Q2 2023 Absolute Software Corp Earnings Call
Good afternoon, everyone and thank you for standing by welcome to the absolute Software's fiscal 2023 second quarter results Conference call. All participants are in listen only mode.
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I would also like to remind everyone that this conference call is being recorded today February 14, 2023, I would now like to turn the floor over to your host.
Johan Kim Vice President of Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us today with me on today's call are Kristie, Wyatt, President and Chief Executive Officer of absolute software and Jim <unk> Chief Financial Officer.
Before beginning our formal remarks absolute software would like to remind listeners that certain portions of todays call 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 Tuesday February 14th 2023.
In absolute software undertakes no obligation to update or revise publicly any of the 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 most recent M. DNA, which is now available on absolute softwares website.
And will also be available on SEDAR and Edgar.
I would now like to turn the call over to Kristy White. Please go ahead.
Thank you to everyone joining us today for absolute software Q2 fiscal 2023 earnings call.
During today's call I will focus on my remarks on three areas first I will recap our Q2 results and how they are reinforcing our growth strategy.
Next I will touch on where we are seeing growth and how that's bolstering our go to market momentum.
And finally, I will close by talking about our outlook for the remainder of fiscal 2023 amidst the current economic headwinds.
Before I step through the results I wanted to take a minute to welcome Jim Mcgill to his first earnings call with absolute.
It has only been with us for a short time, but he brings a wealth of financial and operating experience to the company and I'm very pleased probably has hit the ground running we're really excited to have someone of his caliber as the leader of our finance organization and I look forward to introducing him to more of you over the course of this year now let's get to the results.
Q2 was a solid quarter, we delivered stable growth to increase are arc 225 million, representing a 15% increase year over year, driven by growth of 18% in enterprise and government with wins across key verticals, including health care transportation and public sector.
Enterprise and government accounts for approximately 80% of our AOR education grew 6% year over year, we had some nice wins, there that should help growth going forward.
The sequential increase in air at $9 $3 million is the largest in absolutes history.
This performance came despite broader macroeconomic headwinds and illustrated the critical role absolute place to protect corporate networks, and the new remote and hybrid work world.
Adjusted revenue was $57 7 million, a 9% increase from the same quarter last year, we on boarded almost 2000, new customers this quarter, bringing our total customer base close to 20000.
Our pipeline is strong and we're seeing growing interest in our cross sell and collaborations with our partners.
I'm also pleased to report that our efforts to win wider recognition in the marketplace are taking hold with recent accolades from leading industry analysts.
Before I turn to our profitability I want to first acknowledge the modifications to our guidance for the balance of this fiscal year.
Our customer retention and NPS scores remain very strong we did see a reduction in the average contract length and we saw some slippage in a small number of high value secure access signings to later in the year.
We believe both circumstances are attributable to the more cautious macroeconomic environment.
As customers seek to limit or defer large cash expenditures.
Well these issues only impacted our revenue by approximately 1 million in the quarter, we expect that trend to continue and for it to have some cumulative impact on the revenue recognition in the second half and that's reflected in our revised outlook.
We are also seeing more customers adopting our secure access cloud offering evidence of our solid position in the V. P. N. A market. However, those contracts are recognized ratably and have no upfront revenue component.
One of the hallmarks of that food is that we have a strong track record of delivering healthy revenue growth with strong margins.
We posted an adjusted EBITDA margin of 22% in our fiscal Q2, we have taken steps to manage our cost structure to deliver to our original adjusted EBITDA dollar target.
Jim will provide more details, but I want to be clear, we are continuing to invest in building our awareness and our go to market initiatives and remain confident that our growing funnel of opportunities and our ability to close on them will lead to some improvement in AOR growth for the remainder of fiscal 'twenty three.
I want to provide more context on that last point. So let me highlight some examples of the customer momentum we are seeing in enterprise and government across a collection of industries.
Health care is an important vertical for us as the industry places a high value on safeguarding patient data and we are well equipped to meet the stringent security requirements of this industry.
We are increasingly recognized as a core component of the security fabric and keeping devices applications and data secure with our self healing differentiation differentiation.
Reflecting that increased awareness, we had a health care customer expand their deployment of our visibility and control capabilities and transitioned us into their security and compliance team from within their IP asset management team.
Additionally, a large California managed care provider is now using absolute resilience to help identify assess and self heal their critical security applications like crowd strike that locker NZ scalar. This deployment is a great demonstration of how we are complementary to the broader security ecosystem.
We are also making inroads in the financial sector.
A tier one global bank adopted our absolute control in absolute software with nearly 24000 license purchases.
This design win was a great example of our PC OEM partner, leading with Standalone software deals.
And in transportation, our cross selling momentum continued this quarter with a nice win at a European public transportation authority that added secure endpoint licenses to their existing secure access deployment.
This customer was already providing the remote workforce with a resilient V TNA solution, ensuring secure network connectivity wherever those employees are working now this customer is also utilizing our self healing capabilities to deliver greater resilience visibility and control for their mobility answer first applications.
We also signed a widely recognized global ride hailing provider.
This firm is a widely distributed workforce and was looking for a solution to manage a fast growing fleet of mobile endpoints with the capabilities absolute control provides them. They can now re architect their security compliance and audit program, thereby greatly improving remote device lifecycle management.
And we have good news in government as well, we increased our penetration in one of Europe's largest police forces supporting always on secure connectivity across the 39000 mobile devices.
Proving resilient and coverage across the forces entire patrol area.
And finally, I am thrilled to share with you that we achieved our fed ramp ready designation well it will still be a couple of quarters before we received a full authorization. The designation is already opening doors with partners and federal agencies, who need the highest level of cloud security in the market.
Our relationships with OEM partners, who have large federal practices will be an important resource to building our awareness and we look forward to updating you on this market as we move forward.
Let me now touch on the growing awareness, we are gaining in the industry.
G. Two continues to recognize absolute as a leader for the 12th consecutive quarter and their winter 2023 grid reports for endpoint management, well, what I'm really excited about is that they named absolute as a leader in their zero trust networking category for the second consecutive quarter.
Other industry analysts are also increasingly recognizing the unique capabilities, we're delivering to our customers.
On the unnamed absolute software as an endpoint security vendor to watch IDC recognized absolute as a leader in European end user experience management, citing our strength and ensuring resilient network and access requirements.
And Forrester is now recognizing the increasing value of firmware level protections to ensure that softer agents are functioning properly. They are included absolute in their new research category for firmer embedded persistence in their end user computing tech side.
Lastly, we are collaborating with more of our OEM partners that'd be a software and services as an increasingly attractive way to enhance the value they offer to their customers.
Lenovo as an example, now includes absolute secure access and their cinch sinkfield suite of products, reflecting growing customer interest for always on self healing network connections.
The key takeaway is that despite a decline in P. C hardware attached sales in our education and mid market verticals.
We are growing our revenue through OEM partners by generating a higher penetration of Standalone software sales.
We continue to see P. C. OEM partnerships are strategic and a significant opportunity to drive growth and awareness for our secure access products and greatly contribute to our expanding our cross sell initiatives.
Moving to education, we have seen some temporary headwinds to AOR growth, but as we have seen a mix shift from P. CS to lower priced chromebooks.
The good news is that overall unit growth this quarter remained low to mid teens.
With expanded adoption for our resilience for Chromebook solution.
One of the nation's largest school districts had chosen not to use absolute as they migrated to chromebooks last year. However, they quickly realized the value that we bring to the table and have now installed on nearly 200000 new chromebooks.
As a result, they were able to improve their device loss prevention, kpis by 10%, bringing them into compliance with their boards mandate.
Well education is now approximately 20% of our air or it is still a very attractive business with expected solid high single to low double digit growth over time strong margins and free cash flow.
Before I hand, it over to Jim Let me close by saying we are pleased with a solid quarter on AOR growth and remain confident in our long term plan to enable a reliable work from anywhere experience that ensures maximum security an uncompromised productivity.
You have heard me highlight our commitment to the rule of 40 as a framework for how we manage our business and specifically we have always stated that we are committed to balanced growth and to achieve over time, what we call. Our 'twenty 'twenty model, which means 20% revenue growth along with 20% EBITDA margins.
As I mentioned earlier, while macro headwinds will impact our near term growth. We are actively managing our business to deliver on our EBITA margin commitment. However, however, based on our guidance, we will not fully achieved the rule of 40. This year on revenue, though on an IRR basis, we remain on track.
With that I'm going to pass it over to Jim to provide more details.
Okay.
Thanks, Christy good.
Good afternoon, everyone.
I've had the opportunity to meet a number of you over the past couple of months and often the first question I am asked is why did I choose to join the absolute team.
I don't think it will surprise you that it is likely the same reason many of you have invested in our company.
Our unique position in the firmware of over 600 million devices gives us a unique unassailable market position with a very large and growing addressable market and our expanded portfolio opens up opportunities for accelerated growth.
And I liked the fact that we can balance attractive growth with strong margins and free cash flow.
What I bring to the table his experience building a robust financial organization that positions absolute for success, which enables christiana team to continue to build awareness of the company and to accelerate our growth.
As I settle into the CFO role I'll be prioritizing enhancements to our finance operations and taking a broad view of our capital structure.
We'll share more on these topics in coming quarters.
I'm really excited to be part of absolute if we do our jobs well and I'm sure. We will absolutely will soon no longer be the best kept secret in cyber security.
With that introduction, let me move to our Q2 results.
As a reminder, we are reporting revenue and year over year comparisons on an adjusted basis that excludes any I FRS purchase accounting impact on deferred revenue.
We believe this adjusted revenue metric provides a more meaningful and transparent view of the combined business.
Adjusted revenue was $57 7 million for Q2 fiscal 2023 up 9% from the prior year.
Reported revenue in Q2 was negatively impacted by approximately 1 million attributed to a reduction in our contract lengths of our secure access offering.
This reflected customers exercising more caution in their purchasing actions due to macro concerns.
Particularly late in the quarter.
As a result of higher than expected mix of customers chose to sign one year contracts to reduce large upfront payments and manage their long term commitments and we also saw some timing slippage in a small number of large pipeline deals.
To give you a sense of the impact on contract lengths. We ended the June quarter with average contract lengths across the entire business at almost 1.4 years.
Since that time this metric has decreased to 1.2 years.
This shift has an impact on revenue due to I S. R. S accounting, but does not have an impact on annual recurring revenue, which looks at the annualized value of our contracts.
Total annual recurring revenue or a R. R was 225 million representing growth of 15, 1% year over year.
The 9.3 million sequential growth in total a or is a record for absolute and up from $6 2 million sequential growth in our first quarter.
The AOR growth was driven primarily by continued strength in enterprise and government, which grew nearly 18% in Q2 at the higher end of our growth rate recorded over the past year and a half.
While enterprise and government was strong education are our growth was moderated.
And it grew two 6% year over year down from 7% last quarter and 12% in Q2 of last year.
At the end of Q2, approximately 80% of our secure access <unk> portfolio was on subscription agreements up from 77% at the end of Q1.
Net dollar retention of 107% is largely consistent with prior quarters.
Enterprise net dollar retention remains strong despite some of our customers slowing or reducing head count.
Education net dollar retention declined year over year in part a hard comparison due to the higher COVID-19 remote classroom purchasing dynamics, we experienced during and throughout the pandemic.
Moving to margins and cash flow.
Adjusted gross margin of 88% was in line with the prior quarter, but down slightly from prior years, we absorbed higher costs during the migration of our data centers to AWS.
We expect gross margin return to historic levels up 100 to 200 basis points from current levels next fiscal year.
Adjusted EBITDA was $12 8 million or 22% of adjusted revenue.
As mentioned on our last call, we moderated hiring in Q2 and expect head count will be relatively flat for the rest of the year.
Given our revised revenue outlook. We are also managing our costs more aggressively for the rest of the fiscal year by reducing discretionary spend.
We will continue to invest in building awareness in our go to market initiatives.
Operating cash flow was approximately 1 million due to lower deferred revenue and other working capital related items.
We ended the quarter with a cash of approximately $50 million.
The decline from the prior quarter was primarily a result of the lower cash flow from operations, which I just touched on our dividend payment off cycle that payment and certain settlement costs associated with our stock based compensation program.
With regard to our debt our coupon increased 142 basis points from our prior quarter, resulting in a sequential increase of $800000 in additional interest expense.
For our Q3, our coupon has increased another 106 basis points, which will result in a $650000 sequential increase in our interest expense.
Our expectation is for higher profitability and cash flow for the remainder of the year and that gives us confidence in our ability to service the debt, while continuing to invest in our business.
Turning to guidance.
We expect continued strength in our sales pipeline and higher levels of secure access renewals result in an acceleration in both our adjusted revenue and adjusted EBITDA for the remainder of the year on a year over year basis, and compared to our Q2 performance.
That said, we are mindful of the macroeconomic environment and the impact that we discussed there.
Therefore, we are updating our guidance to incorporate these parameters.
We now expect adjusted revenue for fiscal year 2023 to be in the range of 231 million to 235 million representing growth of approximately 10% to 12% respectively.
There are two primary factors in our revised revenue outlook. The first is the lowered contract term assumptions for secure access which will result in a reduction in revenue of approximately $6 5 million for the full year versus our original expectation inclusive of the 1 million we already felt in Q2.
And second to a lesser extent the slippage of a small number of large deals out of Q2 previously mentioned.
We currently expect all of these deals to sign between the current quarter and the end of the calendar 2023.
As a result of these factors. We also have slightly moderated our growth assumptions for the remainder of fiscal 'twenty three to reflect the macro factors. We've described and now expect it to accelerate only slightly above our 15% year over year performance in Q2.
I'd also note as Christie sided in her prepared remarks that an increasing number of customers are evaluating and opting for the cloud version of our secure access product.
It's important to call out that secure access cloud revenue is recognized ratably over the entire contract term with no upfront revenue recognition. So to the extent. This mix shift continues that can also impact near term revenue recognition, but does not impact IRR and therefore is a positive development relative to our longer.
Term revenue trajectory moves.
Moving to adjusted EBITDA, while we see our topline growth moderating we are aggressively managing discretionary costs and expect adjusted EBITDA margins to expand almost 200 basis points versus our prior expectation and range of approximately 23% to 25%.
When you put it all together, we believe we will achieve our prior adjusted EBITDA dollar targets, while maintaining our initiatives to build our awareness and enhance our go to market, which we believe are important to our success.
We remain confident in our long term commitment to the rule of 40 as a framework for how we manage the business.
Given the macro pressure, we see across the industry, we believe our time to achieving our twenty-twenty model will be extended.
For that reason, we are taking our growth expectations down for this year and focusing on driving profitability.
We remain committed to our balanced growth strategy and while our guidance doesn't call for a rule of 40 on a revenue adjusted EBITDA basis, we believe a or our rule of 40 is still achievable given our expectation of improved <unk> growth for the remainder of the fiscal year.
With that let me turn the call over to the operator for Q&A.
Operator.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing you to you.
It would drop in the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble IRA.
Our first question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
Great. Thanks for taking my questions and providing the clarity on the updated guidance.
I guess just.
First question I guess for you Jim welcome aboard and.
Just with with a lot of the upfront hiring that happened at the beginning of the fiscal year, how should we think about the operating cost for the remainder of the year I know you're doing some cost controls, but are there any increases in the March quarter, just with the with the started of the calendar year or should we think of Opex flat to maybe even down to hit your updated guidance.
Yeah. Thanks, Mike.
I'm I'm brand, new and it's a fun, it's a fund position to be in in terms of the team and.
Taking over that now from from Ron Haan, who let us pretty effectively up to the point, where that I joined the team.
From an Opex standpoint, I think the way to think about the Q3 and Q4 and a path to end of year is looking at our our profile for Q2 and expecting that that's.
So to speak the high the high Mark we're gonna be.
Disciplined with regards to discretionary costs, we're going to be disciplined with regards to head count.
And as I've said in the prepared remarks be thoughtful about our balanced growth profile.
Yeah.
Great. Thanks.
Follow up question now past line.
Yeah for Christy just on the secure access side I think he might have some easier growth comparisons in the second half of the year, but it sounds like some some deals are shortening. So is it is the updated guidance, mainly just to the deal shortly and secure access or is there kind of a broad based strength across.
Our broad based weakness maybe across the whole business. If you could just maybe touch on what you're seeing for the second half of the year.
Hi, Mike. Thanks for the question actually we're seeing strength in the assay business anything a solid quarter.
We did have a small number of other fairly sizable deals in the very low.
<unk> ended the quarter that pushed as Jim said in his comments, we see those coming in in in a in this year. So I don't think we're seeing a trend in the overall strength. So I think we saw them a little bit of timing in the last moments, but I think the bigger component is really around the contract terms and you know we've talked quite a bit about.
Ultimately wanting those contract terms to come down so that so that our revenue line sort of smooth. So I think we had signaled.
One of the things we watch closely as we looked for macro impact and we certainly started to see it. So I think this is more us reflecting that in the second half of the year.
Right. Thank you I'll pass it on.
Yeah.
Our next question comes from Scott Berg with Needham. Please go ahead.
Yeah.
Hi, Christy and Jim. Thank you for taking my questions I have three.
Starting off with the change in contract terms I, obviously get the ifr impact of shortening those terms and it's Christy just finished an especially tough favorable for you in the longer term subtle aligned rubberized, a little bit better what they are.
Those customers that are teaching those terms is the concern there primarily just the cash outlay for that so.
Two years upfront versus one year.
Hey, Scott. This is Jim Yeah, I think the quick answer is that is what concerns us cash outlay clearly customers are thoughtful rollout.
There are upfront commitments that being said our net dollar retention is very strong.
In some cases, we have a program, where we extend our customer with more call it co terminus interaction.
This is a a renewable that's coming up in the next six nine months.
The customer entertains and uplift in their engagement with us.
And rather than and adding a year or two the current contract of nine months.
We.
Process there on <unk>.
Over the remaining term, let's call that the six or nine months and so we end up with as an effect of.
And add onto the customer relationship.
But a term lengths that.
Coterminous with the existing existing run out of the contract.
These are all dynamics that play out in the context of engaging the customer obviously will do the extra term to add onto the year, if that's possible, but what.
What we like to do is engage the customer and work with them with regards to what it is they'd like to do to put in place. So.
There are some of the dynamic yeah, and I just to add onto that you know when the original expiry date comes on then the customer will renew the entire estate.
I had a couple of more points to that Scott I think that.
You know a couple of the things we mentioned on the call are N. P. S scores actually we're at another record high this quarter sort of mid to high seventies.
Standing for something we're very very proud of them and our retention remains strong and stable and so so as I said you know we have the revenue kind of recognition mission components, but I don't think is seeing.
No not interpreting it at this moment as any overall sentiment across the USA businesses.
Got it helpful and then for the second question.
Education segment, I'm, just kind of a second quarter in a row, where you've had a unit growth to be strong, but customers or at least more customers choosing to chromebooks.
Versus the you know versus the P. CS for their for their device.
Joyce do you think this is a long term change or is this really just reflective of the short term supply chain issues with the PC end market.
It's it's a great question and I actually think that the supply chain issues, maybe led some customers to try chromebooks for the first time.
I don't see any reason why they would go back but you know there are areas, where we see it more concentrated so we see it more concentrated for example in the lower grades maybe not so much in sort of the advanced great. The other thing we've done quite a bit of work on and I think maybe I've mentioned this in the past is that education is an industry tends to be more run rate buyers.
They're they're one of the few parts of our business, that's still does kind of hardware and software purchases more combined and they take longer term licenses.
And so if they're doing that with chromebooks the churn.
For the the refresh rate of chromebooks actually tends to be about 18 months shorter than that of a P. C. So we'll see that sort of renewal if you will a little bit sooner on the books as well so while we're seeing this shift yes, we see some compression on error or it's yi.
I'm a little.
We're a little bit more about the unit volume growth just to sort of if you can sort of see the delta between those two dynamics, but run rate. That's what gives us confidence that this is a high single digit low double digit stable business.
But that'll do.
Got it. Thank you and then for my last question.
Just recently a week or two ago, you announced two new your application persistence of a service partners. The partners I know, it's very early in that life cycle. I believe that brings you to four partners there, but any kind of update to how that's progressing what you're seeing about interest or take rates you know through those IFC partners for you.
Thank you yeah.
Thank you for asking so the I think we're getting close to it doesn't I don't think we have the final member of <unk> partners.
We are starting to see some of them go into commercialization as we said this is a sort of a liberal over us as we're standing those partners have been kind of getting ready to sort of help them turn to market. So we're feeling quite good.
About how that's taking shape you know as I said, it's something you'll continue to see us update everybody on high overtime.
Great. Thanks for taking my questions.
Yeah.
Okay.
Okay.
Our next question comes from Dennis will sharpen the BMO capital markets. Please go ahead.
Hi, good afternoon.
On the secure access business remind us what proportion of that business is all currently on a cloud model versus being an under audit recipe into recognition.
Yeah.
Uh huh.
I'm trying to think of what we've put out there publicly I think in the what we've said publicly is that the shift to term is I think we said above 70% I think it's approaching 80%, which is what Jim shared in his comments the percentage that's gone to cloud is actually incredibly small. So so they were just starting on their cloud journey at the time of ACA.
Provision what is very exciting to us is the number of new customers, especially in especially some of the larger customers that are starting to look at cloud adoption. So so we are starting to see an uptick in interest on that but.
Current percentage of the overall portfolio it is still very strong.
Okay, and then in terms of the deals that were delayed just to clarify was that entirely on the secure access side and on the endpoint business any change in sales cycles. There is a function of a weaker macro.
And they were on the on the SA side. There was there was.
Three of them I'm actually I think we see them all coming in this year two of them in the house and actually.
Some of them have kind of grown in value and so.
Now there's the part about the secure access business is that it is a little bit lumpier in that way. It does tend to have sort of some of that lumpiness is the sort of traditional enterprise stuff.
As opposed to the SEC business, which it was it's got a lot more small medium business sort of hum diversity across the installed base.
I know you.
You know I don't think we've seen are observed anything unusual on the S. E side outside of the a P C hardware attached.
Comments that I made earlier, which was relatively small.
Okay, and then finally, if you can remind us in terms of the fed ramp opportunity you alluded to it recognizing that you know it will take a few months to get the final you know.
Certifications and then to go from sales cycles, and so forth but.
How should we think about quantifying with us.
Well I mean as far for your so your addressable market.
Yeah.
I mean, it depends on whose numbers you're going to to believe but I think that the you know the overall federal security spending budget is is in the billions on its own and so I think that and you've heard this past year, you know executive orders from by talking about the shift to zero Trust. So we see it as a significant market.
Spansion opportunity not just within the U S are celebrating we're having conversations with some of our international government customers, where you know certifications in the U S. You know there may be sort of loosely affiliated or similar certifications or structures or controls that we can we can sort of work with within those regions and so we're working closely with our partner.
This too to look at how we introduce that both on sort of zero Trust and sought after opportunity side, but also opening that conversation about how do we make federal devices more resilient as a whole and how do we make all of the security happening within that within those environments.
You know work better.
Thanks.
Our next question comes from Mark cash with Raymond James. Please go ahead.
Thanks for taking the question this is mark on for Adam.
I guess when we look at the updated guidance is decreasing by about four 5% at the midpoint for revenue and the commentary about duration slippage, but also having confidence in closing those deals.
Where do you feel you'll be exiting the year now versus previously thinking that 20% growth in poor Q.
Hey, Mike This is Jim I think the way we think about it is what I said in my prepared remarks, I alluded to the notion that there would be an ever so slight modest increase as we execute to year end on our total <unk> performance.
Hum.
And then setting against that a disciplined.
Oversight on our spend to achieve our our rule of 40 goalpost.
With respect to the.
Hum.
I'm I'm, losing I'm, losing the point I'm, sorry, [laughter] asked the second part of your question again because.
As I was looking at my notes.
Yeah.
I mean, the question is if you had deals slipping.
From Q2, and you have confidence in signing them you previously the commentary last quarter was exiting four Q was about 20% growth. So I guess I'm getting at is is Q2 kind of at the trough of revenue growth.
For fiscal 'twenty three.
Thank you that's helpful.
Yeah, I think the quick answer is yes, and and you know that therein lies some of the framing of eyewear.
Notably focusing on what is the right reflection of the growth of the business, but we're being disciplined with respect to how we set expectations on the revenue side.
Okay that makes sense.
And then a question on sales productivity and kind of the focus right now so if I recall the quota carrying hiring was completed early in one Q. So I guess, how long does it typically see how do we think the growth take hold and we looked kind of people ramping getting trained up and then if I kind of thinking about.
Looking at Q2 and act endpoints declining on new logo area are increasing.
Is that all a reflection on sales more folks in hunting new accounts versus renewals.
Oh, that's a great question, Mike. So so first of all yes, I think from me from.
From the beginning of the year, where we said that the majority of ours are.
Selling capacity, we attempted to get in place as we came into Q1 with the expectation that they'd be hitting their stride in the second half and so it it's going to vary a little bit by this team in which product set et cetera, but generally yes. Our expectation is is that a you know a lot of that sales capacity is coming online in another investment we made in.
<unk> was around demand generation and in some of the investments we made in an FTE hours for example, and so while we you know we we we set expectations as well that that that investment we made intentionally in the beginning but you'd expect to see us bring expenses or sort of curtail that hiring and bring costs in line in the second half of the year and that that remains to be.
So I think you should expect that that capacity is sort of coming online.
Okay. Thank you Seth one more.
Just how did customer behavior shrimp throughout the quarter.
Started out kind of as you expected and got worse as the weeks and days progressed or would you guys see on your end.
Yeah, I mean, I think as we come into this quarter, even right we see.
Stable growing pipeline.
I think that a lot of the customer our customers. So they have to still have very real problems, they're trying to solve within their environment. In some cases, that's only amplified by you know the other parts of the organization that may be undergoing stress within their environments.
And so that's why I say I don't think on the AOR side, we're seeing a significant impact on demand and in some cases as Jim pointed out they may opt for a one year contract as opposed to two or three year contract because right as opposed to you know.
Optimizing unit volume they want to they want to sort of optimize for for sort of cash flow management and so.
So so that's one of them you know one of the pieces I don't know that I would say, we saw any sort of inflection point I think it's not unusual for some of our larger opportunities to happened in the last couple of weeks of the quarter and this was just a case, where a handful of those moved around you know Marc.
One thing I'll add is.
Recall that in the last quarter when Ron was acting CFO . He gave a stat on the performance of the business.
Which was a reflection on the revenue growth and what he did is he described if we ratably recognized our revenue from the network motion acquisition.
From the time, we purchased to the time that we reported last quarter and he gave a what would our AOR growth be if everything was ratably recognized we did the same exercise for this quarter and what we've reported as our Q2 performance is 9% revenue growth adjusted revenue growth.
But we ran the same exercise this quarter to get a sense of what would our AAR are have been had we enjoyed this ratable recognition dynamic and the analysis said that the growth would have been around 13%.
So 30%.
If if if everything was ratable.
And on an IRR perspective, we performed at 15, 115, 1%, which is actually pretty good. So your your question about the profile of the quarter.
Your your your question about the profile of the quarter did things get worse and the answer is I think it was <unk>.
Steady state of business.
With this dynamic of shortened term based on just a buying pattern and.
I wouldn't I don't know that I would characterize it as worse. It clearly it has an impact on the revenue.
And it's the reason that we reframe if you will.
The guidance, we're setting from an adjusted revenue perspective, but we feel good about repeating the performance that we have in this quarter on an a or a perspective Q3 and Q4, yeah and just to just to just just want to make sure I heard that correctly. It was 13% would've been the ratable adjusted revenue.
Growth, but if you ran that same calculation on a 15% 15, 1% of Aero growth, Yes, I think that's right.
Okay understood. Thank you so much for the answers.
Thank you Mark.
Our next question comes from David Kwan with TD Securities. Please go ahead.
Yeah.
You've talked about I guess.
It looks like a renewal base in the second half that you expect for secure access can you talk about what the contract length.
We're that are coming up for renewal because it sounds like Oh, many of customers that you're talking to are maybe looking to sign shorter contracts.
Hi, David Yeah. So what we had talked about was that a lot of the early contracts in that motion was making their first move from perpetual to subscription and tried to be acquisition had multiyear terms and that in time, we wanted to bring those the average term rate back down to closer to one year, so that we'd smoothed out that revenue right.
Revenue line and so the renewal period.
It doesn't always reflect with the original term on the contract was Oh, we will sort of work to to sort of balance that out with the field organization, but.
Now are we with.
Long said you know the ideal place for us is probably.
You know and that sort of one point to 1.3 space and sometimes you know what's going on with the customer will kind of move that up or sort of moved that down and just a reminder, that it is very specific to the SA side right.
What happens on the sell side. It does have an effect on cash flow, but it doesn't really have any effect.
Sure.
Yeah.
Yeah. So it sounds like I guess it sounds like the majority maybe all these contracts are coming up for renewal.
Is that kind of giving you indications that they're looking to sign maybe one year contracts versus the multi year that they'd signed previously.
Yeah, I don't think so I don't I guess the way I would rephrase that is you know with with an eye on what's going on in the economy around us, we're taking a position and managing the business in a.
In a thoughtful way that says if we continue to see through the second half the contract terms on SA looking like they did in this past quarter.
That was sort of thought that through I wouldn't I wouldn't go so far as to say customers are giving us that signal yet because I think some some cases, we're talking about expiries. It ended Q3 and Q4.
Sorry is it maybe a better way to put it is like what are you guys assuming in.
In your guidance are you assuming that the vast majority of the renewals that are coming up are going to just be for one year term.
Yeah.
I think the right frame it is.
We looked hard at Q2.
And the fact pattern that emerged and we apply that on a go forward basis, given given the condition of the macro market. It's it's wise for us to be prudent here and be thoughtful about.
What to expect in and we have a obviously there's a spectrum here you can have a spectrum of optimism or pessimism and we tried to be balanced about where are we where we fell out on that.
Here is the <unk>.
Component of our business and that as you know was the normalizing factor of all of the mix of various contract types that we sell and so that if you want a pure into the business you didn't get a real sense of the momentum we're executing in the market <unk> is the key to do that.
Alright, I'll just add that I appreciate the color Jim.
Last question.
Just looking out on the presentation and seen all the metrics come out, but there was a slide in there that indicates that the number of Ah at the endpoint.
It's a lot sequentially from $14 1 million to $13 nine.
I'm, just kind of cleaning up the data or was there something else going on.
Yeah, it's not it's not unusual to remember just for folks who aren't familiar with that number that's the number of devices actively calling in to our cloud hosted services. So what it doesn't include it's not necessarily a reflection of the seats sold. These are these are licenses already purchased and what's being sort of activated and so what's not reflected is if you have.
On Prem customers, who were not connecting to the cloud so that would be an S. A specific piece whether or not in that number.
And it's also just not unusual for that slowed down during the end of the year, you're talking about a quarter with Thanksgiving and the holidays and a lot of I T programs sort of freeze deployments as they go through their end of year or so if it's not unusual to sort of see that slowdown.
Yeah.
Thanks.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Chris the White for any closing remarks.
Alright. Thank you, let me close by thanking everybody again for joining us today, and and again, while we weren't immune to the macro environment. We are very pleased with the progress, we're making and was a solid quarter an era of growth and we feel very confident in continuing to deliver against our long term plan.
Thank you everybody.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.