Q3 2021 Absolute Software Corp Earnings Call
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Good afternoon, ladies and gentlemen, and thank you for standing by and welcome to the absolute software corporations third quarter fiscal 'twenty, One 2021 conference call.
Before beginning its four months absolutely electric among other things to see that certain portions of today's discussion may contain.
Forward looking statements that reflect current views with respect to future events and conditions.
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.
S.
Excuse me as at the date hereof, and absolute does not undertake any obligation to update.
Thank you for to revise any of the include forward looking statements whether as a result of new information future events for US was a set.
As may be required by applicable law.
Clickable security laws.
For more information on the assumptions risks and uncertainties relating to those these forward looking statements. Please refer to the appropriate section of the company's Q3 fiscal 2021 and DNA.
Well on the absolute website.
Softwares website and will be available on SEDAR and Edgar.
Hey, Kurt.
I'd also like to remind everyone. This conference call is being recorded today Tuesday may 11 at five P. M. Eastern time, I'd now like turn the conference over to Christopher <unk>, President and Chief Executive Officer.
Sir Please go ahead.
Thank you operator, good afternoon. Good afternoon, everyone and thank you for joining us for absolute for since Q3 fiscal 2021 conference call.
Joining me on the call today will be our CFO Steven from data.
Maybe this is for announcing for the quarter. We were very excited to announce that we've entered into definitive agreement to acquire that motion.
Provider of security solutions for what's going on.
And that work force.
A combination of absolute endpoint.
Net motion net workers.
And our collective data and intelligence capabilities absolute will create a first of its current solutions that will deliver always on connectivity.
Just visibility control.
So they vote for each of our strong Q3 results and the continued positive trends in that business.
Then I will review, the rationale and strategic fit for credit and that motion.
I'll be joined by net motion CEO, Christopher Tennessee, who will share with you a bit more about the company.
Then Steven will take us through the financial benefits of the transaction.
Q3 was another strong quarter for absolute reported record revenue and adjusted EBITDA for the third consecutive quarter.
We had a $2 9 million a day early in Q3, Mexico per quarter, but they are a 124 day off the record 19 per se.
Driven by an 18% increase in active devices.
We reported record revenue growth of 18% with continued strength from adjusted EBITDA margins and solid cash flow.
These consistently starting number for her to work for us.
Some of our ability to execute with strong demand for endpoint capabilities organizations across all industry growth.
Sure to adopt adapt for the new remote and hybrid working model.
Brokerage Q3 was driven by a series of new customer wins as well as expansions across our existing customers, notably across insurance health care and then factor in the industry.
Our investments in innovation continue to pay off for enabling our customers with solutions that provide intelligence and resilience for the application for running across the organization.
In Q2, we expanded web usage analytics for both enterprise and education customers.
Yeah.
Well listen deeper historical analytics and insights to usage patterns to make better informed decisions on the applications from their devices.
Since then the adoption of this capability is exceeding our expectations for 462% increase from Q3 of more than $2 5 million devices.
All market segments, including both enterprise and education.
We also added more mission critical applications to a growing application for assistance library, leveraging the power of absolute persistent something in connection to monitor the health reported from the two critical tests and applications on the device.
New titles include Fortinet for coin in.
For those device intelligence from Palo Alto networks global protect security platform to name a few.
As the only provider of application for system, we continue to see more customers adopting this critical capability, particularly to ensure endpoint management and BPM tools remain healthy and unbelievable across them.
This quarter, we call. It 20 per cent increase motivations of application persistence being used for team and look for.
42% increase from customers persisting Cisco A&P.
In terms of adding net scope in parallel for global perpetual for total.
From a 27% increase in reactivation, but net looking at 50% increase of activation focussed on the heels of a parallel for global protect.
We are excited for what we felt comfortable with engine, which monitoring alerts from a wide range of endpoint events, such as the IP address changes removal of device hardware.
From a security controls.
Customers' luggage this capability Tomorrow November one for suspicious cause ice activity for example.
Geraghty hadn't been can be a weighted on suspicious events, such as a kitchen being deactivated.
Like being removed device moving outside of the Geofence for me as someone who came from when it come from is that really for you.
He hadn't heard can then take remediation actions to absolute Reed switches.
We continue to see momentum in our growth partner channel program for the 20% increase in the number of elite and from your partners.
We were also honored to be acknowledged for this program and channel reseller News as 2021 partner program Guide.
Mr Distinguished partner program for leading technology companies.
<unk> also enjoyed a number of additional recognition one in particular with from candidates club email them for their commitment for workplace diversity.
It was recognized in the blood the middle of 2021 women need here that.
Annual editorial benchmarks it identifies best in class Executive champion diversity and corporate Canada.
In summary, it was another very strong quarter for us marked by continued execution and market momentum.
Our unique and differentiated capabilities are accelerating our customers' ability and their new work from any one strategy and share their devices data and applications and sit here and.
There wasn't a day or intend to value well now I'll turn the call over to Steven to take us through the Q3 financials in more detail.
Thanks, Christine good afternoon, everyone. We appreciate you joining us.
We're excited about both our Q3 results and the compelling addition to our platform of the net motion acquisition.
Terrific business and fit and when you 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 <unk> our.
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 develop 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 funded.
Performance in enterprise and government remains solid in Q3, where they are growing approximately 12% year over year consistent with last quarter. As we've noted during our last few calls there remains some lingering COVID-19 related headwinds in a few enterprise verticals, including health care Prof services and retail.
We continue to experience solid growth in financial services and government and we remain focused on accelerating our overall growth trajectory.
So far as our global presence, we continue to see strong demand where international air are comprised approximately 30% of our year over year growth. We also saw strong results in net dollar retention that continued to expand and came in at 110% in Q3 versus 101% from the prior year. This all.
<unk> and our strong top line result, as Kristie mentioned, the total revenue coming in at $37 million up 18% year over year.
Looking at spend and profitability total non <unk> operating expenses in Q3.
It was $19.2 billion up modestly from the prior fiscal Q2, as we invested in sales headcount and go to market activity as well as increased cost 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.
As you can see in our financial results for the past several quarters. We're excited about the powerful growth trajectory that one had been achieved significant growth in <unk> revenue and adjusted EBITDA.
We're continuing to invest in order to capitalize on multiple growth drivers, including channel and global expansion cross selling of the platform and analytics and an exciting pipeline of new products.
Shortly we also continue to be committed to driving profitable growth and so we focus on delivering revenue growth and healthy adjusted EBITDA margins.
With that let's turn to our financial outlook for our current.
End of year fiscal year ended June 30th 2021.
We expect the power of our SaaS model to drive solid results as we continue to invest in our business. We expect some increased spend over the prior Q3 and Q4 in two important areas sales and marketing head count and program spend in engineering, and new product and platform trajectory.
And so.
Considering all of this.
We are raising our financial outlook for the full year fiscal 2021, ending June 32021 as follows.
We're raising our revenue guidance and expect full year total revenue to be in the range of $119 million to $120 million. This equates to a full year of fiscal 2021 revenue growth of approximately 14% to 15 per cent.
We're raising expectations for adjusted EBITDA margin for fiscal 2021, and anticipate that to be in the range of 24% for 25% for.
We're also raising guidance for cash from operating activities margin should be in the range of 32% to 35 per cent and finally, we're maintaining our expectations for capital expenditures for the full fiscal year 2021 to be in the range of $3 million to $4 billion that completes our review of our Q3 earnings results and so I'll hand it.
Back over to Christie to dive into the net motion acquisition.
Thank you Steven the past 12 months have been transformative in so many ways.
For our industry.
One of them visible among the interest the impact on how companies work and how they work and how they secure their in the face of for mobility.
According to Gartner, 90% of businesses are preparing for employees to work remotely even once COVID-19 vaccines are widely available.
For the new hybrid work paradigm businesses continued imagining endpoint access and network security to support support for new work from anywhere else.
Another long standing effect of the past year is the need for greater operational agility.
If workers with some home on a moment's notice I T organization globally were tested and hope we've never seen before to mobilize the workforce at scale and with velocity.
Realized from one side of the building they lost much of the visibility and control. They previously had.
Organizations today realized that the world can change on a dime.
Foundation, other endpoint management strategy needs to be flexible and able to respond without compromising any other security posture all day.
You can experience, which brings me for the third market trend.
For so long as interest for so long as an industry, we focused on the detection and remediation.
Is that in layers and layers of technology on these devices for wanted to protect the data but has no debt protection is only effective.
Those controls from an installed volume and healthy we've talked many times about the dark and they want it and its effect from the security posture of being on the call.
Critical control go offline or devices no longer visible are able to connect the data and these are vulnerable.
For the past year, we've seen a new level of accountability for I T organization for not just simple security, but to ensure that it is working even in the face of adversity.
So it is against that backdrop that I would like to announce the acquisition.
That's what other kind of definitive agreement to acquire net motion will provider security solutions for the world's growing remote workforce under.
Under the terms of the agreement absolute will acquire all issued and outstanding shares privately held net motion for approximately 349 of them in cash.
We see this transaction is a natural adjacency for our business that will position us to lead in the new work from anywhere ore.
And to define a new standard of endpoint of zone that enable for hub is working well.
Importantly, this transaction creates compelling financial benefits for our shareholders.
Going forward the transaction is accretive to our revenue adjusted EBITDA and adjusted EBITDA margin.
This strengthens our commitment to the rule of 40, and our continued goal of delivering balanced growth and profitability.
Expect the transaction to comb from 46 weeks subject to anticipated regulatory approvals.
From a strategic point of view this transaction as the world pivotal moment for our company.
What we gain by the addition of net motion is really remarkable in how well it lines up with the future of that space.
I'm quite resilient to become critical to effective remote work.
And as we look out to the emergence of the work from one of our era, we see endpoint with Williams, playing an increasingly vital role in helping organizations deliver secure global secure and productive experiences.
We're going to go through a lot today, but what I really want to understand about this transaction is good for people.
Finally, net motion and adding debt with excess capability, it's a natural evolution of the endpoint with volume.
Meet the changing needs of our customers.
Second we are well positioned to create a unique offering from our high growth Bassi in D C and end markets. We're in.
Important resilience is vital for raising the bar and security without compromising productivity.
Third we are positioned to secure a highly relevant and differentiated positioning mobile is a question of mortgage of multi device world and for.
We are positioned to create a platform that delivers unmatched visibility for the remote work experience with data.
Book.
Together, we take two companies with really compelling and unique customer value that would tailor made for the exponential growth of the hybrid growth model.
Work to blend the best of endpoint resilience with connections.
The combined company has the potential to have a truly unique set of solutions that address for our customers need now and well into the future.
This combination is about combining <unk> put your endpoint.
Network access to ultimately create happier hybrid employee a more selective Iga department.
More secure organization.
Yeah.
I spoke earlier about the mobilization for the workforce from 2020 ml per minute shifts the debt that has occurred and how companies think about works today.
Prior to 2020 remote work was quite minute.
One study found that about 90% of employees rarely or never worked from home for organizations that net debt will not work with a small group with a defined connection to corporate assets from a limited set of devices.
I mean, if it was an inefficient use of extreme for the worker then so be it.
The author for physical space.
Also played a large role in the company's digital security strategy has so many end users were on campus and therefore are protected by the local network.
For now we all saw that completely behind us.
One study estimated that 96% of company, they're willing to offer flexible work options moving forward.
We wont work for rent for me separately managed security and compliance process for really the center of the working extended almost.
Almost as long term implications for how organizations are for security and productivity that are almost still just a margin, but one of the obvious outcomes is that what can happen anywhere on a broader number of devices, providing the book and connect.
Organizations today are racing to catch up on this new paradigm.
The near term imperative all from the tailwind that we've talked quite a book quite a bit about in this past year.
Organizations today are asking themselves how can I mobilize my entire workforce, how can I deliver a great experience how do I remediate issues in devices go dark how can I proactively insurance security regardless.
Good location.
This has led to a race for.
Point solutions for specific problems, but at the same time, we're seeing our customers starting to ask themselves bigger questions about what's coming next.
Recognition of <unk> revolutionary impact of the work for many of our era.
Like how do I secure corporate access day assets across the cloud on premise and in the data center with a hybrid multi device field force how do I heard me for charity and with now work from anywhere in the current without degrading the user experience.
And how can I improve and remote work experience, how can I get data and analytics.
What's really going on with those devices.
These forces of what brings us here today. These questions can be boiled down to two things how.
How do I missed for my employees have a resilient set of devices that I can trust and how do I make sure that they are consistently and securely connected to their networks.
What has also emerged as it so often for chairing the network connection comes at the expense for the sub optimized user experience.
Disconnection poorly performing applications.
And even losing the ability to connect for the enterprise completely leaving employee exposure to non productive.
We believe a zero trust security posture posture necessary for any faster evolution cannot be achieved with a net.
Can't Trust the data coming from one poem.
By connecting visibility control and self healing between the network and the endpoint you can significantly heightened security while simultaneously improving the experience from the zone.
<unk>.
In absolute is uniquely positioned with this acquisition for delivering unique value and helping customers make this transition and in doing so we can accelerate our strategy to become a highly relevant for you.
In this high growth market.
Importantly, William for network access play an integral role together to meet the needs of the work from anywhere.
You can see that this combination creates a significant amount of expanded opportunity for our combined company.
With net most of them, we expand our core total addressable market from the 68 billion endpoint security market.
111 billion combined endpoint security and network access margin.
You've talked about this before but this market consists of well identified business drivers that are contributing to our strong business momentum.
What I really want to underscore this position and gain in what we call the secure access market, which looks at the key components of Neil Trust in factories that we just talked about.
With that motion.
For you to highly compelling competitively advantaged offering in the marketplace, that's growing from 28% compound average growth rate.
That is why acquiring that doesn't make so much sense to us.
Can deliver broad benefits for our customers in a really critical part of the market.
Now in the second and I'll get into more detail about what our combined platform will have the opportunity to do together, but first I'd like to introduce Christopher Tennessee net motion CEO.
Who will take you through a bit more about net motion and the success and innovation that delivered to the market.
Thank you Christine.
I am extremely excited about the opportunity for combination presents.
Barton process Indemnifying, our next partner, we chapter of accelerated growth.
We reported that we found someone who share our vision for security and compliance and the work for any of our world.
Absolute really stood out from all moving some groups based on their myopic focus with our next generation solutions.
Better managed endpoint security.
All impacting the user experience.
It's been a pleasure working with you and the team have kidney.
And then on the score arguing that joining absolute.
That next chapter for net motion.
Let me tell you a little bit about our company.
Net margin software is a Seattle based organization with a 185 employees around the world.
Secure enterprise partners.
Optimizing network performance and most importantly.
User experiences.
Net motion.
Secure access platform that combines securities.
Visibility.
And policy management to provide for that most secure customer experiences.
Net motions.
This platform combines three key elements.
Zero Trust network access otherwise known as <unk>.
Experienced moderate.
And a highly optimized enterprise VPN, delivering uncompromising and secured network access.
Rigorous customer environments.
Our platform successfully supports.
1 million workers for 3000 organizations in Europe.
Particularly proud of our net promoter score of 91, which has led to one of the cash flow from February and the industry.
Additionally for.
For a five the largest book you're alive for our customers.
Q1 free up a lot.
Logistics providers and you can buy for example of all first responders across North America.
I'll take a moment to explain exactly how net motion works.
Net loss from allow for enterprise for awhile.
This critical enterprise resources, whether they are from Macquarie.
Comments.
Third party hosted applications by Snow Sports authority of 55.
Our platform not only provides the access.
<unk> optimized the network traffic.
More of a network of it anymore.
Users immediately.
Could you just bridge going about their daily tasks.
Network optimization.
Here are a few examples.
A large financial service provider deciding to standard global call center for each home when COVID-19 hit.
And almost immediately.
Any user experience and employee satisfaction.
The dropped calls and core for quality on your laptop and smartphones.
Our network optimization.
Can we improve the user experience and more importantly employee productivity.
Another example from other largest smartphone from the World recently pointed out and a senior partner would be able to access download content from your document management system, while on international flights.
Partner never do this before it's a great example of our ability to optimize the most core performing networks.
Finally based on our distributed architecture.
Net unprecedented visibility you can provide.
The network and more importantly, the user experience.
With a lot of ITG aims to better understand and just for your concerns.
Concerns you.
In terms of behavior.
And as the performance of critical IP assets.
Unique data as we can.
Correct.
Complementary to unique dataset for a few calls.
For the future potential margin combined dataset with Pandora.
In summary, our technology drives improved security.
Is your experience.
Liability and half from the.
Roy a modern edge networks.
Net motion is well positioned for growth from this work from anywhere.
First we bring compelling value for multiple buyers.
From the IP manager overcoming connectivity issues.
Greetings for connected solutions and enabling remote working.
For enterprise health infrastructure needs looking at adopting zero Trust solutions for more.
Love to get a quick win along the way with the next generation VPN actually improves the user experience.
All of this fall for giving you the journey.
We have a highly efficient channel model tied to the inside sales and corporate and enterprise sales force for continued partnerships with leading network providers in that motions for geographical markets.
The average price in the reseller community.
An extensive integration enhanced by our zone.
Identity and other technology alliances.
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.
Perfectly positioned to enable the EPS to SaaS new transmission.
I'll close by saying all of opinion version right.
Really excited to join the absolute team.
Our shared vision and complementary technology.
This is the perfect combination.
Now I'll hand, you back to Christy.
Thank you Christopher.
All of Us would absolutely they're thrilled to welcome the net merchant team for the absolute family.
So really they had a small delay in the system here.
I'd like to share a little bit more detail about how the addition of net medicine for the absolute family of products.
Truly unique offerings.
Evolution of modern Insulins isn't it.
Absolute as an endpoint centric security company and as the leader in endpoint zone tuition most.
Most importantly, you have.
The industry from the unbelievable defense platform bedded in over a half a day and debentures.
It organizations complete connectivity visibility and control with an ability to Tokyo and mission critical applications. So that they remain healthy donor intended.
For customers it firmly embedded connection enables us to capture data.
Data intelligence from the device ranging from its location and usage to talk status from security posture.
We also offer new endpoint remediation and control tools, such as reach to help configure and 19 endpoint security posture.
Where is it most importantly, we are able to deliver endpoint with volume.
Our connection that can self heal critical applications and enable the device to heal itself.
Think about it from a user standpoint, our solutions will focus on productivity.
We try to keep the employees device money securely and effectively to optimize the user experience.
One other things that did that most excited about when we were getting into amendment motion. That's how philosophically aligned that few companies are.
As we talk about visibility and control of devices and applications.
Smith from focus on visibility and control of your connection.
And as we think about self healing applications. They think about cell phone connections leveraging the unique traffic shaping that Pete.
They too are solving customer problems, but we're not working for prioritizing for.
Focus on intelligence controlling those items.
As you just heard they offer incredible data on network connectivity user experience from location along with real granular policy controls that can enable their truck boxes and a strict application of mud.
Like us they have a similar development capability in their network connection continuity.
Net mentioned Hilli fall for modern day access challenge and if we are solving for productivity and that most of them are solving for connectivity.
To keep the user it's all safely and consistently connected to the net worth to optimize the user experience.
Based on the momentum we discussed in this quarter's earnings that won't surprise anyone to see how both of US something companies are meeting the near term imperative for work from anywhere world and that we've seen that in other adults.
With this transaction, we position ourselves to deliver solutions that address many of the key customer pain points that we discussed earlier.
We had them for the new work from anywhere era. This transaction is about creating something 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.
The endpoints of always on the move always under attack and always changing we can simplify the complexity of this dynamic by extending all the work for doing an endpoint and connecting it to the network.
With net motion absolute will deliver the next generation of income.
For maximizing security with Uncompromised productivity.
So I have a little bit more into to help trucks and staffing in a second but I really want to underscore the potential scope of the solutions that we can collectively going to ban critical customer problems for.
Example, organizations will need to talk to visualize and analyze data about all aspects of their end users digital growth experience.
Together with more emotion absolute will be able to offer a unique value into the remote work experience for delivering deep insights into the device the applications and the network.
And look for more and better control tablet formula net with policy control the organization can significantly enhance the security posture improved user experience and enhance overall complaint.
As we've discussed for the factory transition is coming as organization catch up for the sudden work from anywhere evolution, but we recognize that well back to you for future. Most organizations will have to adapt a thoughtful multiyear process to move from the traditional VPN true.
For two salary position.
Isn't that motion will position itself for a rich suite of solutions to guide that transition all within one platform.
According to Gartner for 'twenty.
Two for at least 40 per cent of enterprises will have explicit strategies to adapt to.
To really understand how our combined products for delivering unique value into the rapidly growing <unk> market share in just a few more minutes from our differentiated approach.
The other test them for a few center around how you can establish trust with an endpoint, especially one that is on the move in excess of a mix of corporate assets.
In the cloud on premise or other data center.
For the standard Zero Trust model, which now enables access to corporate resources by integrating the user based on meeting certain policies and contracts requirement and.
In that context is typically some combination of location and identity.
I think it's an oversimplification to say them again point out for a solution that goes off line cannot facilitate access.
Therefore, the first step for US is really to make the became quite itself has always been self healing.
In a world, where an employee could be anywhere being able to simple too much for the network is critical.
By integrating application for assistance with net motion pinpoint assets.
We can ensure that gives you visibility to connect is not compromised.
Once connected maintaining that connection and ensuring performance EBIT, even as the employment dorm networks from location one.
The strong differentiation for the amortization of product.
This is exactly what that motion Dalton is one of the drivers behind their high customer NPS scores and net retention.
As I mentioned earlier their truck solutions also rely on contextual details or data about the NPL status for established trust.
Recently this context is somewhat limited to things like identity and location.
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 in context, we can contribute to that equation.
Nick datasets provided by both absolute and net motion details like device health security posture version of security solutions and many others.
Become factors, providing better context for establishing trust.
And if the security posture for device can be context losses.
And by leveraging application for system to ensure that application for installed an effective will mean that more users.
Greater security complaint will be able to simply can it get better security better user experience and.
Unless works for I T.
Putting it all together, let me give you a quick hypothetical situation, what I think can really bring home how compelling this offering could be.
Sunday night, and the employees' devices being updated with a number of patches pushed out for my T earlier in the week.
And as it so often does something that has happened in the patching process, which has impacted the antivirus software unless it corrected.
What's more because the patch processes unsuccessful the device for them to be encrypt the laptop more representing for high level of security book.
In this scenario.
Zero Trust network access with the one point you mentioned, both a laptop a compromise that can prevent access to corporate applications until the device has been successfully remediated.
And what's more there's application for assistance, we can actually with stores in there from security controls on the laptop automatically by repairing them installing the antiviral.
Which in protecting the data and restoring the visibility to connect safely.
This situation instead of having to bring the laptops for one office from apparently even to coordinate with I T at all.
Pointing self healing and we're going into the event and the users back online.
Well I'm going 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 net merchant bookings momentum through leveraging absolute.
With large existing enterprise and government customer base and leveraging our channel.
Additionally, we expect to bolster absolute growth profiles for selling.
Most of them channel been approaching that machines installed base of iOS and Android devices.
And we've talked about today, we see compelling long term product synergies between our two companies from 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 net motions brought in complementary channel partnership extends our market reach significantly.
Current brings relationships with major laptop and tablet OEM will net net motion has strong relationships with mobile carriers and resellers worldwide. These two channels will be powerful partnerships from the ongoing evolution of securing the work from anywhere Arab we book.
For a complementary land and expand strategy with direct sales teams, but local channels to enhance retention and support improved levels.
And you heard from Crystal for earlier, but I really want to underscore how excited we are to have motion to enjoin the absolute.
The potential of this combination is going to be unlocked through the collaboration of these teams.
Couldn't be more encouraged with how well our team for cooperated even just in getting to this moment today.
I'm going to turn it over to feed him in a moment, but I want to wrap it up by state by where we started with our four key themes for today.
I hope you can see what we gain and the addition of the net net merchant acquisition and how it's really remarkable in how well it lined up for the future of other states.
First acquiring that motion and out of network access capabilities is critical to achieving $9 1 billion strategy based on the exciting new dynamics of the work from anywhere.
Second we are positioned to accelerate into delivering endpoint and building solutions that can create incredibly compelling force in zero Trust solutions for these high growth markets.
Third we are position to approach a highly relevant and differentiated position in mobile.
For customers manage a multi device 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 started down this journey into the work from anywhere.
This is a company that will be perfectly suited to meet the incredible challenges and opportunities in front of our customers.
And this combination is about resilient secure endpoints and there's room for your network access.
To ultimately create a happier hybrid employee and what's that cause I T Department and a more secure organization.
For the thought I'd like to hand, it back over to Susan.
Thanks Christy.
Let's let's get right into the financial impact of acquiring net motion, we benefit immediately by creating a scaled business with 175 million dollar per our book of business and revenue is Chris you talked about the acquisition of net motion positions us and new compelling and high growth markets for further support.
Our revenue growth trajectory. The acquisition also provides us with meaningful revenue diversity, it helps de risk and drive our long term growth profile.
Our already solid profitability gets further bolstered by the attractive profitability profile with net motion, we expect that to flow through to cash generation that will enable flexibility in our capital allocation differ to create stockholder value.
Finally, the acquisition fundamentally strengthened our rule of 40 execution as we will be a stronger more diversified business with improved revenue scale and growth and we'll always be delivering net revenue growth from a strong foundation for profitability.
We wanted to provide some visibility to net motions financial profile over the last 12 months ended March 31, 2021 that motion generated approximately $60 million in revenue and ended the period with an <unk> base of approximately $55 million, adding.
Adding to this nice revenue profile, they delivered strong profitability of 30% adjusted EBITDA margin 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 ifr S or purchase accounting adjustments.
Two of the key drivers of net motions compelling financial profile or the company's strong net promoter scores from customers.
And it's 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 want to note that net motion is in the process of two important expansions of their business that will further support the scalability of their model and it also has an impact on revenue accounting for.
The first evolution is that the company has begun moving the customer base from a historical software license and maintenance model to a recurring subscription model.
Did that motion 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 out to only selling the subscription models from new customers.
The second transition naturally follows the dynamic of selling subscription offerings and that's one of the strong core engineering and operational skill sets with absolute brings to the story that is that net motion is beginning to transition its product delivery to the cloud from a historically on prem installation.
Absolute obviously has a lot of prowess with the cloud business and our management team is particularly experienced in these migrations and so we look forward to driving these transitions from growth initiatives together with the net motion 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 involve some level of upfront revenue recognition of the subscription commitment under the relatively new 606 guidelines for.
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 a 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 reduced reliance on the education space. While it has certainly been a terrific driver of growth. This past year going forward. We are pleased to diversify our growth in revenue portfolio and more enterprise offerings and importantly, the pro forma business is also expected to deliver significantly higher levels of adjusted <unk>.
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 Ifr S 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.
Yeah.
What we did also wanted to provide you with some color on what we see as the financial impact of the acquisition on a go forward basis from a macro perspective.
Dynamic that reflects our enthusiasm for the asset and what we believe we're uniquely able to do together with net motion in a nutshell. We're excited about the net motion business and our bringing our unique firmware embedded resiliency to it.
Following the close of the transaction, we expect this trend of the acquisition to be accretive on a forward looking basis <unk> growth revenue growth and adjusted EBITDA margin.
Again more on this more detail 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 net motion and through which net motion will become a wholly owned U S subsidiary of absolute.
The transaction is subject to standard closing adjustments on 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 has a six year tenor theres, a coupon of LIBOR plus 600 basis points. Its callable at 101 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 the approximately four five times leverage at closing and enables us to delever going forward with our target to obtain a net debt to adjusted EBITDA ratio, that's below two times and a two year timeframe.
On the topic of return of capital our ongoing cash dividend payments.
And 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 deleveraging as we move forward.
All to the benefit of stockholder equity value.
As we've talked about today, we're very excited about the net motion 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 resilient strategy and meet customer needs and the new work from anywhere era.
Absolute software benefits meaningfully in bolstering our market and growth opportunity the diversity of our revenue and our overall scale fall on a foundation of profitability we.
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.
Benefited from long term durable tailwind, but as a result.
With the addition of net motion will be able to compete and additional emerging high growth market segments like C TNA and sassy 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.
At this time is free to have any questions. She expressed star one on your telephone keypad for any questions again star one for any questions Orange crushed. Our first question comes from the line of Adam Tindle from Raymond James.
Okay. Thanks, good afternoon, congrats from 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 SaaS vendors like a net scope for example, where there are some learnings and those partnerships that got you more competent to.
Make this a big move here.
No. It's a great question and thank you. So so I think this past year has really been unprecedented so for.
Highly overused word if you remember at the very beginning of the pandemic one of the first areas, where we felt organizations struggle with keeping their employees connected and we made application for assistance for VPN available for free to our customers.
I do want to be really clear day.
No backing away from the partnerships, we already have with multiple from others. We're still very much committed to working with those lenders under the under the application for assistance program.
What we did see was really.
Following.
Is that getting to endpoint in volume for really going to make devices self healing and deliver great security with great user experience.
You can't ignore the networks piece, what we saw more often than not what really was the networks that was affecting not just for ease of experience, but whether other device could connect to actually heal or would be able to work to remediate what's going wrong. 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 you lean in towards the margin.
Got it and.
And maybe just as a follow up you talked about how it strengthens the commitment to a rule of 40 company I'm wondering if you could maybe outline a little bit more detail on the planned investments in synergy expectations Post acquisition, you talked about around $50 million of trailing 12 month EBITDA, but with.
With those expectations would you expect that to grow at a rate of AOR higher or lower based on the planned investments for the combined entity.
Yeah, Hey, it's Stephen good question Indeed.
As Christi, you talked about in our review of this right was that it's a really compelling acquisition for us in so many ways, particularly on the synergy side.
Mostly on the revenue would go to market synergy side.
And so we've been excited to do that we're digging into it with CK and adjusted the CFO and <unk> and will definitely.
Divide more visibility and covered.
Rather too that when we issue our guidance for the full year and then obviously it goes without saying after we close the transaction.
On the asset but we.
We are pretty bullish on the combination and the ability to get.
Get value from our own.
Cross selling of products non U.
Right as well as the combination of the two two capabilities into new products and so it's a multi vector support to the synergy growth overtime.
Understood. Thank you very much.
Our next question comes from the line of Mike Walkley from Canaccord Genuity.
Great.
Thanks for taking my questions. Congrats on the strong results and the acquisition certainly a transformative just just trying to get a better feel for net in motion.
Do they see as the most direct competitors and are they more.
Zero Trust or are they also providing SaaS fee features such as secure web gateways cloud firewall casualty some of those type offerings also.
Oh I can't do that.
From a net motion perspective.
Cognizant competitors coupons different products that we're taking to market.
<unk> side of things.
Often run into.
Palo Alto.
<unk> on the EPS side of things well for many times for PDC.
Yes.
Snapped or a pulse secure and.
And as you start looking at.
The SaaS really news, which is the convergence of net.
At work Union security.
There is a bunch of different elements to it.
Between the VPN <unk> transmission.
Our features.
From a from an end.
<unk> firewall and endpoints secure web Gateway perspective, and then also kind of are in debt mix current margin perspective.
We've got some pretty compelling value add for for the journey to Safi.
So as you can see ourselves.
And we speak to it from a color from perspective.
At launch.
Okay, great that's.
That's very helpful. Thank you.
And just a follow up question for me I guess.
For Stephen just just given net motions you had $55 million.
With the transition from perpetual to SaaS is it.
In the very early innings for this will be a headwind for year over year reported revenue growth as they go through that transition or are they pretty far along in that process already.
Yeah, Hey, Mike Good question.
So there's two migrations right there.
Migration to cloud and the migration of their on Prem customers to subscription.
And the short answer is we see this as accretive to our revenue growth and <unk> growth on a go forward basis that we'll get into next year.
And that's a function of the growth profile as well as the accounting that we talked about.
Okay.
Yeah.
Just I just wanted to clarify when I say I think Christy answering the earlier question, but this doesn't impact at all any of your persistent partnerships.
I'll be fine with that.
Given that no simple like we compete with some of your persistent partners.
No I think.
I think I think that from our perspective, the core resilience very similar to the kind of some of the future overlap. We see for example, other endpoint management tuition.
Commitment to resiliency to create self healing capabilities no matter what happens.
So if you are using one of our partner solutions and you want to leverage our platform to make that solution self healing as long, we probably wouldn't have the same level of data and visibility that we would have on an integrated solution, but we know that are looking for very early phase within this market and so we're going to see a lot of diversity in that really is true.
Part of kind of being foundational within an ecosystem. So again similar to what we see what our approach is great, let's make that UBM persistent debt.
You know figure out how we can do better integration with their vendors.
In to other partners in this space would be exactly the same I don't think we ever approach a customer assuming debt that we're going to sort of own the complete stack and that's why being easy to integrate into the enterprise, it's gotta be incredibly critical.
Okay, Yeah that makes a lot of sense for my question attached to them, maybe just just going back to the strong quarter.
I guess I'll, just the education market very strong, 35% ADR growth and realized with 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.
COVID-19 or per school from home are.
Just been a great growth driver I'm, just wondering how we should think about that going forward.
It's a great question and I said, you know we continue to see a lot of strength in that market I don't think we've seen that change in the <unk>.
Last quarter clearly.
As demonstrated by our results.
You had said that at some point.
That means educational institutions get to the other side of their digital transformation, we would expect to see from leveling off but that's from where we sit today, we continue to see stable and building pipeline in my opinion.
Great.
That's encouraging to hear and congrats on everything I'll pass the line.
Thank you.
And our next question comes from Scott Berg from Needham.
Yeah.
Hi, everyone. Congrats on a good quarter and interesting acquisition here I guess, let's start with the acquisition really quick.
Christy.
We'll call. It the end point access market is highly competitive I know I think it's Chris the company's CEO talked about some other competitors as they compete with out there.
You heard us to look at net motion, what's the kind of the one.
Feature functionality component to their platform that you were most impressed with it says hey, this is super differentiated relative to that competitive end market.
I think.
There's two pieces. Unfortunately, there's not one I think for first thing is the.
The unique IP, they have and the ability to say to the traffic that really impacts the user experience. So in the past year, we bought them at home stay home. If they can call you have a bunch of applications running you know the ability to actually.
Optimize the traffic that goes to the applications you need at that moment.
For when some of them are in the cloud and some of them are behind the firewall and there are a variety of different places, it's not an easy thing to do and honestly, that's where a lot of wood.
What I would call legacy VPN fruition offline.
And I think the second part of technical connected part of that is really the resilience piece.
There are some unique IP around how you move between networks and even if you're not moving your home depending on what's going on in your home for other people are jumping on and off the network you could be changing network connection for network could crunch out for a moment.
Moving to survive that and actually keep a seamless.
And seamless security experience I think was incredibly compelling and so.
It would be a mistake to think of those sales that's kind of going backwards into the VPN market I think we're really going into those facing forward and say 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 resilient cause about creating controls that don't fail.
And we can make it appropriate for from an application and device perspective, and they bring a lot to the table with creating that seamless from the network.
Got it that's helpful and then Steven as a follow up if you look at your net revenue retention in the quarter, obviously fantastic at 110, especially relative to where the company has said in the last couple of three or four years can you help us understand where the improvements are coming from is it more better retention driving.
Net number off maybe you're having better upsell or cross sell.
Success with some of those customers lately any maybe color.
Color there would be helpful.
Sure sure Hey, Scott Good question.
The other 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 for economic bottle of land and expand continues to be fairly robust this quarter last quarter now in 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 net new logos and upselling customers versus renewing our customer base and we are just getting more time under our belt.
And more experience with our teams and covering our customers. So that we are seeing steady.
A steady increase in core renewal rates, a little by little and that's what continues to bump up the total net dollar retention sequentially quarter after quarter.
Great. Thanks for taking my questions.
Thanks Scott.
And our next question Crystal line of David Kwan from TD Securities.
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 the acquisition whether it be from a platform perspective, or just the company's overall employees et cetera.
I did a true I'm happy to.
So accordingly, we're.
Only in the integration exploration conversation. So I just have to call me up with that I think we will.
Currently not directly connected to one another as businesses, but.
But I think our.
Philosophy as we go into this is that they're doing a really great job with that business from for at least from a selling and marketing perspective.
We're going to continue to do a great job with EBITDA and so we will use the first couple of quarters to really focus on driving performance in the market, while our backend product teams are working hard on some of these early products projects that I talked to I talked a little bit about earlier. So so you wouldn't expect to see for.
For the Big integration on day, one we're very lucky that we have a team that has.
I've been through a fair number of these and understand though a lot of other 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 them.
Okay.
And then can you maybe talk about.
Cost synergies like is there is it are you expecting much in terms of cost savings you talked about kind of a pro forma.
Non ferrous what should I say I'm, just kind of like one plus one is there anything beyond that in any meaningful way that you think we could realize with the combined company.
Hey, David.
Yes, it's a good question and there certainly to be some cost synergies right at the base level. According to.
Functioning companies together.
Dare I say there are certain positions that you don't need to us right and so we'll work through that together in the most efficient way.
But as Christie and CK, Paul talk to the adjacency of these two businesses.
And the.
Synergy of the product and the value prop to customers. It makes us much much more of their revenue expansion and synergy still.
<unk> that does putting to massively overlapping things together and you could read a whole bunch of cost out like this is 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.
Well that makes sense I guess last question for me.
Just on the enterprise and the government.
Vertical.
The growth that has been kind of steady there and at a low double digit range I know COVID-19 impacted some of the verticals like healthcare and retail and professional services.
Could you.
That growth getting up upwards into kind of mid to high teens or even 20% of it at some point over the next couple of years or should we be kind of expecting kind of a low double digit type growth rates.
I can I can start that Wolfgang just talking a little bit about what's going on the market and then Stephen feel free to chime in.
So I you know we're in a very unusual period I think we've all seen growth rate for <unk>.
<unk>, 16% from enterprise.
I think as we talk about on each of these calls we've seen in other segments that flow.
LOE down retail and remember for others, but.
Sort of one off from here or there.
But that hasn't Tampa.
Tampa does sort of view on what the the long term outlook, we've talked a little bit about some other new product introductions and from the new innovations. We're working on that are affecting net space. The investments, we're making on net retention as Stephen announced some of the additional international markets that we've been.
<unk> been hiring and standard weapon for many people in T cell side, you know I don't think our view on me.
The post COVID-19 World has gone down in any way I think we still strongly believe that long term the right place from a rule of 44 for 2020, and that's independent of whatever we would do.
From an M&A perspective.
Yeah and to add that.
Because David Christie's good point is.
That the growth that we've seen and that we expect to have in that we invest in is around some of our enterprise customers as well obviously, we cover the gamut of enterprise mid market SMB small business customers.
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 other sectors in general and that may even offsetting from other large growth sectors.
To abate so that we can start seeing lift in the overall portfolio.
Okay, great. Thank you.
Thanks.
And our last question we have comes from the line of Dennis Ross Chapin.
Excuse me from being.
Capital markets.
Hey, guys like other congrats on the quarter and on the deal.
In terms of the license to SaaS transition can you just clarify will existing net motion customers be required to move to a subscription model and a license model.
And then just in terms of the two.
Terms is typically it's a 12 month contract for them or what is the average look like.
Sure we can tag team on this with TK for sure, but my learning and understanding and spending a bunch of time with their CFO who's a great Guy.
As they approach the transition pre pandemic.
Was really more of a work with customers constructively to move them over and then there's a lot of for.
First responders health care organizations government organizations for large enterprise, we're dealing with a pandemic COVID-19 was lets not force people over so its being done in a very thoughtful.
Collaborative way with customers and I think as I mentioned the view is that the.
On Prem is no longer sold to new customers and so it's really a story of how that gets migrated over the next.
Youre going plus going forward.
Yes, just jumped at it.
Steve highlighted you've had.
A lot of organic momentum people moving from there for traditional perpetual maintenance perpetual licenses to subscription and this momentum has been there just been encouraging.
In conjunction with the absolute.
We will look to see you want to accelerate that or keep bad news, but either way, it's certainly in the right direction.
And then in terms of terms are typically people are going to 12 month terms on new deals or what does that look like.
Yes.
Traditionally called non firms.
Okay.
In terms of.
Other markets you mentioned debt.
Hi channel element, but what does the mix look like as far as channel versus direct within net motion.
So for.
Currently today.
Stephen I don't know if you arent from peak to be exact percentage.
Yes.
Italy channel focused organization.
For some time in five years.
I want to join the business inside of an already channel organization or not.
The average in the channel and for doing.
That makes it unique and it's one of margin.
One other thing Kristine I started speaking early on I think she got quite excited about because it's not only do we have the traditional value added resellers like for CDW model we've got.
Really the global channel go to market around carriers as well and so we've got you interrupted channel partners like AT&T.
Like Verizon.
Rogers Archie.
For telecom and in a variety of other than those markets and so not only great for middle market for net Moshe and what's going on.
When you also look at NAV.
Rod.
From an absolute haven't well, we think that we'll be able to bring incredible value to the channel.
Okay, and then finally from a vertical perspective, I mean, clearly a lower level of education exposure, but just otherwise any key vertical differences to call out.
Is it pretty profit should be across other verticals or any other specific.
Verticals to highlight in terms of net motions current mix.
Yes.
The vertical Chris I'd like to see the kind of the vertical overlapping.
And that's where the things that was scheduled to Christie and I talked about by the way that day.
Right.
Free trading is.
One of our core market for.
First responders and so that's the market that both organizations for a whole lot of strength and experience and great customers, then and there.
The other was legal which is one of our fastest growing market for one example.
Before with <unk>.
National flow.
Turning to download a file.
So EBITDA.
There were book be able to retailers.
Can you tell us and then.
We've got a lot of great customers in the airline industry.
Thanks.
So we feel that that's got some additional value we can bring over.
As you mentioned, we have traditionally done a lot in the education space.
Okay.
Thanks for that one.
Yeah.
And at this current time there no other questions in queue.
I know you don't 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.
This does conclude this does conclude today's conference you may now disconnect speakers. Please hold the line.