Q4 2021 Absolute Software Corp Earnings Call

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Good afternoon, everyone and thank you for standing by welcome to absolute Software's fiscal in 2021 fourth quarter and annual financial results Conference call before beginning its formal remarks absolute software would like to remind listeners that certain portions of today's discussion may contain.

Forward looking statements that reflect current views with respect to future events and conditions any such statements are subject to assumptions risks and uncertainties that could cause actual results to differ materially from those projected in these forward looking statements any forward looking statements contained in today's conference.

Call are made as of today's date and absolute software undertakes no obligation to update or revise publicly any of the included forward looking statements whether as a result of new information future events or otherwise, except as may be required by applicable securities laws.

For more information on the assumptions risks and uncertainties relating to these forward looking statements. Please refer to the appropriate section of the company's 2021 M. DNA, which is now available on absolute Software's web site and will also be available on SEDAR and Edgar.

I'd also like to remind everyone that this call is being recorded today Tuesday August 10th at 5 P. M. Eastern time, I would now like to turn the conference over to Kristy White, President and Chief Executive Officer. Please go ahead.

Thank you operator.

Good afternoon, everyone and thank you for joining us today for absolute Software's fiscal Q4, and full year fiscal 2021 conference call. Joining me on this call is our Chief Financial Officer Stephen data.

On today's call I will start by reviewing what a remarkable year for absolute.

What was a remarkable year for absolute as shown in our full year results and then focus on our roadmap to long term accelerated growth with our endpoint resilience strategy.

After another robust quarter, we ended the year with strong momentum.

In Q4, we finished with $123 million of IRR and revenue was $32 million.

With continued.

With continued strength in adjusted EBITDA margins and cash flow.

As we look at the full year 2021 was a transformational year for absolute.

Year over year, we achieved record AOR growth of nearly 14% and record revenue growth of 15% for the year, we realized $121 million in total revenue.

Above the top end of our original outlook in fact, I'm very pleased to say that in 2021, we met or exceeded our key objectives, we delivered results better than our outlook on every metrics, most notably achieving our goal of 40 commitment for the full year and in every quarter in fiscal year 2021 reflected in our continued discipline and balancing the growth companies growth.

Profitability.

As a result of our strong execution focus we were able to effectively capitalize on our momentum to make strategic moves that position absolute to accelerate long term growth.

This included raising capital and increasing visibility with U S shareholders through the listing of our shares on NASDAQ as well as the acquisition of net motion, enabling us to step into complementary high growth markets with a product offering perfectly suited for the modern work and learn from anywhere era.

In parallel we've continued our investment in the team and talented absolute with new additions to the senior leadership team, including Matt Schoenfeld as Chief revenue Officer, Edward Choyce, Senior Vice President of global alliances focusing on persistence as a service and of course, Stephen get us as our Chief Financial Officer, who joined US mid year.

Let me share a few thoughts on some of the core dynamics contributing to our momentum through the year and carrying into this year.

While we benefited from certain trends during the pandemic. This was a year, where our commitment to focused execution delivered results.

We have talked at length over the past year about our category and our leadership in endpoint resilience and our passion for helping our customers realize tremendous value through the expanded use of our products across their environments. You can really see the success of this strategy. When you look at the improvement in net <unk> through the year, where we are seeing strong results from both new net new logos.

As well as new additions and expansions.

We have seen increased adoption across all business segments as well as increased usage of our key capabilities. As an example, we saw an 84% increase in the usage of application for assistance.

70% increase in the usage of geolocation, and a 370% increase from the utilization of web usage across enterprise and education customers.

In particular regulated industries like healthcare and financial services stand out because of the risk landscape. In these segments. We often see these groups as early adopters with accelerated deployments and higher utilization of our more advanced features such as application for assistance and absolute reach.

As a result, we are also seeing significantly higher net promoter scores from these groups.

Health care for example continues to adapt and utilize application persistence with nearly 65% of all of our health care customers having adopted it.

In financial services, nearly 60% of our FSA customers used application for assistance.

We also saw these FSA customers leverage our rich portfolio of scripts nearly 3 times as often as our average customer.

Yeah.

Fiscal year 'twenty, 1 was a very successful year in our partner ecosystem, our OEM partnerships more programs integrations and initiatives than ever before are resulting in steady demand and continued growth with new customers as well as expansion within our existing share customer base.

Also within fiscal year 'twenty, 1 we launched our new channel partner program to extend and broaden our customer reach through resellers.

This program was acknowledged with a 5 star rating and channel Reseller News as 2021 partner program guide and fueled our momentum to grow our reseller partner base by 69%, adding 36 partners during the year and delivering significant positive impact to our pipeline as well as increasing our MSP business by more than 36%.

And finally, we continue to expand our application for assistance ecosystem, adding several new titles throughout the year, including net scope cloud access security broker and Nextgen secure web gateway Lenovo device intelligence and Florida client VPN.

This updated versions of he said endpoint antivirus and Avanti security controls.

We have also published our inaugural corporate social responsibility report as we continue our commitment to building a future for the next generation.

As we look back at the year I am very proud of the absolute team for the amazing results. They produced we are capitalizing on the potential of our technology and quickly demonstrating value to our customers and our partners.

Now let me go a little deeper into what we saw in the fourth quarter.

Overall, the business delivered solid growth even in the face of several macroeconomic trends, including the Covid global pandemic and the global chip shortage that is directly affecting our OEM partners in the PC industry.

Analysts are calling for slower year over year growth for Pcs and while we have seen some effect on expansion licenses sold with new PC sales, we continue to see strong IRR growth across segments.

Enterprise and government as the segment continues to represent 2 thirds of our era and demonstrate steady growth.

Our large enterprise customer segment in particular showed strength in up sales and renewals over several quarters custom.

Customers are choosing absolute across both new and existing systems because of our alignment with the core long term shifts in how they serve and secure their organizations in the face of remote and hybrid work environments.

The education segment also continued to demonstrate strong demand, though slightly slowing in velocity. This past quarter. As a result of some of the same supply chain constraints from delays in Covid funding and some amount of post pandemic normalization, we continue to see strong demand and expect continued growth here.

Our expectation is that the continued focus on mobility and remote work and learning we will continue to drive steady growth from the business as our customers navigate both the effects of the Covid pandemic as well as the dynamics shaping the PC industry.

Our investments and accomplishments in fiscal 2021 position absolute very well to be able to offer customers a unique solution to manage the modern workforce as we move into fiscal 2022.

Fundamental to any organization success in the post pandemic world will be the continued requirement to be able to connect manage secure and control enterprise devices at scale, regardless of where those devices maybe.

Absolute has always had the unique differentiation of being able to manage and control. These devices enabled by the hardware itself, while lowering the complexity and cost of administration.

With the acquisition of net motion, we now have the ability to reliably connected devices and a highly persistent and reliable way without negatively affecting the user experience.

The secure access market is expected to grow at 36% CAGR over 5 years and together, we will work to meet the demands of this new work from anywhere era and create a differentiated position focused on zero Trust and safety security postures.

Gartner recently reported net interest in Zero Trust network access solutions is up 230% between 2019 and 2020.

Our experience to date, certainly affirms that the keen interest to learn more and consider how to affect this transition within the organization.

I'm very encouraged by how these initial reactions highlight the potential of the 2 companies have together and that we have a clear roadmap to deliver on that potential.

We closed the net motion transaction on July 1st and are on track with our integration efforts I am pleased to say, we're moving quickly on all fronts with all back office teams, having already been organizationally integrated.

These teams are now moving towards integration and rationalization of shared systems and processes net.

Sean filled and the team are hard at work developing our combined go to market approach and engineering teams are engaged in the planning and development work required to deliver new value to integration as we move through this process thoughtfully you should expect to see more updates through the year on our progress.

As we embark on fiscal 2022, we are working to capitalize on the market opportunity before us and accelerate our growth trajectory, we are well positioned to deliver a differentiated solution to the industry as our customers manage and multi device world and require high visibility and resiliency and remote work and education environments.

We are well organized to be able to execute on our plan and you should expect the company to invest and focus on growth with continued balance.

With that I'll now turn the call over to Steven.

Thanks, Christy good afternoon, everyone. We appreciate you joining us fiscal 2021 was a transformational year for absolute software, where we saw record <unk> and revenue growth accelerate year over year. Despite some challenging times through the pandemic. We've been incredibly busy these past few months with a net motion acquisition and we've made significant progress integrating the companies.

Including our central back office teams to support our product and go to market efforts across the now expanded platform and portfolio I'll talk about this more in a few minutes, but overall, we'd like to cover 3 topics with you know first talk through our Q4 and fiscal 2021 financial results second update you on the closing of a net motion acquisition and provide some color.

Around the dynamics and growth profile of that business and third go through our financial outlook for fiscal 2022, which just started last month.

Let's start out with the highlights of fiscal year 2021 that we just closed this past June 30th and then bridge that to Q4 results total revenue for fiscal 2021 came in at approximately $121 million above the high end of our guidance range of $119 million to $120 million and up 15, 4% for the year.

Year, a significant acceleration over the 6% growth in fiscal 2020. The performance was driven by the strength of our recurring revenue subscription model and strong growth that we saw in IRR through the year total IRR ended at a record $123.4 million at June 32021 up 14% year over.

The year also exceeding the 10, 6% growth in IRR that we saw at the previous year in fiscal 2020.

Fiscal 2021, adjusted EBITDA came in at $31.9 million or 26, 4% of revenue that was also above our guidance range of 24% to 25% and showed a strong and fairly consistent margin level with the prior year.

The over performance is reflective of several factors from higher incremental revenue on strong bookings in fiscal 2021 to our disciplined operational expense management through the year as well of course from the impact of the pandemic.

Looking at the underlying bookings strength through the year and so far as performance.

Performance by vertical education, <unk> ended the fiscal year at $41.4 million up 21% from the prior year.

Overall was a strong year through fiscal 2021 for education with the core demand being driven as you know by the remote access needs of school districts and their digital transformation strategies that were accelerated with the onset of Covid.

Importantly, we continue to see solid levels of activity in the space at school boards now grapple with the complexity of managing their greatly expanding endpoint populations and are tending to operate more and more like enterprises managing their info SEC and large scale device management programs will talk to this dynamic a bit more when we focus on Q4 in a moment.

Enterprise and government <unk> ended fiscal 2021 at $82 million up about 11% year over year, a fairly consistent growth trajectory through the year.

Strong customer segments, such as financial services showed nice upticks in growth, but were somewhat muted by headwinds in other verticals, such as healthcare retail and travel and leisure, which as you know were hit hard by the pandemic.

Nonetheless, we saw consistent growth in enterprise and government through the year and in light of the investments that we're making in both product and go to market, we expect accelerating growth as we move into fiscal 2022.

It's been great working with our new CRO, Matthew Schoenfeld, and I'm bullish on all the great changes that he is driving and our go to market efforts from sales management systems to additional selling capabilities to customer engagement methodology to compensation plans and array of targeted initiatives aimed at driving sales productivity and bookings growth.

Focusing now on the last quarter of fiscal 2021 for the fourth quarter ended June 32021 revenue came in at $31.8 million up 17% from the prior year and up 3.7% from the prior quarter again reflective of the strong <unk> growth this past year.

While education IRR grew really well through the year and ended fiscal 2021 up almost 21%. It was relatively flat sequentially on a dollar basis as a result of 2 factors first many of our education customers saw delays in receiving devices because of the global shortage of semiconductors and the impact on the supply chain.

And second we heard from some customers that while U S. Federal funding for schools was strongly supported in the by the administration. It didn't make its way necessarily down to some states and districts with enough time to support a more robust harvest season purchasing.

It was this relatively lower education <unk> growth of 21% that impacted our net dollar retention for the fourth quarter unfavorably by about 400 basis points coming in at 106% down modestly from Q3, but still up from the 104% in fiscal 2020.

As I said earlier business activity levels in education remains solid and we believe educations digital transformation will continue for some time, where we see a structural shift in demand that's higher than it was pre pandemic that said as we continue the process of getting back to normal we do expect to see a trajectory in education to more sustainable.

Long term growth levels that are off the highs of the previous few quarters, 30, and 35% IRR growth.

Looking at enterprise there are while the year over year growth rate remained fairly consistent on a percentage basis on a dollar growth basis, the $3.2 million sequential increase in enterprise <unk>. In Q4 was the largest dollar increase in <unk> in over a year and despite the COVID-19 headwinds as.

As we've discussed our enterprise and.

And government sector is central to our growth and has been showing good activity levels. Accordingly, we're looking to continue our investments in this space to capitalize on our unique endpoint position and drive growth through the coming fiscal year as Christie discussed.

Finishing out the Q4 results the rest of the P&L came in strong with sequential improvements in operating leverage operating income generation and an adjusted EBITDA margin in excess of 25%.

With that let's move to our second topic and talk about the close of the net motion acquisition and provide some color on the business and upcoming historical financial statements filing and the dynamics around historical growth.

As you know, we're very excited about the value prop and acquisition of debt motion is a terrific fit and business and we're pleased to be adding into the platform as we talked about at the Mei transaction announcement, the acquisition positions us and the compelling new and high growth SaaS ANZ TNA markets to further support our long term growth trajectory at the same time the acquisition Alt.

<unk> provides us with meaningful revenue diversity that helps de risk and drive our long term growth profile.

As we disclosed the transaction was a $340 million all cash acquisition through which net motion became a wholly owned subsidiary of absolute software. We financed the acquisition through a $275 million term loan from benefit Street partners and $65 million in cash from our balance sheet.

We financed the acquisition and set out our capital structure strategy that we believe offers 3 important benefits to the company and therefore to stockholders.

1 the financing structure provided us the ability to stay competitive in the transaction process and ultimately be successful too.

To this structure sets out our cost of capital that is sustainable for the company to carry over the long term if needed. So theres no unnatural pressure of having to go for some unattractive follow on financing in the short term.

And 3 the term loan structure provides the company with flexibility with baskets in terms that allow us to optimize our capital structure and deleverage as we move forward.

All 3 we believe to the benefit of stockholder value.

Importantly, we continue to believe that the strong profitability profile of the combined business supports the approximately 4.5 times leverage at closing and enables us to de lever going forward.

With our target to obtain a net debt to adjusted EBITDA ratio, that's below 2 times and a 2 year timeframe.

As you saw this past month, and the quarterly announcements our cash dividend payments remain in place.

Before we get into some of the business dynamics and financial profile, we want to reiterate that we are providing information and insights on the net motion business today in order to provide you with a benchmark and to get a feel for the business as we just closed the acquisition on July 1 and are launching into our fiscal 2022 year.

The Nexgen VPN and <unk> SaaS offerings are being integrated into our product portfolio and are now part of the overall absolute platform as 1 single unit. The operations are not run as a separate business or segment.

Because the net motion acquisition is a meaningful addition to our company and financial profile, we will be filing a business acquisition report or bar filing with the Canadian regulators on SEDAR later this quarter.

Among other info the bar will contain the audited financial statements of net motion for calendar 2019, and 2020 when it was a standalone company and it will include Rs pro forma financial statements of the combined companies for our fiscal year 2021 that just ended on June 32021.

The <unk> purchase price accounting and financial statement work is underway to produce these financials and is progressing well as you would expect there will be the normal purchase accounting adjustments, including an anticipated write down of deferred revenue and the conversion of net motions U S. GAAP financial statements to our Canadian <unk> financials.

While it is not yet completed we did want to provide some color on what we see as key takeaways from the coming filing in order to provide the necessary context to understand their historical revenue growth and the accounting rules that have influenced it and of course to get a better feel for the business today.

1 of the main things that is visible in the historical financials is that net motion reported very strong revenue growth in calendar year 2020 that approached 30%.

This outsized growth rate was a direct function of the revenue accounting rules around customer migrations from on Prem perpetual licenses to on Prem subscriptions.

With large numbers of migration is occurring in the first quarter of calendar 2020.

The key message to call out is that we do not expect those revenue growth levels to continue going forward as we don't expect that level of large concentrated migrations as the company returns to a more steady state customer conversion trajectory and growth rate.

As we discussed on the May call net motion is in the process of 2 important expansions of their business that will further support the scalability of their products and that also has an impact on the revenue accounting and resulting revenue growth rates. The first evolution is this migration of its customer base from our historical perpetual software.

License and maintenance model to a recurring subscription arrangements.

When an existing customer from net motion software license customer signs an agreement to move to a subscription arrangement. The accounting treatment for this is governed under GAAP by ASC 606, we're roughly 50% of the total contract value of the new subscription arrangement is recorded upfront.

As software license revenue in the P&L in the period in which the agreement assigned.

The remaining 50% of the value of the contract is taken ratably to subscription revenue over the life of the agreement.

They now only sell the subscription model to new customers as of June 32021.

Net motion had roughly half of its revenue base under subscription agreements.

Given the ongoing nature of the pandemic and our sensitivity to supporting customers and moving thoughtfully ahead with them as we look into fiscal 2022, while we're bullish on the migrations and the value prop to customers. We don't expect that level of concentrated migrations and resulting outsized revenue growth from the accounting treatment.

As we saw historically in the net motion business on a more normalized basis. We believe net motions revenue growth rate is more similar to absolute annual growth rate. This past year as we stated when we announced the acquisition in May to.

To finish out the earlier point the second transition that the net motion team began to drive is transitioning its product delivery to the cloud from a historically on prem installation.

In this case transitioning a customer from a legacy on prem maintenance arrangement or even from an on prem subscription arrangement to a cloud SaaS service is not fraught with the same ASC 606 upfront revenue accounting treatment and results in essentially the same ratable revenue effect.

The last point to make on the net motion acquisition is that as Christi, you talked about the integration is going well and that speaks not only about the dedication of absolute employees, but the terrific group of people were welcoming from net motion.

From my standpoint, we worked hard together the month of June and at closing successfully launched new sales comp plans that incentivize our product cross selling we're continuing to work hard and have already integrated the core business support organizations in accounting finance and HR with multiple resources, focusing on our systems and ERP.

<unk> integration and expect that to go live early in calendar 2022, we look forward of course to reporting on our progress in the coming quarters.

With that let's turn to our financial outlook for the year ahead. As you know we began our new fiscal year 2022 on July 1 that just passed the same day that we closed the network the net motion acquisition we.

We have confidence in the long term trends in our business and our ability to capitalize on both our unique capabilities and position in the market and the demand is continuing to show signs of growth.

Our firmware embedded value prop now all the more enhanced with our Nextgen VPN and Z TNA offerings, we expect our SaaS model to drive solid revenue results from our growing <unk> base as we continue to invest in our business in fiscal 2022.

We anticipate a fairly steady gross margin profile through fiscal 'twenty to 'twenty 2 consistent with the overall margin for fiscal 2021 and.

And we see investments and 2 consistent areas in fiscal 2022 sales and marketing and products in development.

And so far as a percentage of revenue we expect some increased investment in sales and marketing in the first half of the fiscal year as we drive our new products into the market.

We're also planning for increased investments as a percentage of revenue in the second half of the fiscal year in R&D to further drive our platform innovation and product differentiation.

With this view towards driving organic growth in tracking our revenue trajectory from period to period, we're focused on providing visibility to investors in line with how we run the company and with the metrics that we look at to accomplish this we're providing guidance for revenue on an adjusted basis.

This means that we'll be presenting fiscal 2022 guidance that does not include the yet to be completed M&A purchase price accounting adjustments that write down deferred revenue that we believe add complexity to the underlying economics and impairs the comparability of revenue from period to period. This.

Consistent with how we planned our fiscal 2022 internally and it aligns us with stockholder interest as this is also the basis for how management will be compensated.

And so with that context, we're pleased to share our outlook for the longer view trajectory of the business and provide guidance for the full year fiscal 2022, ending June 32022 as follows.

We're setting out initial full year adjusted revenue guidance to be in the range of $203 million to $207 million. This.

This equates to an implied full year fiscal 2022, adjusted revenue growth rate of approximately 11% to 13%.

And we're setting out.

Initial guidance for full year adjusted EBITDA margin for fiscal 2022 calculated on adjusted revenue to be in the range of 18% to 20%.

In order to further help you model this out the math of our initial adjusted revenue growth rate guidance for fiscal 2022 is based on pro forma fiscal 2021 combined company adjusted revenue of approximately $182 million.

Note that this calculation and assumption for fiscal 2021 pro forma revenue of the combined companies is based on the adjusted combined company revenue, which does not include any adjustments for purchase accounting or GAAP to <unk> conversions.

1 last topic that we wanted to note as.

As we indicated a couple of quarters ago, when we introduced our quarterly earnings deck and the financial metric sheet. We continue to look to drive transparency in the business and provides investors with high quality information in a low friction way.

Another 1 of these initiatives that we're implementing involves how we report stock based compensation expense in our financial statements.

Previously the company had disclosed SBC altogether in 1 separate line item on the face of the income statement.

As Youll see in the reporting of the Q4 financial statements stock based compensation expense is now reflected in their respective functional line items in which they occur meaning cost of goods sales and marketing R&D and G&A, which is consistent with the presentation of our SaaS peers comparative periods for fiscal year 2020 have been reclassify.

To conform to this presentation and present comparable info.

It's important to note that you still have the same detailed SBC info by functional line item in the footnotes and M. DNA. This is just a change in how SPC as presented on the face of the P&L in order to be more comparable to the SaaS community. We're continuing to look at our reporting practices and disclosures were there.

View to driving further transparency simplifying our reporting and continuing to be consistent with our SaaS company peers. We look forward to keeping you apprised of our efforts in this area each quarter.

With that we appreciate your time and support and we're glad to open the call for your questions operator.

Thank you ladies and gentlemen, we'll now begin the question and answer session should you have a question. Please press star followed by 1 on your Touchtone phone, you'll hear a threefold prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star flow.

By 2.

If you're using a speaker phone please lift the handset before pressing any keys.

1 moment for your first question. Okay. Your first question comes from Mike Walkley from Canaccord Genuity, Mike. Please go ahead.

Great. Thanks for taking my question and congratulations for a strong.

Close to a strong year again, I guess, Steven maybe for you just to help us walk through the puts and takes for your combined.

Net motion in absolute business guidance of 11% to 13% revenue growth.

Can you maybe walk us through how youre thinking about the different segments.

What may be net motion adds to that pro forma.

Revenue type growth number that you've laid out for us.

Sure, we'd be happy to and as usual I think Christie and I will tag team on it.

Mike The key part is that they're not actually segments and I hate to sound like a finance.

Dork about that but they are fantastic products that are being folded into our platform and so we won't be reporting on them as separate products will be reported.

The combined business there will be some disclosure that we'll have in our footnotes of each quarter, because it's a material acquisition that will.

Talk to the revenue for net motion so you'll see that on a historic basis, but the premise really is that you have 2 strong book of business and IRR.

That are driving nice growth for each of the companies and so that contributes to the growth trajectory as we move through fiscal 'twenty 2 with both product sets.

And then we've taken a fairly conservative approach, but are fairly bullish on the business and so far as the synergies from the 2 businesses that we're putting together.

That really falls into 2 buckets.

The cross selling synergies that are important and then as we mentioned on the remarks in a moment ago, we launched right at closing with comp plans too.

<unk> them selling our products into their existing customer base and vice versa.

And then there's the synergies around all of the really good IP of marrying persistence and connectivity.

And so far as new product development and product enhancement that obviously it takes more time. It is not something that we will see financially showing up in the P&L until the exit of this year and into next year or likely.

And so that's how we thought about our guidance. We obviously just came off of planning internally and have been going through that and so we feel good about the year.

Wanted to set expectations in a thoughtful way.

Great. Thanks, maybe just a follow up for a little more color within this disease.

Did these.

Ongoing supply shortages is that impacting guidance at all given it.

It sounds like Pcs are going to be constrained for.

Several quarters and also just how are you thinking about the education vertical.

Been quite strong, but also they are impacted by some of these PC shortages.

So I think those are all components within it.

And I think the first pieces of it sort of take them instead.

We had been saying for a while we've had education would eventually normalize and harvest season sort of seems to be that moment. Although 1 thing we did touch on in the call as stated 1 of the Influencers. There was really more about kind of the bureaucracy around how the money was flowing the COVID-19 sort of funding was flowing through the system. So they were.

Still seeing very strong demand.

No I don't think anything has changed in my view of how that's going to kind of work through through the coming quarters.

On the PC side, we've talked about this in the past.

Where we tend to see that as if people are purchasing software licenses in combination with the PC. So we don't see it affecting our expansion business our enterprise licensing when a customer is activating existing devices within their environment, and we've talked quite a bit about how we land with a customer and then we expand after that moment, mostly on existing devices and so we don't.

See any direct impact of the supply chain shortage on that part where we might see it is on some net new logo and some PC connected expansion business and I think thats a little bit of what we saw in this past quarter and I'd say you saw that somewhat distributed across education and enterprise. So it was nothing that was sort of.

Unique to that from.

From 1 segment to the other.

Okay, great. Thanks.

My question kind of to both you and I'll pass the line just just embedded in the full year guidance. Just just to help US can you remind us of any seasonal trends to consider kind of the quarterly cadence towards that full year guidance, especially since some of this or you haven't seen that pro forma for net motion. So how to maybe think how that has any seasonal trends.

And then just on the adjusted EBIT targets.

Steve you laid out a little bit but those are some of these increased investments more front end loaded or do you expect margins to be kind of steady throughout the year as it sounds like R&D might be more backend loaded in terms of opex increases yes.

Yes.

Some questions and.

You nailed it the key takeaway so our starting in the bottoms up kind of our margin profile is fairly steady through the year, but we have a little bit higher we expect a little bit higher gross margin.

Alright, EBITDA adjusted EBITDA margin in the first half of the year.

Really the main reason that you set we will have a little bit more investment in sales and marketing in the first half and so first half of the year compared to the prior year.

I expect to have a little bit lower.

Adjusted EBITDA margin, but then in the second half of the year is as you said as we talked about we expect to invest a little bit more.

As a percentage of revenue and in aggregate dollars.

In R&D, specifically in engine and product as well.

So.

We expect adjusted EBITDA to be a little bit lower in the back half of the year, not massively, but a little bit lower.

Okay, and then just a quick clarification and I'll pass line, Yes, I think it's great to invest for the big opportunity ahead.

Does the guidance also to really know cross sell between the 2 companies in the current fiscal year, but really starts to pick up and exiting the fiscal year and into future years.

Yes, I think Thats basically right. The assumption is and we keep saying just because from an operational standpoint, we're very focused on it.

Getting comp plans in place and getting people really armed and cross trained and the sales teams are in training actually all day today.

On this topic, which is educating them on on each other's products and so they can be diverse and at least have the conversation to bring them in but the short answer to your point is that we have not assumed.

A large pickup in cross sell and certainly not in the first half of the year, but that it accelerates as we move out of the fiscal year.

Great. Thanks for taking my questions and best wishes for success with the integration.

Right. Thanks, Thanks, Mike.

Your next question comes from Adam Tindle from Raymond James Adam. Please go ahead.

Okay. Thanks, good afternoon, and congrats on a strong finish to the fiscal year I wanted to ask maybe Christiana Stephen can tag team on the last call you characterized most of the margin accretive to a number of key metrics you talked about how it strengthens our commitment to the rule of 40.

This call your initial guidance for fiscal 'twenty, 2 as low double digit revenue growth and high teens EBITDA margin or more like <unk> 30.

I'm wondering what have you learned about the pro forma entity over the last 90 days, that's leading to this change is that calendar 'twenty, 30% elevated growth.

A surprise or that migration.

Something new.

Acknowledging that obviously, you've outperformed metrics from the past so maybe there's some level of conservatism just unpack if I'm reading too much into this or is there some changes that you've learned over the past 90 days.

Most important takeaway is no surprises and no bad news.

The integration and the teams coming together has been really tight and has been tremendous sharing of information.

And I think we would offer just disaggregate the economics of the business and what we said, which still holds true and I'll get to in a moment with the approach to setting guidance and taking a thoughtful dare I say conservative approach to beginning the fiscal year and how we expect to revisit guidance through the year as we go quarter to quarter.

And so that's kind of the mindset of guidance per se, but for the.

And what we've seen in so far as the economics of we see this as accretive if that still stands.

As we said bolt on top line and on bottom line.

Which was kind of a call out that we wanted to offer.

Around the historical financials that really had some outsized growth because of the.

Goof ball accounting on accelerating 50% of the revenue upfront that really drove a lot of revenue that is non recurring to that degree and so when we gave that color and provided that last quarter on the announcement.

We were speaking to the normalized rate that was not based on some nominal growth rate or some.

Use case was really based on what we saw is the steady state run rate of the business and we we still believe and still have in our math of our numbers that it adds to revenue growth with the synergies baked in and then it adds to profitability.

Got it that's helpful I figured that might be request from tomorrow. So, let's just get it out on the table.

And that's very clear I did want to ask.

The news sales comp plan for cross selling.

Any way you can maybe unpack some of the mechanics behind that and also any analysis, you've done on level of share customers or synergy dollars that you're now getting some visibility into.

Sure sure we'll tag that so on the sales comp plans it was really.

Fairly straightforward, we wanted to really Incent, our sales force to bring in and net motion sales folks to sell deals and obviously vice versa. We wanted to Incent and motion folks now go bring in resilience and so we really attached a.

Our compensation plan, almost and overlay and so far as you know.

Could conceptually be paying twice for the deal and so sales reps on our side for example feel like they can get paid some really good commish for a net motion product to core complete product closing at their customer alright. So it is not a small little kiss like all had great you get.

Kiss rejoin us it's almost as if they got full credit for the deal so that they feel like they can achieve their comp for the quarter and for the half of the year as we looked at it through these transactions that they can get paid well and thats. How we wanted to make sure that it wasn't and also have or a nice to have that it was.

Thought of us folks part of folks comp plans.

No the only the only thing I'd add to that is maybe too.

Additional data points. The first is we set our selling comp plans against the first half and second half.

So the plan we've put in place is really for the first 2 fiscal quarters.

And the second small nuance within that is where incentive.

So theres, a commision connected but in terms of retiring quota.

Not exactly the same right. So so so 2 folks are incentive financially to sort of bring them together, but but we've been quite thoughtful about how we're sort of mapping out quota across all across both of those pieces.

You asked a little bit about the customer overlap.

Don't think we've reported out on that but we think that there is.

There's a lot of white space right. There is some nice customer overlap, but if we take their footprint in <unk>.

Mobile, which is a completely complementary sort of area to us I think that there is a lot of white space. There when we talk about some of the additional plant.

The platforms that we get to support as a part of this so we're also assuming.

At some point over time upsell and expansion within our existing accounts. The last thing I'd sort of add is we are running them as parallel sales organization for this for this first half of the year as we've talked about when we first started talking about the.

Transaction integration right. The back office functions are fully integrated today, but the selling and go to market and the product teams are still running as complementary but connected and so so we're getting a lot of.

We're not trying to slow either side down, but give them. Some nice accelerators to find new business opportunities on top of what they already have.

Understood. That's helpful. Thank you both.

Thanks.

Your next question comes from Scott Berg from Needham. Please go ahead Scott.

Yes.

Hi, This is Michael Rackers on for Scott Berg. Thanks for taking my question today.

So you guys have made some solid changes to drive higher customer and revenue retention over the past few quarters.

We have the net revenue retention rates, but can you give us some color on gross churn improvement in the quarter.

Yeah.

And we're happy to start and then Stephen can jump in but.

As you know we don't report out the renewal rates, we reported out on the total but I think we did give a few comments this quarter about some of the nice improvements we've seen as a result of some of the investments we've made in formalizing the renewals process and we've talked in the past about some of the partnerships we've had around that.

What you would expect to see as we go into the next year is we're going to continue to do more we're continuing to build out the renewables function and more separation of selling effort.

Across all different tiers and across all segments and so that's a place where we continue to pay a lot of attention.

Without without sort of getting into the weeds of which we.

We just can't kind of talk about by segment or within the various different areas. I think we're very happy with how it's how it's sort of taken hold and also I think the part that I feel probably best about is is the increased connectivity with our customers right I think that the investments we've made in this area within our business over the past year has gotten as much closer to our customers which helps.

When we think about new AOR growth in some of the other initiatives going on within the company.

Yes, Michael you've nailed the 2 pieces, obviously as Christiana said.

Renewals base plus expansion and how the business has improved a lot of it has been through the really good nuts, and bolts and blocking and tackling around renewal rate.

And as Christian said, we expect to continue to see that as well as some real expansion opportunity from enterprise as we move through the full year fiscal 'twenty 2.

Or is what our outlook is on that.

Right and then just 1.1 more from me.

So you mentioned earlier you brought in a.

Our new Chief revenue officer during the quarter can.

Can you just talk a little bit about the impacts.

On fourth quarter bookings and what type of changes, we should expect moving forward.

Sure I'm happy to so even though Matthew started 2 weeks before the year end, we did not actually put him into the role until the first of July and so we actually had Sean continue out at the end of the fiscal year.

And given that from an opportunity to sort of.

Observe and kind of start to connect with with the team. We also do our company kickoff.

Normally it's been in Whistler at the last couple of years Thats clearly been virtual but that happens for the whole company followed by sales kick off in the third and fourth week of I think it was the third week.

As of July.

And so whether that's impactful because in a very very short period of time I think Matthew hit the ground running and we've made several key new additions into his own leadership team.

Yes.

Stephen pointed out earlier. He has this leadership team off site for a couple of days now go interest him work with force management and some of his best practices around pipeline inspection and growth strategies and so I think he's had a tremendous impact in a very short period of time.

And at NAV.

The 1 part even though I just mentioned a moment ago that the 2 sales teams are.

Running in parallel the head of sales for net motion also dotted line reports into Matthew So he's already sort of inclusive of the 2 halves and really working together with both sides and sort of those cross selling strategies, we talked about earlier as well so.

Very very big impact in a very short period of time.

Alright. Thank you so much that's all from me.

Thanks, Michael.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by 1.

Your next question comes from David Kwan from TD Securities. David. Please go ahead.

Good afternoon.

I was wondering on the education side, you saw the slowdown this quarter. It sounds like it was just more of a timing issue as I guess taken awhile for funding certain fund I guess, the trickle down to your debt to case and customers.

Have any visibility as to when you could see that pick up have you seen a change since the end of the quarter.

And then also maybe looking at it over the longer term once things kind of normalize a bit here do you still expect that the education business can kind of grow roughly in line with.

Government.

In enterprise.

Net.

Hi, David So I don't think our view and education has changed we did we did know that at some point.

Hyper growth period for where every school was going through their pandemic transformation.

We did sort of signaled clearly that that wasn't going to be a forever thing I think that is a as I mentioned in the comments I actually think there's 3 components to what we're seeing in education.

Some of it is that post pandemic normalization I think folks are if this is a busy time in education that figuring out where all of their devices are and how to get them ready for the new school year. Some of them collected them some of them didn't and so we are still seeing a lot of activity and a lot of demand in that space.

Some of what they had hoped to do with deploying new devices was impacted by the supply chain dynamics, we talked about earlier.

So I don't think our view has changed.

We don't we don't expect it to sort of pop back up to.

The FY 'twenty growth rate or the Q1 through Q3 growth rates that we saw before but we started to see it starting to settle into a little bit closer to normal.

All I can say in terms of visibility as we continue to see strong demand and we're going to watch it closely as we go through the year to see how that progresses.

No that's helpful.

And I was curious on the debt side.

Just wondering if you can maybe talk about your auction.

When you look to potentially refinance that debt down the road hopefully with cheaper maybe bank debt.

What options you have got any prepayment penalties and stuff like that.

Hey, David.

Our comments that we were mentioning.

We structured a bunch of terms and conditions that give us a lot of flexibility. So that there are not onerous prepayment penalties, we have some nice carve outs and baskets that would allow us to swap out other types of financing whether it's equity.

Or otherwise or cheaper debt or non cash pay debt and so what we're focused on really is managing the leverage capital structure as well as the cash pay overtime.

And we will.

Coordinators, who we said what we meant in metal we said on the whole notion of putting in place a financing package that we can sustain over the long term and so this is something where we want to be really thoughtful about what cap structure makes the most sense, but it is some amount of deleveraging over time that will be.

I'll make it very attractive so theres not a big onerous prepayment penalty and then Oh by the way at year 1 Mark.

Any take down beyond baskets is at 101, and so it becomes even more attractive.

That's helpful.

Last question on the guidance.

Can you talk about what foreign exchange rate, you're assuming and are you still planning to continue our hedging program.

Sure, Yes, we basically our philosophy as we forecast on current day exchange rates. So we are not speculating on what the rate is and so to.

To the extent that it changes favorably or unfavorably, we would get affected like everyone else in the market on our <unk>.

Conceptually how you model it what we do them on our expense profile, we have a large amount of expense head count mostly right 70, plus percent of our expenses head count we have a big chunk of Canadian based head count were USD functional and our next biggest currency is GBP and.

So we are very simple forward contracts, where we're buying forward currency. So we lock in that budget right. So from an expense standpoint, we pretty much lock in the vast majority of our P&L all of our Opex.

And it's really the economics of revenue that would fluctuate.

Over time with the market.

Perfect. Thanks.

Yeah sure good.

Good question.

Your next question comes from panels Metropolis from BMO capital markets. Please go ahead.

Good afternoon.

In terms of the EBITDA guidance.

Can you clarify what you're assuming in terms of <unk>.

Conference in central budgets, and whether that's coming back to normal in the coming months.

So can you just clarify can we clarify.

Yes travel conference Tradeshow budgets.

Sure.

Are you assuming that that kind of ramps up back to pre pandemic levels are implicitly what is.

Sure.

EBITDA guide assume on that front.

Yes. Good question, we're actually talking about this earlier today so.

We assume that starts to come back a little bit, but nothing remotely close to what it was pre pandemic, obviously us and everyone else from the past year plus.

TNA budgets of anywhere from.

15% to 20% to 25% of what a normal spend would be.

Theres some spend in some events that still happen right you still have a sales kickoff you still have a President's club you still have a conference for people for our customers such as virtual so it costs less but its still cost money and so we're assuming in our profile that starts to work its way back as we move through the year.

Obviously, nothing Super meaningful right now in Q1 as we all know.

Okay great.

You obviously hired.

Alliances recently.

With an interesting background can you maybe expand in terms of.

Yes.

The approach there is.

What can be focused on and just general update 1% from the surface.

Okay.

So we've talked a lot about the program, we said that as we were going through the pandemic here our focus had.

Shifted slightly over 2.2 more fulfilling out the catalog of application persistence within the product as opposed to.

Under the banner of alliances.

Edward come first from Stan Samsung, where he he had a very similar role and worked on from some very broad very visible relationships, especially on the mobile side.

So he's formerly taken on responsibility for that persistence is a service program and is really going is already I think integrate short period of time and sort of reaching out and establishing a lot abroad dialogues around.

What have you or how does sort of further those relationships as long as put some formalization around the program. So in the background right. We've continued the product work. We've continued to work with a small number of partners who have taken on the technology, but I think this is really about taking it to the next level. So so hopefully we will have more to come back and update you all line.

As we go through the year on that.

Great I'll pass the line thanks.

Thanks.

Your next question comes from the cash.

Kevin Krishna router from day short tail Kevin. Please go ahead.

Hey, there. Good afternoon, just 1 question from me with regards to net motion and your assumptions.

For further growth there for the year can you talk about maybe from.

The land versus expand opportunity.

You know, where where do you see that growth coming the mix or is it kind of 50.50, So I guess, what I'm trying to understand.

With absolute software as a product we understand that there are various tiers and different pricing.

Our models can you talk about you know what what you see a net motion with the current base.

I'm trying to think about the different levers, whether that's new new customers existing customers expanding the number of endpoints that they're on and then sort of thoughts on potential pricing increases whether that's there and that might be b from you know.

Various different flavors.

The product offering within our existing customer base.

Hi, Kevin.

I think it's probably a little early to talk about pricing. Although it is something that we're spending a lot of time looking at I think that in terms of pricing changes.

I would probably look at this journey in a couple of steps right first of all I think there is bringing up training sort of the sales on both sides as well as the channel and the Oems on the value was kind of the new solutions and it takes some amount of time, especially with our channel structure to kind of place those within.

So I think the first pass youre going to see us really.

Cross selling rate it really is and there is a lot of.

Potential there. So for example, we don't we haven't had a mobility product and net.

We have an opportunity to talk to customers about mobile units, which is an area that we havent havent connected to in quite some period of time and then firstly.

Across their customer base being able to.

Offer our core capabilities as well and so just as a quick refresher I mean, I think they had about 13000 customers to our.

3000 customers to our 13000 customers. So I think we're approaching.

Approaching 16000 combined.

The second piece is when do we start to actually integrate product and I think thats likely where more interesting things happen.

At this.

Just kind of take that through steps, how do we how do we inject.

The core of what we do and connect what Theyre doing into our core platform and I think once we.

In the third of course would be around the data right. How do you bring all of that intelligence from the device from the from the network into 1 common view about what's going on across the enterprise and so that's kind of the journey youre going to see US go through as we go through the next 12 months so.

I think pricing is a little further out there until we come back and talk about a combined roadmap, but those are sort of the big I would say milestones in our thinking.

Okay, maybe maybe just to be clear there. So I mean your guidance isn't really expecting much in the way of cross selling between the 2 until later on in the year. So I'm just trying to think about nearer term within net motion itself. Those 3000 customers like can you talk about maybe the expansion opportunities within those accounts.

And then within there it is.

Is the net motion products something that has multiple different pricing tiers and much like we see with absolute software, where there could be just natural progression upwards I'm not talking about your thoughts on moving pricing between the bundle absolute net motion just trying to think about within that motion sure.

Sure sure Yeah, well it takes them a little bit on it.

So in essence, you got the takeaway spot on which is we're bullish on the cross selling but we're not.

Counting on.

Any material revenue to the model until middle to the end of the year kind of thing, but to your point the <unk>.

The businesses are being run right now is really growth trajectory for each set of products and the net motion product on products. The core complete has a really nice profile of both land and expand and so their growth has not just been from adding new logos.

Similarly, its not its not also been historically just from mining the existing customer base, it's been a nice blend between the 2.

So that was part of the attractiveness when we were doing diligence and learning the company and working.

With CK and the management team to their approach with customers and so the short answer is it's a blend of both.

Expansion of existing.

So.

Customers have upsell they have a really nice and Dr.

Our ratio in core renewal rate as well as new logos.

Okay, great. Thanks, very much I'll pass the line. Thank you.

Thanks Kim.

There are no further questions at this time weighted.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.