Q2 2022 Absolute Software Corp Earnings Call

Good afternoon, everyone and thank you for standing by welcome to the absolute software its fiscal 2022 second quarter financial results Conference call. All participants will be in a listen only mode.

Should you need assistance please but.

Should you need assistance. Please press Star then zero to reach an operator.

Before beginning its formal remarks, so absolutely software, but I'd like to remind you that today's portion 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 such forward looking statements.

Any forward looking statements can be 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 law.

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 MD&A, which will be available on the absolute software its web site.

C D and E G J R.

I'd also like to remind everyone that this conference call is being recorded today Tuesday February 8th at five P. M Eastern time.

I'd now like to turn the conference over to Kristy White, President and Chief Executive Officer. Please go ahead.

Thank you operator, and thank you to everyone joining us today.

Building on our strong performance in Q1, we delivered another strong quarter in Q2, achieving 17% adjusted revenue growth year on year with an adjusted EBITDA margin of 26%.

This resulted in this thing the sixth consecutive quarter of absolute being a rule of 40 company on a combined revenue and adjusted EBITDA basis.

We also generated record operating cash flow of $14 7 million in the quarter, while driving a healthy 15% year on year growth in air across products segments and regions.

I am very pleased with the quarter and we'd like to take this opportunity to reiterate this.

<unk> long term goal remains the same.

Typically that we are committed to operating as a rule of 40 company.

I have spent a considerable amount of time these past months speaking with the customers and especially customers of our recently acquired motion products.

Again, and again I have strong support for how we deliver resilient self healing security solutions.

But the timeliness of delivering those solutions into today's environments. Our CIO. Since he says are supporting broadband about workforce programs, requiring a robust endpoint centric security strategy.

Specifically had a lot of discussions around the drive towards zero Trust and the need to move away from legacy network connectivity solutions.

These conversations have confirmed the need for a <unk> solution that skips maternal altogether.

Your tunnel is in the cloud or to your data center.

Remote worker needs, an amazing user experience cannot afford any latency introduced internet user experience.

Netmotion has continued to shine in this respect as demonstrated by our continuously strong NPS scores and our ranking as a leader by <unk> Dot com in the winter 2022 endpoint management and zero Trust networking grid reports.

Finally, it also shows in our active endpoint growth, which was 16% year over year and is now more than 13 million active devices.

As a result of our strong first half performance, we will be raising our full year outlook, which Stephen will cover following my remarks.

We continue to see strong global growth in our enterprise and government business delivering a healthy 17% increase in are higher growth year over year, reflecting solid sales activity across the now combined go to market teams.

One notable customer wins for motion products with the New York Police Department, who after a long competitive process selected our solution based on performance user experience and resiliency.

The education segment remains an important part of our business as it represents 23% of our total <unk> and.

Q2 saw continued Ara growth of 12% year over year.

This performance was impacted by the seasonality of the education market and slower growth of P. C sales into education, but offset by some strong international opportunities.

As we enter the traditionally more active quarters for the education market. We continue to see a shifting security landscape for schools as they struggle with the influx of new devices. The mobilization of students and the escalating need to protect both the students and the school from ransomware students safety and privacy risks.

To support this evolving model, we launched a new absolute resilience for students devices to help I T teams simplify the management and collection of missing or stolen devices at the end of each school year.

Long term our view on the education business remains unchanged, we are transitioning over time from the strength of a previous COVID-19 year two of sustained moderate growth business.

As we enter into the second half of our fiscal year I would like to touch on two areas of focus that speak to the early success. We are having following the motion acquisition.

First the speed with which our go to market investments are seeing results and second new product and service introductions.

First as a result of our continued go to market investments internationally, we saw very strong uptake 47%.

In international AOR growth year on year, with EMEA and a T J being a few of the highlights.

In EMEA, we have continued to see and integrate with our OEM partners as well as establish new channel partners. As an example, we announced new distribution agreements with Niveous in Benelux and EMEA in Dubai.

We also scaled our customer activation capabilities, notably with our partner H T. Enabling in fact reactivation in EMEA.

Our customers with the ability to track and manage their assets through the supply chain and into their hands.

And a P. J, we saw a longtime absolute MSP partner in one of Japan's leading Internet access cloud network solution providers announced the launch of the new service solely based on our solution.

The offering is a modern remote access service based on VPN aid to support large enterprise customers.

Our investment in our enterprise sales team is beginning to pay off as well along with our strategy to deepen our customer relationships and grow arrow hurt by demonstrating the power of endpoint resilience into their environment.

For example, this quarter, we saw one of the largest U S. Banks, one who has been a customer since 2015 upgrade and expand their deployment to absolute resilience across 65000 devices to provide additional visibility and compliance controls to their remote workforce.

The added visibility, which includes application persistence allows them to ensure proper business controls and compliance needs are met.

Matter, where their employees are located critical in the modern work from anywhere era.

Which leads me to my second area of focus our product and service offerings and we've as we've continued to see customer adoption that absolute resilience CRO. We are also seeing the usage of application persistence itself increase.

In the past 12 months, we have nearly doubled the size of our catalog and we've seen the adoption and application for assistance grow by 70% with most customers, enabling application persistence for multiple applications and with many customers, enabling the capability for five or more.

One of the most notable use cases for application persistence is malware or ransomware remediation.

In the past few quarters, we have had multiple customer escalations for our customers become infected with ransomware and as a result reached out to absolute for help.

In one case, the customer was hit with the hard to decrypt ransomware and was forced off line for the first week of the attack because the ransomware explicitly attacked and landed the customer's security and management tools inoperable.

This put the customer into a state where they couldn't either prevent the infection spread nor restore the already infected machines.

By using a combination of our reach and application for assistance, we were able to break the reinfection cycle by identifying and quarantining infected machines.

Reinstalling updated security tools, and keeping users' safety safely offline until their machines were restored to offer both protected and infection free state.

Cause absolute can always communicate and update devices and applications, even when ransomware has explicitly paralyzed the other security tools and operating system services.

We can be an invaluable tool for IP and security teams that know they must have a way to remediate a potential ransomware attack even when remote.

And finally, I would like to speak to our ongoing integration of the net motion Z TNA solutions integration is proceeding nicely as the Netmotion V. TNA products are incorporating persistence.

We'll be the only truly resilient Z TNA solution that delivers a true endpoint zero Trust solution.

That starts with the firmware and with a differentiated user experience and.

In my many discussions with customers. This is the key differentiator to our combined solution well other VPN or Z TNA solutions introduced network latency or secure access solution side delivering both the added security and high performance.

Yeah.

In closing we have delivered strong financial results for the first half of the year continued investments in channel and products are steady execution, while adhering to the rule of 40, and it's clear the market shift to remote work in zero Trust creates a unique opportunity for absolute in a large and growing market.

Our focus remains the same to be at the forefront of the evolving security landscape.

Take out a material world the continuously shifting workplace.

The long term shift to distributed work aligns and what we see is the growing need for solutions that secure organizations enable productivity and reduce the overall attack surface.

Last quarter, we took a meaningful step.

Towards that vision by integrating our <unk> product with a resilient platform by providing customers with the first ever opportunity to a doctor resilient self healing and self healing zero trust solution embedded in the hardware of more than a half a billion devices, our future roadmap as engineering to expand on these capabilities and significant and exciting ways.

Helping us drive revenue growth, while becoming even more relevant and solving challenges and addressing the priorities facing modern CIO since he says.

Executing this plan will take the best people with the most targeted strategy things I believe we are truly establishing as we move forward into 2022.

I'll now turn it over to Stephen to walk you through more of our Q2 financial details and how we're raising our outlook for the fiscal year.

Thanks, Christy good afternoon, everyone. We appreciate you joining us we're pleased to report continued strong momentum through the second quarter of our fiscal 2022.

Performance in our core enterprise and government vertical delivered solid and our.

Growth, which was bolstered by improving sales execution across our product lines and helped drive strong new logo bookings.

I'd like to cover two areas on that front with you today first talk through some color and details of our Q2 fiscal 2022 financial results and then second review our financial outlook for the current period and provide our updated guidance for the full year fiscal 2022, ending June 30th 2022.

As a reminder, in our continued drive to provide our investors with information that reflects how we manage and measure the business. We're reporting revenue on an adjusted basis that excludes any I FRS purchase accounting impact on deferred revenue.

In addition, our year over year comparisons are based on an as if combined basis that includes the netmotion results of the year ago period in fiscal 2021, but that does not factor in any U S. GAAP to Ifr S. Adjustments you can find the pro forma combined fiscal 2021 financial results and the business.

This report that we filed in September 2021, and that is available in the Investor Relations section of our website on SEDAR as well as Edgar.

We believe this adjusted revenue metric provides a more meaningful and transparent view of the combined business and helps to evaluate the progress that we're making over time.

With that let's get into Q2 results.

<unk> revenue was $52 $9 million for Q2 fiscal 2022 up 17% from the prior year on an as if combined basis from Q2 fiscal 2021.

The strong revenue performance was driven by continued growth in our base as well as greater net motion customer migrations from on Prem perpetual licenses to on Prem subscription agreements.

At the end of Q2, approximately 66% of the core complete a or our portfolio a transition to subscription arrangements up from about 62% at the end of Q1 in September 2021.

Overall total IRR came in at $195.6 million at December 31, 2021, 15.4% year over year growth on an as if combined basis.

Recall that unlike revenue <unk> is not impacted by I FRS revenue accounting requirements and is free from the complexity and periodic distortions found in revenue.

The solid overall, a or our growth was driven by continued strength in enterprise and government that came in at 17% year over year growth on an as if combined basis. This was partially offset by incrementally lower growth in education and <unk> that came in at 12% year over year in Q2.

As we begin lapping tougher quarter Comparables in education that saw a surge from COVID-19 spending last year.

We were particularly pleased.

Within enterprise and government the net motion core complete products had a particularly strong quarter as Christie said earlier, we're beginning to see enterprises move away from legacy network connectivity solutions in favor of a more robust endpoint centric security strategy.

We continue to believe that absolute core complete is positioned well as we are seeing increasing engagement with new customers.

In that regard new logo a R. R ended Q2 at $3.7 million up 76% on an as if combined basis from the year ago period, and a solid sign that Matthew and the new sales leadership and combine teams are improving the execution of our go to market land strategy.

Net dollar retention was 107% in Q2 versus 109% in the prior quarter consistent solid enterprise and government M. D. Our results were impacted marginally by education net dollar retention that came down sequentially as the pace of expansion with existing EU customers slowed March.

Italy from a year ago surge of Covid related education buying as I mentioned a moment ago.

Closing out a our growth business from our top OEM partners showed another quarter of sequential uptick in the second quarter in terms of both dollars and growth rates.

Moving onto cost and profitability for the quarter adjusted EBITDA for Q2 was $13.8 million for a margin of 26% of adjusted revenue.

The better than anticipated result was driven by a combination of discipline in operating expenses slower than anticipated hiring and head count growth and the corps complete revenue favorability from greater customer migrations that we discussed earlier.

Taken together with our strong revenue growth our strong adjusted EBITDA results provided another quarter a rule of 40 performance.

Cash from operations in Q2 was a very strong $14.7 million or 28% of adjusted revenue, which reflects the solid dynamics of our subscription model and is back to levels consistent with historic norms as all significant one time deal related costs that impacted cash flow are behind us.

Yes.

Going forward, we expect solid cash flow from operations to continue trending above adjusted EBITDA given the duration of our signings is expected to be greater than one year.

Taking a look at the balance sheet. We ended the December quarter with $61 million in cash the roughly $5 million or 10% sequential increase reflects strong cash flow from operations in Q2, and net cash generation, even after debt service and dividend payments.

Let's now turn to our outlook for the second half of fiscal 2022, and our updated guidance for the full year of fiscal 2022 ending June 30th 2022 .

Overall, we're bullish on the combined business as we move forward and while the prior year Q3 fiscal 2021 was the company's highest.

<unk> and revenue growth rate quarters and years, we still expect our combined sales model and business traction to drive solid top line results from our growing a or our base in the current Q3 fiscal 2022 quarter.

And so far as cost structure and investment profile looking ahead as we've discussed for the past few calls we anticipate an increased periodic opex investment in the second half of the fiscal year.

This incremental period spend is in R&D as we move to integrate the underlying net motion and resilience product and infrastructure development.

And in ramping our now combined sales force and go to market.

As previously indicated we expect R&D and sales and marketing expense to increase as a percentage of adjusted revenue for this discreet period of Q3, and Q4 fiscal 2022 versus the first half of the fiscal year.

And so with that context and following the strength of our Q2 financial results. We're updating our outlook for the full year fiscal 2022 ending June 30th 2022 as follows.

For the full year fiscal 2022 we're raising our adjusted revenue guidance from a previous range of $204.5 million to $207.5 million to now be a range of $206 million to $208 million.

This equates to an implied full year fiscal 2022 adjusted revenue growth rate of approximately 13% to 14% from a previous range of 12% to 13, 5%.

And we're raising our fiscal 2022 full year adjusted EBITDA margin guidance, which is based on adjusted revenue to now be in the range of 22% to 24% from the previously issued guidance of 19% to 21%.

Recall that our adjusted revenue growth rate guidance for fiscal 2022, and our other year over year growth metrics are presented on an as if combined basis and are calculated based on the combined company fiscal 2021 financials and do not include any adjustments for purchase accounting or GAAP to Ifr S conversions.

On that front and as a final topic, we thought it would be helpful to provide some color on the purchase accounting write down to deferred revenue from the acquisition of that motion.

As of December 2021, the remaining value of deferred revenue write down that will be taken going forward over future periods as approximately $7 million.

We anticipate the quarterly difference between our Ifr S reported and adjusted revenue numbers will continue to decline as we move forward and for it to be relatively small as we enter our fiscal 'twenty 'twenty three in July 2022.

The deferred revenue accounting write off was $5.3 million in Q1 fiscal 2022 $3.9 million and Misreported Q2, and is expected to continue to decline as we move through the second half of the fiscal year.

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

Operator.

Thank you and we will now begin the question and answer session.

I'd like to ask a question. Please press Star then warm and you touched here in third.

If youre using a speakerphone please pick up your handset before pressing the key.

Withdraw your question. Please press Star then two.

At this time, we will pause momentarily.

And our first question today will come from Scott Berg with Needham. Please go ahead.

Hi, everyone and congrats on the great quarter. This is Michael Rackers I'm on for Scott.

Considering it's been about six months since then that motion acquisition can you just talk a little bit more about the sales motion and integration.

And the changes you've seen under the new C. R O.

Maybe a little bit on what that looks like moving forward.

Hey, Michael.

Chris He is having some.

Mute speaker issues. If you can hear me, let me, let me do that whilst she well she joins yeah as we mentioned last time.

The integration of the sales force between the two companies happened ahead of schedule and so that was really compelling both from a structural standpoint, or bringing them together comp plans account coverage plans.

As well as cross selling and so Matthew.

Leading the effort has really moved quickly both on the integration of the team as well as bringing in new folks to the lead various aspects of it and so we've been really pleased with how the first half of the year or fiscal year closed out in December and so that's why you're seeing and hearing from us.

That we're in a much better place now to go spend and invest in a combined go to market effort on both sides.

Of the Fed's, most sales and on the go to market on the marketing side.

With the team as well.

Great and then just one more quick one for me I don't know if the technical difficulties or are still going on or or not.

But maybe can you just give a better color around the impact of the chip shortage in the PC industry and maybe any impact that tad as of late and then maybe kind of compare that to some of the strength and the chromebook market that we've seen lately.

Thank you.

Yeah.

Sorry about that it looks like the operator reconnected me could.

Could you just reported I repeat the first part of that question I didn't quite hear it.

For sure could you just talk a little bit about the impact of the chip shortage in the PC industry and any recent impacts you've seen.

And then maybe compare that or offset that to the strength in the chromebook market.

Sure.

I think that we've talked a little bit about this in previous quarters, we have seen lead times on hardware in some segments.

Expand I don't know that it was any more exaggerated this quarter then the our comments on the previous quarter. We did touch I think in our comments earlier that the education PC market was a place where we saw.

I'm, a little bit of a decline in a little bit of a softening I would say the mix shift.

We continue to see chromebooks being very strong in education, sometimes it's driven by preference and sometimes it's driven by availability, we've certainly seen customers in the past year accelerate their portfolio on one side or the other just based on availability of product.

X and get their hands on so I would say not any more exaggerated than what we've seen in previous quarters, but it does continue to put a little pressure.

On that part of the business.

Right. Thank you.

Thanks.

And our next question will come from Mike Walkley with Canaccord Genuity. Please go ahead.

Great. Thanks for taking my questions and also my congratulations on the strong results.

First question just with the three $3 7 million a new logo a R. Can you can you give us some more color about this healthy metric and where the new logos are coming from and what solutions are choosing it it sounded like from your comments quote complete was the part of the driver here.

Hi, Mike Thanks for the question. So so yes, I think we saw healthy net new logos in all segments, but definitely I think on the V. C. R side and as we talked about before we see a healthy.

Deal flow with many of our OEM partners as being one of the first touch point with with our Oems.

I'm, sorry within our within our customer base.

So I'm not I'm not sure there's much more color around that I don't think we saw any particular vertical market within enterprise.

Fittingly high we did see a number of larger education accounts.

A handful of sizable deals in international education as well.

Again through similar channels in partnership with our Oems.

Okay. That's helpful.

Christie Zero Trust means a lot to lot of people in the industry certainly a buzzword out there in cyber security.

We think absolute with Netmotion has this unique.

Solution with a combination of persistence now connected to net notion solution.

Can you talk about you know.

Your interaction with customers that you know how your sales force is educating them about the <unk>.

Feeling Standalone zero trust solution that unique to you and.

How's the pipeline developing whereas you get into those conversations.

Certainly so so we're still in very early days of that we announced last quarter that we were in combining persistence and self healing with Netmotion client I think that that's starting to make it work its way to customers. So those conversations with customers are really just beginning I think we have.

Solid.

Support so I'd say, there's a lot of receptiveness to from customers in terms of having self healing solutions and seeing sort of netmotion being one of the strongest candidates for that and I think that in.

With respect to sort of zero trust more broadly you Youre right Zero Trust means a lot of things a lot of different people. So we try to be somewhat specific about the secure access component of it and making sure that we always have that ability to connect and that the unique part of our approach is that it really is very endpoint centric right we were.

We believe that more intelligence should be pushed to the endpoint and automation should be pushed to the end point, where these controls can make better decisions and also remediated if they themselves become compromised and we see a lot of support for that within our customer base as well as much as customers and vendors talk about zero Trust and I have spent quite a bit of time, especially.

With the Netmotion customer base over the past couple of months.

I would say that.

There is a lot of energy and momentum behind the acquisition of zero Trust products, but the deployment of them in terms of how theyre configuring and how far into those projects and getting to a true zero Trust architecture still feels to me like it's relatively early days and so we see customers leaning in and acquiring the technology in.

Starting to move down that path, but being able to map roles with access to specific applications and data feels like it's still early on in that that timing I think is positive for us from two fronts. One it is.

A good moment for us to be having those customer conversations and to one of the unique things about the netmotion product as it can help customers on that journey. They can they can start with one model and then slowly start migrating.

Users over two more sort of zero trust approaches and so.

It's just a little bit of context in terms of where we're hearing zero trust as a whole is in its maturity curve.

Great and just a follow on to that is here.

Landing. These initial customers how do how are they rolling out it seems like they might start slow and Kevin really nice upsell opportunity within the base over time is that a fair way to think about as you win some new logos for the service.

I think it would depend we're spending a lot of time and I'm personally spending a lot of time I think with existing customers. We certainly have seen.

A nice pipeline building of net new logos on that side as well selling model is slightly different because again with our VCR products. We tend to see those are smaller more rapid deals coming in through the OEM channel and with that motion they tend to be more direct engagements with the customers at least right now while we're still sort of scaling up.

The team at the OEM channels to fully participate in the and the net motion piece.

Great. Thanks last question for me for both of you and Stephen and I'll pass the line just great to see the strong adjusted EBIT margins.

Talking about a ramp in hiring in the back half of the year just with the tight labor markets. How is that hiring environment are you guys able to get what you wanted or do you think you'd be able to ramp those people into place over the next couple of quarters.

It's a great question and I think that we're seeing but we probably won't be D. This won't be unique to us we are definitely seeing a T.

Tightening of the pipeline around talent, I think that and we've talked a little bit about that in previous conversations as well I'd say, we're doing fairly well if I compare us sorta versus market metrics. We have seen increased attrition in the last couple of quarters versus our previous run rate some of that as a result of the acquisition and some of the.

Work needed to kind of rightsize the different groups and some of it as a result of what folks like to call. The great resignation as I look into the second half of the year I think that where we're likely winning more than we're losing right now, but I still expect to see some some tension in the talent market continuing and so we are as we've talked about.

In this particular quarter, but I think part of that is by choice, we're sort of managing and keeping a cautious eye on how we're spending as we go through this.

But we are definitely being aggressive in filling the critical roles that matter most to us that a lot of our attention is on critical technical roles and of course, the go to market team.

Great. Congrats on the success with Netmotion to date, and the integration and I'll jump back in the queue.

Thank you thanks, Mike.

And our next question will come from Dennis No shop, who loose with BMO capital markets. Please go ahead.

Donald.

Sir your line is open.

Sorry about that I was on mute.

Hi, Christy.

In terms of.

Integrating that motion from a cloud perspective.

Can you just recap for us what remains to be done so you've now watch resiliency with Netmotion.

But in terms of what you consider kind of full product integration where are the remaining steps.

Yeah.

Hi, Dennis sorry, I'm familiar with the.

The mute issue is we just had a moment ago.

And so I think.

We've done very well in what I'd call functional integration, so putting the people where they are meant to be long term focusing on process and how we sort of align kpis and visibility on the business.

I think on product integration, specifically the first step as I said was just connecting.

Persistence and self healing with the Netmotion client some other critical components that we're working on.

<unk> would be for example, inter it's sort of intermingling of the data so that we have greater well called context awareness of the data coming from both solution. So we can really see from the firmware through the operating system applications and through the network and then being able to use that data back with the customers.

So I think that's another major milestone for us as we go forward I think you know so it's they were.

We're making good progress I think the team has a very aggressive roadmap and you know as we speak right now where we're a week short of a sort of jumping into our.

Processes, we kind of put the budgets in place for next fiscal year. So I think we feel very good about where the product roadmap is is headed and I feel very good about kind of where those product teams are settling I think they're getting a lot done.

Great.

You referenced the.

In fact reactivation with HP in the B and just remind us how much more can you be doing with your large Oems internationally, what are some of the untapped opportunities in the low hanging fruit in that regard that maybe people tend to focus on over the next year.

Sure. So so first on the H P. Pes is quite interesting we have a couple of partners who choose to turn on factory activation.

Dell has done quite a lot of that with us and we've seen it with some other partners as well and as I said, what that means is a customer who's really concerned about secure supply chain can actually activate.

At the moment the devices manufactured so the device does not activate when it gets to the customer it's actually alive, the whole way through that process and so.

If that device, where where we're sort of turns on or compromised or connected elsewhere.

The customer would have visibility to that.

And so in terms of untapped opportunity with the OEM partners.

International is the one that jumps to the top of mind for me I think I said in my comments, we still are we're making nice progress in international but I'd say in terms of overall representation in our portfolio. They are I think that we're still quite late.

We believe that our international business should be much stronger and growing much more quickly and I know that many of our OEM partners have the same belief and so that's where we're spending quite a bit of our time right. Now is looking at how do we replicate some of the great programs. We've had in North America and in some parts of international and how do we do that more broadly.

It's not a it's not a switch that we flip each partner is sort of structured differently with different teams in different locations.

But I think that this is a joint goal that us and many of our partners have is two to open this more broadly.

Great question see the progress in the quarter and I'll pass along thanks. Thanks.

Thanks, Jonathan.

And our next question will come from Kevin Christian or update with Desjardins. Please go ahead.

Hey, there good afternoon team congrats on a good quarter.

Well for me our first question that I had for you maybe Steven can you can you talk about you know any on the adjusted revenue the impact from the transition that you saw in the quarter the perpetual.

Two to subscription transition I think you said you've moved from 60% to 66% of the way through I'm. Just curious if there's any way to quantify the topline impact in and just to confirm that that popped any top line impact from that transition came down at a full margin on EBITDA.

Sure.

Sure Kevin Mexican cents so.

It's interesting we spoke in the last quarter or so or even at the outset of the acquisition about the migration that the company is driving as you said from on Prem license for classic perpetual license of software to subscription and what started perhaps to be.

Kind of more of a one tiny acceleration of that now starts to feel like it's part of the business run rate, if you will and so.

That continues to be part of what is contributing to revenue growth.

Every quarter that we're seeing.

And so.

The one number that you mentioned I'm not sure was quite apples to apples that we were saying it it's about two thirds of the.

Net motion of their core complete a IRR is now on subscription and that's up from 62 ish percent last quarter. It was 60 and probably in previous quarters before that so it came up a little bit which is nice.

And frankly, we expect that to continue the uptake and interest from customers has been very strong. It is mostly customer driven so it's not that we have a target quota thou shalt convert theres number of customers this quarter, but really is customer friendly and customer centric and the uptake is.

Been quite nice so the contribution.

Helped but it wasn't the whole dynamics of the.

Core complete portfolio.

Okay, and so I mean, I know it's out of your control and you said, it's customer driven but.

I mean, do you expect that sort of like three 4% conversion every quarter and and some benefit adjusted revenue again.

Again, we can't time, it, but that's sort of what will <unk>.

I expect over there yeah. Okay. Yeah. Good question. So I think the the point of view from US is we expect that to continue.

We probably would not pegged the dollar amount because it just depends on the complexity and size of the customer right smaller customers a lot of smaller customers can come over a very simple straightforward contracts and arrangements. Other larger customers you know those discussions and putting that in place takes a little bit longer.

So the makeup of that customer mix wood determined is that a three months process or four month process right. So do you crossover the quarter end, but we do expect the activity to continue so the message is not this is a lull in it was.

A one off and it was nice well lasted and it's over.

If we have a third left of the whole IRR base to bring over and so we were engaged with a lot of conversations with customers and so those conversations are continuing and we expect that activity to continue for the next few quarters.

Gotcha and add onto I'm, sorry, I, just would add onto Stephens, great point, there which is.

If if the view is visibility right once a customer has gone to an on Prem subscription model all of their renewals will also be on prem subscription until they make that journey to the cloud and so the visibility and the predictability of that part I think is relatively known and I think the part that.

The part that is a little bit movable as new customers, making that shift for the first time after Stephen's point, there's just.

It's not a tremendous number of them out there.

Net new business.

Sure.

Maybe you know obviously, so that was one contributor to that to the strength in the quarter, you, obviously called out that motion and you had some strength.

Internationally, but when we think about the.

The quarter's results and then how you thought about you know setting the guidance or updating the guidance just noticed.

That the top end of the guidance didn't move as much as the low and I'm. Just wondering if you can talk through the thought process on guidance and sort of what it's implying.

Sure.

<unk>.

Big part of the guidance and for our view of Q3 is what we had talked about previously and then I just mentioned a moment ago, which is.

When you look back at Q3 of last year, you're really talking about the.

Highest <unk>.

The level of company growth and they are are in revenue and in many many quarters and that was awesome.

And so we're a little bit thoughtful about we still expect to grow and we're bullish on this current quarter. It's just a very difficult comp year over year, where that was really the peak.

Having said that the aspects that you pointed to are spot on which is we still have a lot of activity and seeing a lot of good results out of international.

But by far and so that's still a big contribution to what we're seeing we're seeing really good uptake in the enterprise, meaning large corporate customers that that part of the business is really doing well in and Matthew and team sales execution on those two fronts has been quite strong.

Maybe just a couple more for me one on the E. R. R. A growth 17% in enterprise and government that.

Clearly that that represents a mix of Nat motion and then the core a b T I know you're not.

Explicitly breaking these out but historically at least over the past few quarters.

Enterprise and government segment had been sort of in that 10% to 11% range I'm wondering if you could just help us kind of understand.

How that business is doing relative to the broader enterprise.

Great. He quoted there at 17% sure yeah. Good unreasonable question. The short answer is it did better this quarter. So we were pretty pleased and as you can probably tell that's informed.

Quite a bit of our qualitative assessment about how if you will the V C R. The visibility control resilience.

Product portfolio of that enterprise Gov part of the business had a really good quarter that was above what it has been historically.

Okay. Good to hear good stuff I'm. The last one from me move in rest of the eye to the Opex line items as I think about the adjusted EBITDA last quarter and this quarter. There were some add backs on integration and legal fees I think it was what just shy of $2 million in the quarter do we expect those to go.

Way I in Q3, Q4, and sort of where what are those one time items be sitting on the on the P&L I would it have been in the G&A line.

Yeah, Great question. They are for the most part integration costs.

And that is mostly where they sit and we expect them to still be there, but be less going forward than it was in the last two quarters.

Gotcha and then so the G&A may moderate down and then are in line with your prior guidance you're expected to see a bump up in sales and marketing and R&D over Q3 Q4, you did mention that there was a little bit of a lag I think in hiring or that sort of benefited a bit in Q2 that'll that'll catch up in Q3 Q4.

That's right.

We would agree with everything you said.

Perfect. Thanks, a lot congrats I'll pass the line.

Thanks, Kevin.

And our next question will come from Adam Tindle with Raymond James. Please go ahead.

Hey, guys its Alex on for Adam.

My questions.

Nice to hear that your commitment to being a rule of 40 company.

Recently, you said that you're trying to get to 2020 mix, 20% revenue growth.

That implies a slight acceleration from here and I was just wondering you know where could we expect that growth to come from more endpoints you know new logos Upsells cross sells.

Generation of Netmotion, just a bit of a breakdown there would be great.

Hi, Alex.

I don't know that I can give you a detailed breakdown, but I can kind of break out some of those pieces for you.

And as I touched on earlier, we think that there is a lot of net new logo and new device opportunity internationally. So that's one of the areas, where we expect to see growth I think another place that we've talked quite a bit about is new product introduction.

Meaning you know as we go further in this C. T N a roadmap in some of our other data and analytics products that we've talked about.

We start to see those layer in and that looks a little bit more I guess, you could model it like upsell, but it's more air or per device or more <unk> per customer.

So we've really barely scratched the surface on cross selling and sort of sharing.

Customers and solutions between the two selling teams, partially because personally by design and I'd say, mostly by design, we were running in parallel in the first half of the year and we're just now starting to kind of have those products touch one another so youll see more of that as we go forward.

Thanks, and then actually just to double click on kind of the international motion I know you've mentioned in the past that one of the things you look forward to leveraging wasn't that motion sales forces some of your international footprint International presence.

Have you seen any tracks.

Traction as a result of kind of leveraging that motion international footprint for absolutes core offerings, yet or is that kind of still on the roadmap and the longer term strategy there.

No. We certainly have I think we talked on an earlier call that we actually had promoted the netmotion international sales leader to become the combined international sales leader and so as we've looked at the different regions. A P. J as an example, where net motion was was doing much more actively than absolute had been in the past couple of years and so.

No. We definitely are leveraging I would say relationships and channel partners on both sides and as we look at Oem's distribution and direct sales I think that's probably where we've seen the tightest sales integration there they're less less running in parallel in the international markets than they have been in North America.

Awesome. Thank you very much.

And our next question will come from David <unk> with TD Securities. Please go ahead.

Good afternoon Kristina Stephen.

Wanted to talk about on the guidance side, particularly on the adjusted EBITDA margin guidance.

The new guidance that you provided this up I think part of it.

<unk> bought the way from the initial guidance you provided six months ago I'm, just kind of wondering what's really driven that significant upward revision in such a relatively short period of time I know you talked about challenges those hiring but wondering what's kind of else is out there that's driving that increase sure sure yeah.

So to put it in perspective, so it's an annual guidance that we gave to your point.

At the beginning of the year and we're now halfway through so I think our view is we're halfway through the year and we've made very good progress and we know more now than we did six seven months ago.

The crux of it is really probably on three vectors.

David you know one.

T need spend is less this quarter and we expect to be a little bit less than we had anticipated. We I think we had like others expectations that our hopes as the case may be that.

The pandemic would have subsided earlier, then it obviously came back.

So to speak and so that was one dynamic that's contributing to some some are less than anticipated spend.

Two of the topics that Christine was talking about in so far as attrition and hiring.

That that impacts our view of not spending quite as much in the second half.

The third aspect is that frankly, we're getting really good productivity with.

The resources and team that we have both on the selling go to market side productivity as well as the.

Production non revenue.

You're generating head count that the rest of us are.

And so far as getting things done so that combined with more favorable results right. We had a more positive Q2 for example on the E. R. R side and on the revenue side that we anticipated that that all flows through to the full year impact.

Well that's helpful. Stephen.

I know, you're not providing guidance for 2023, yet, but how should we think about the margin profile for next year, you know understanding the commitment to the rule of 40.

The guidance I think kind of baked in EBITDA margins falling closer to the 20% level in the second half of this year.

And so just wondering whether you see that's kind of closer to the 20% level is where you might see margin.

For next year, and then I guess a related pickup in the revenue growth hopefully as well.

Sure Kristen and I will tag team on that as usual.

Yeah, I think we would offer at least two points on that one we've been.

Fairly.

Consistent transparent about the notion that the investment that we're making in sales and marketing and R&D in the second half is is fairly periodic meaning it's really for this six months.

And so we do not expect and see a need for a pronounced investment and spend that's going on in perpetuity or even into the next fiscal year and so we believe that we will enter the next fiscal year and a better cost structure and productivity standpoint, and so to the crux of your question when you talk about.

Our EBITDA margin, we expect to see a lift headed into next year. We when we talk about you know what we perceive as a floor of 20.

And the second half of this fiscal year ended June being in the low twenties, then that's something that we do not expect to maintain over time, we expect to see that begin to lift again.

Modestly and to the point the conversations the March to 2020, 20% top line, 20% profitability is kind of the the mantra. If you will it's you know as we say not a straight line, it's not linear, but we expect to exit the year in a very compelling position to demonstrate topline.

On our way there.

And the bottom line solid profitability will be kind of the constant the floor. If you will that like okay. They can always maintained as healthy profitability, while while growth exits way up there.

That's helpful. Steve and then you've got to go run the numbers you talk about I guess on the on <unk> basis.

I'm trying to.

Do an apples to apples comparison at all on the growth in.

In particular.

Converting the Netmotion from U S. GAAP the ifr Rouse like is there much of an impact that so that 17% growth, let's say that you generated this quarter would vary significantly from it. If you did that calculation that cannot drink. Good good I'm glad you're calling out so one that is totally our endeavor.

Is to always provide apples to apples.

Information. So you can really get a sense of the underlying organic growth in the business and so that's why we talk about it on an as adjusted basis. So so thank you for saying that.

The main difference really is probably on the cost side not really on the revenue side I FRS and GAAP are pretty darn similar close on the revenue so that wouldn't really be a difference at all one one item that comes up for example is the capitalization of lease expense.

That happens to be a U S GAAP and I F. R. S difference.

Other than that there isn't really not tremendous differences.

No that's helpful and the last question.

And just on the education side, you guys talked about the tougher year over year comps.

We start to see this quarter and we'll see that over the next few quarters I guess kind of once we get through that though how do you see the growth trajectory for.

For the education business do you see that.

Revenue growth the era of growth starting to pick up again or do you see kind of settling in maybe in the low <unk>.

Low to maybe mid double digit range.

Hi, David.

I don't think our view on that has changed very much I think that Q2 is always seasonally one of the softer quarters for education and as I said last year. We you know we had a particularly strong quarter. So I don't I don't think we were.

Surprised I think we've.

Actually quite pleased to see the stability of the education business as we went through Q2.

I think as we head into the second half of this year and these are the traditionally more active quarters and we are seeing a lot of activity. We are also continuing to see a lot of funding sitting out there and I think I mentioned on one of the previous calls.

We've been working quite closely to make sure that that our customers can take advantage of that funding specifically with absolute software.

I think our long term view remains unchanged, which is I don't see that.

Talked about the three chapters right. The pre pandemic, we saw education as a classroom business that was in a bit of a decline I think during the pandemic. It was clearly a little bit more of a boom and we saw a big surges in activity as customers were figuring out how to equip every child with a screen and I think long term, what we see is a steady run rate business that that like.

Look you know likes it likely looks like an enterprise in terms of its use cases.

The seasonality in their buying patterns are a little bit different so it's probably on the lower end of that the enterprise space. You know there I always expect a little bit of a lag between agent.

[noise] present government. So I think if we were if.

If we were guessing I think we'd be targeting sort of low single digits as the run rate as opposed to kind of putting it back up in high single digit or high double digits, sorry, So that was low double digits as opposed to high double digits.

And I don't think that's changed right I think that we we've said pretty consistently that once we get through this peer.

Period of rapid activity, we're going to see things settle down, but theyre going to settle down into a nice healthy stable business as opposed to what they looked like pre pandemic.

That's helpful. Thanks, Tracy that's it for me.

Thanks, David Thanks, David.

And this will conclude our question and answer session I'd like to turn the conference back over to Kristy White for any closing remarks.

Thank you.

I want to thank you all for joining US again today and as we enter into the second half of your fiscal year I'm very pleased with what the team has accomplished we.

We have a clear view on what we need to do as a team and with our strong start to the fiscal year. We remain focused on executing our plan. Thank you all so much for joining us today.

Ladies and gentlemen, the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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