expansion opportunity looking forward.
That's helpful. I guess, what just the last question maybe you can update on the service source partnership I know that one of the things just to help free up a lot of your sales reps to go after new business. So I'm kind of curious how that's ramping up and how that how you might have seen some benefit this quarter.
[noise]. So I think it's just touched on before Q4 fiscal 20 was the first quarter, we started to move some of our renewal.
Okay into service source I think Q1 was really was a slightly larger part of that I think we're seeing the program.
Come on line I think it's I think they're doing well I think we as we've talked about.
You know the the better or the greater impact for US is really getting that time back for direct sellers to really go so focused on filling expansion and I think we are seeing that in the results.
That's great. Thanks.
Thanks, David.
And there are no further questions at this time I will now turn the call back over to Christi White.
All right well. Thank you all for joining us and asked for being patient through a lot of our audio glitch. There. Thanks for taking the time and we will look forward to speaking with all of you on our next quarterly call.
Thank you for joining today's conference call you may now disconnect.
[noise].