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spk01: Good afternoon, everyone, and thank you for standing by. Welcome to the Absolute Software's fiscal 2022 second quarter financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please press star then zero to reach an operator. Before beginning its formal remarks, Absolute Software would like to remind you that today's portion of today's discussion may contain forward-looking statements that reflect current reviews 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 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 security law. For more information on the assumptions, risks, and uncertainties relating to these four looking statements, please refer to the appropriate section of the company's MD&A, which will be available on the Absolute Software's website and on the SEDAR and EDGAR. I'd also like to remind everyone that this conference call is being recorded today, Tuesday, February 8th, at 5 p.m. Eastern Time. I would now like to turn the conference over to Christy Wyatt, President and Chief Executive Officer. Please go ahead.
spk05: 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 being 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 ARR across products, segments, and regions. I am very pleased with the quarter and would like to take this opportunity to reiterate the stated long-term goal remains the same, specifically 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 NetMotion products. Again and again, I hear strong support for how we deliver resilient, self-healing security solutions. And for the timeliness of delivering those solutions into today's environments, our CIOs and CISOs are supporting broad remote workforce programs requiring a robust endpoint-centric security strategy. I have 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 ZTNA solution that skips the tunnel altogether. Whether your tunnel is in the cloud or to your data center, a remote worker needs an amazing user experience but cannot afford any latency introduced into that 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 G2.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 ARR growth year over year, reflecting solid sales activity across the now combined go-to-market teams. One notable customer win for our NetMotion products was 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 ARR. and in Q2 saw continued ARR growth of 12% year-over-year. This performance was impacted by the seasonality of the education market and slower growth of PC 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 student and the school from ransomware, student safety, and privacy risks. To support this evolving model, we launched a new absolute resilience for student devices to help IT 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 year to a 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 NetMotion 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 investment internationally, we saw a very strong uptick, 47%, in international ARR growth year-on-year, with EMEA and APJ 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 Nubius and Benelux and MEA in Dubai. We also scaled our customer activation capabilities, notably with our partner HP, enabling in-factory activation in EMEA, empowering customers with the ability to track and manage their assets through the supply chain and into their hands. In APJ, we saw a long-time Absolute MSP partner and one of Japan's leading internet access cloud and network solution providers announce the launch of a new service solely based on our solution. The offering is a modern remote access service based on vTNA 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 ARR by demonstrating the power of endpoint resilience into their environments. 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 65,000 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, no 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. As we've continued to see customer adoption of Absolute Resilience grow, 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 of application persistence 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 where a customer has 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 offline for the first week of the attack because the ransomware explicitly attacked and rendered the customer's security and management tools inoperable. This put the customer into a state where they could neither prevent the infection spread nor restore the already infected machines. By using a combination of our reach and application persistence, we were able to break the reinfection cycle by identifying and quarantining the infected machines, reinstalling updated security tools, and keeping users safely offline until their machines were restored to an operable, protected, and infection-free state. Because Absolute can always communicate and update devices and applications, even when ransomware has explicitly paralyzed other security tools and operating system services, we can be an invaluable tool for IT 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 NetMotion ZTNA solution. Integration is proceeding nicely as the NetMotion ZTNA products are incorporating persistence. They will be the only truly resilient ZTNA solution that delivers a true endpoint zero trust solution that starts at the firmware and with a differentiated user experience. In my many discussions with customers, this is the key differentiator to our combined solutions. While other VPN or ZTMA solutions introduce network latency, our secure access solutions shine, delivering both added security and high performance. In closing, we have delivered strong financial results for the first half of the year, continued investments in channel and product through steady execution while adhering to the Rule of 40, and it's clear the market shift to remote work and 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 and stake out a material role in the continuously shifting workplace. The long-term shift to distributed work aligns in what we see as 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 ZTNA product with our resilience platforms. by providing customers with the first-ever opportunity to adopt a resilient, self-healing, zero-trust solution embedded in the hardware of more than a half a billion devices. Our future roadmap is engineered to expand on these capabilities in significant and exciting ways, helping us drive revenue growth while becoming even more relevant in solving challenges and addressing the priorities facing modern CIOs and CISOs. 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.
spk04: 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 ARR 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 of 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 IFRS purchase accounting impact on deferred revenue. In addition, Our year-over-year comparisons are based on an as-if combined basis that includes the net motion results of the year-ago period in fiscal 2021, but that does not factor in any U.S. gap to IFRS adjustments. You can find the pro forma combined fiscal 2021 financial results in the business acquisition report that we filed in September 2021 and that is available in the investor relations section of our website on CDAR as well as EDGAR. We believe this adjusted revenue metric provides a more meaningful and transparent view of the combined business and helps evaluate the progress that we're making over time. With that, let's get into Q2 results. Adjusted 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 ARR 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 ARR portfolio had transitioned to subscription arrangements, up from about 62% at the end of Q1 in September 2021. Overall, Total ARR 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, ARR is not impacted by IFRS revenue accounting requirements and is free from the complexity and periodic distortions found in revenue. The solid overall ARR 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 ARR 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 spending last year. We were particularly pleased that within enterprise and government the NetMotion Core Complete products had a particularly strong quarter. As Christy 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 ARR 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 combined teams are improving the execution of our go-to-market land strategy. Net dollar retention was at 107% in Q2 versus 109% in the prior quarter. Consistent solid enterprise and government NBR results were impacted marginally by education net dollar retention that came down sequentially as the pace of expansion with existing EDU customers slowed marginally from the year-ago surge of COVID-related education buying, as I mentioned a moment ago. Closing out ARR growth, business from our top OEM partners showed another quarter of sequential uptick in the second quarter in terms of both dollars and growth rate. Moving on to 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 and operating expenses, slower than anticipated hiring and headcount growth, and the core 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 of 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. 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 ARR and revenue growth rate quarters in years, we still expect our combined sales model and business traction to drive solid top line results from our growing ARR 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 discrete 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 of fiscal 2022 ending June 30, 2022 as follows. For the full year of 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 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%. Please 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 gap to IFRS 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 defer revenue from the acquisition of NetMotion. As of December 2021, the remaining value of deferred revenue write-down that will be taken going forward over future periods is approximately $7 million. We anticipate the quarterly difference between our IFRS 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 2023 in July 2022. The deferred revenue accounting write-off was $5.3 million in Q1 fiscal 2022, $3.9 million in this reported 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.
spk01: Thank you. And we will now begin the question and answer session. If you would like to ask a question, please press star then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily. And our first question today will come from Scott Berg with Needham. Please go ahead.
spk02: 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 the NetMotion acquisition, could you just talk a little bit more about the SalesMotion integration and the changes you've seen under the new CRO? Maybe a little bit on what that looks like moving forward.
spk04: Hey, Michael. Christy is having some mute speaker issues. If you can hear me, let me do that while she joins. Yeah, as we mentioned last time, the integration of the Salesforce between the two companies happened ahead of schedule, and so that was really compelling, both from a structural standpoint of 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 lead various aspects of it. And so we've been really pleased with how the first half of the year, the 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 this, both sales and on the go-to-market and the marketing side with the team as well.
spk02: Great. And then just one more quick one for me. I don't know if the technical difficulties are still going on or not, but maybe can you just give a bit of color on the impact of the ship shortage in the PC industry and maybe any impact that's had as of late and then maybe kind of compare that to some of the strengths in the Chromebook market that we've seen lately. Thank you.
spk05: Sorry about that. It looks like the operator reconnected me. Could you just repeat the first part of that question? I didn't quite hear it.
spk02: For sure. Could you just talk a little bit about the impact of the chip shortage in the PEC industry and any recent impacts you've seen? and then maybe compare that or offset that to the strength in the Chromebook market?
spk05: 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 than 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 a little bit of a decline and a little bit of a softening. I would say the mixed 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, what they can get their hands on. 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.
spk01: Right. Thank you.
spk04: Thanks.
spk01: And our next question will come from Mike Walkley with Tanacorp Genuity. Please go ahead.
spk02: Great. Thanks for taking my questions and also my congratulations on the strong results. First question, just with the $3.7 million in new logo ARR, can you give us some more color about this healthy metric and where the new logos are coming from and what solutions they're choosing? It sounds like from your comments, core complete was part of the driver here.
spk05: Hi, Mike. Thanks for the question. So, yes, I think we saw healthy net new logos in all segments, but definitely I think on the VCR side and as we've talked about before, you know, we see a healthy – deal flow with many of our OEM partners as being one of the first touch points with our OEMs, sorry, within our customer base. So I'm not sure there's much more color around that. I don't think we saw any particular vertical market within enterprise exceedingly high. We did see a number of larger education accounts, you know, a handful of sort of sizable deals in international education as well. And, again, through similar channels in partnership with ROEMs.
spk02: Great. That's helpful. And, Christy, you know, zero trust means a lot to a lot of people in the industry. You know, there's certainly a buzzword out there in cybersecurity. You know, we think absolute with NetMotion has this unique solution with a combination of persistence now connected to NetMotion solution. Can you talk about, you know, your interaction with customers, you know, how your sales force is educating them about you know, the self-healing standalone zero-trust solution that's unique to you and how the pipeline is developing as you get into those conversations.
spk05: Certainly. So we're still in very early days of that. We announced last quarter that we were combining persistence and self-healing with the NetMotion client. I think that's starting to make its way to customers. So those conversations with customers are really just beginning. I think we have solid – I'd say there's a lot of receptiveness from customers in terms of having self-healing solutions and seeing sort of NetMotion being one of the strongest candidates for that. I think that with respect to sort of zero trust more broadly, you're right. Zero trust means a lot of things to 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 really believe that more intelligence should be pushed to the endpoint and automation should be pushed to the endpoint where these controls can make better decisions and also remediate 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's a lot of energy and momentum behind the acquisition of Zero Trust products, but the deployment of them in terms of how they're 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, you know, we see customers leaning in and acquiring the technology and starting to move down that path. But being able to map roles with access to specific applications and data is feels like it's still early on. And that timing, I think, is positive for us from two fronts. One, you know, it's a good moment for us to be having those customer conversations. And two, one of the unique things about the NetMotion product is it can help customers on that journey. They can start with one model and then slowly start migrating users over to more sort of zero-trust approaches. And so this is a little bit of context in terms of where we're hearing zero-trust as a whole is in its maturity curve.
spk02: Great. And just to follow on to that, as you're landing these initial customers, how are they rolling out? It seems like they might start slow and have a really nice upsell opportunity within the base over time. Is that a fair way to think about it as you land some new logos for this service?
spk05: 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. The selling model is slightly different because, again, with our VCR products, we tend to see those as smaller, more rapid deals coming in through the OEM channel, and with NetMotion they tend to be more direct engagements with the customers, at least right now while we're still sort of skewing up and teeing up the OEM channels to fully participate in the NetMotion piece.
spk02: Great, thanks. Last question for me for both you and Stephen, and I'll pass the line. Just great to see the strong adjusted even to margins. Talking about, you know, ramp and hiring in the back half of the year, just with the tight labor markets, you know, how is that hiring environment? Are you guys able to get what you want, and do you think you'll be able to ramp those people into place over the next couple quarters?
spk05: It's a great question, and I think that we're seeing that we probably won't be the – this won't be unique to us. We are definitely seeing – a tightening of the pipeline around talent. I think that 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 sort of 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 right-size 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 we're likely winning more than we're losing right now, but I still expect to see some tension in the talent market continuing. And so we are, as we talked about in this particular quarter, right, 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 and filling the critical roles that matter most to us. So a lot of our attention is on critical technical roles and, of course, the go-to-market teams.
spk02: Great. Well, congrats on the success with NetMotion to date and integration, and I'll jump back in the queue.
spk04: Thank you. Thanks, Mike.
spk01: And our next question will come from Thanos Moshapoulos with BMO Capital Markets. Please go ahead. Thanos? Your line is open.
spk02: Oh, sorry about that. I was on mute. Hi, Christy. In terms of integrating NetMotion from a product perspective, can you just recap for us what remains to be done? So you've now launched Resiliency with NetMotion, but in terms of what you consider kind of full product integration, what are the remaining steps?
spk05: So, hi, Thomas. Sorry, I'm familiar with the – The mute issue, as we just had a moment ago. So I think we've done very well in what I call functional integration, so putting the people where they're 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 connecting persistence and self-healing with the NetMotion client, some other critical components that we're working on. would be, for example, intermingling of the data so that we have greater context awareness of the data coming from both solutions 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 I'd say we're making good progress. I think the team has a very aggressive roadmap and You know, as we speak right now, we're a week short of sort of jumping into our AOP process as 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 headed, and I feel very good about kind of where those product teams are settling. I think they're getting a lot done.
spk02: Great. You referenced the factory activation with HP and NMEA, and just remind us how much more can you be doing with your large OEMs internationally? What are some of the untapped opportunities and a little hanging fruit in that regard that you may be able to kind of focus on over the next year?
spk05: Sure. So first on the HP piece, it's 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 device is 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 were sort of turned on or compromised or connected elsewhere. Okay. the customer would have visibility to that. And so in terms of untapped opportunity with the OEM partners, I think, you know, international is the one that jumps to the top of the mind for me. I think I said in my comments, you know, we still are, we're making nice progress in international, but I'd say in terms of overall representation in our portfolio of ARR, I think that we're still quite light. You know, 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 beliefs. 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 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 to open this more broadly.
spk02: Great. Glad to see the progress in the quarter, and I'll pass the line. Thanks.
spk05: Thanks, Thomas.
spk01: And our next question will come from Kevin Krishnarathne with Desjardins. Please go ahead.
spk02: Hey there. Good afternoon, team. Congrats on a good quarter as well from me. First question that I had for you, maybe, Stephen, can you talk about, you know, on the adjusted revenue, the impact from the transition that you saw in the quarter of the perpetual to the subscription transition? I think you said you moved from 60% to 60%, 6% of the way through. I'm just curious if there's any way to quantify the top line impact and just to confirm that any top line impact from that transition came down at a full margin on EBITDA?
spk04: Sure. Sure, Kevin, makes good sense. So, you know, it's interesting. We spoke 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-timey 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's about two-thirds of the net motion of the core complete ARR is now on subscription, and that's up from 62-ish percent last quarter. It was 60 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 of thou shalt convert this number of customers this quarter. It really is customer friendly and customer centric. And the uptake has been quite nice. And so the contribution helped, but wasn't the whole dynamics of the
spk02: um core complete portfolio okay and so i mean i know it's out of your control you said it's customer driven but i i mean you expect that sort of like three four percent conversion every quarter and and some benefit to adjusted revenue um again we can't time it but that's sort of what we'll Expect over yeah, good question.
spk04: So I think the the point of view from us is we expect that to continue We probably would not pay 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 if larger customers, you know those are discussions and putting that in place takes a little bit longer. So the makeup of that customer mix would determine, you know, is that a three-month process or a four-month process, right? So you cross over the quarter end. But we do expect the activity to continue. So the message is not this is a lull and it was, you know, a one-off and it was nice, well-lasted, and it's over. You know, we have a third left of the whole ARR base to bring over, and so we We're engaged in a lot of conversations with customers, and so those conversations are continuing, and we expect that activity to continue for the next few quarters.
spk05: Gotcha. I just would add on to Stephen's great point there, which is if the view is visibility, 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, you know, the part that is a little bit movable is new customers making that shift for the first time. And to Stephen's point, there's not a tremendous number of them out there, especially not new customers.
spk02: Gotcha. Maybe, you know, obviously, so that was one contributor to the strength in the quarter. You obviously called it net motion and you had some strength internationally. But when we think about demand, 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 end. I'm just wondering if you can talk through, you know, the thought process on guidance and sort of what it's implying.
spk04: Sure. A big part of the guidance and for our view of Q3 is, you know, what we had talked about previously and then I just mentioned a moment ago, which is, you know, When you look back at Q3 of last year, you're really talking about the highest level of company growth in ARR and revenue 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 or spot on, which is we still have a lot of activity and seeing a lot of good results out of international 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 part of the business is really doing well. And Matthew and team sales execution on those two fronts has been quite strong.
spk02: Okay. Maybe just a A couple more for me. One on the ARR growth, 17% in enterprise and government. Clearly, that represents a mix of net motion and in the core ABT. I know you're not explicitly breaking these out, but historically, at least over the past few quarters, the enterprise and government segment have been sort of in that 10%, 11%. Range, I'm wondering if you could just help us kind of understand, you know, how that business is doing relative to the broader enterprise. You quoted there at 17%.
spk04: Sure. Yeah, a good and reasonable 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 VCR, the visibility control resilience, product portfolio, that enterprise, Gov, part of the business, had a really good quarter that was above what it has been historically.
spk02: Oh, good to hear. Good stuff. The last one for me, moving just to the OffEx line, I didn't think about the adjusted EBITDA. Last quarter and this quarter, there were some ADVAPs on integration and legal fees. I think it was just shy of $2 million in the quarter. Do we expect those to go away in Q3, Q4, and sort of where would those one-time items be sitting on the P&L? Would it have been in the G&A line?
spk04: 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.
spk02: Gotcha. And then so the G&A may moderate down, and then in line with your prior guidance, we'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 that sort of benefited you a bit in Q2. That'll catch up in Q3 and then Q4.
spk04: That's right. Yeah, we would agree with everything you said.
spk02: Perfect. Thanks a lot. Congrats. I'll pass the line.
spk04: Right on. Thanks, Kevin.
spk01: And our next question will come from Adam Tindall with Raymond James. Please go ahead.
spk03: Hi, guys. It's Alex on for Adam. Thanks for taking my questions. It's nice to hear your commitment to being a Rule of 40 company. I think recently you said you're trying to get to a 2020 mix with 20% revenue growth. And that implies a slight acceleration from here. I was just wondering, you know, where do we expect that growth to come from, more endpoints, you know, new logos, upsells, cross-sells? Acceleration and net motion, just a bit of a breakdown there would be great.
spk05: Hi, Alex. So 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. 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 introductions. Meaning, you know, as we go further in this ZTNA roadmap and 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 ARR per device or more ARR 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 by design. I'd say mostly by design. We were running them parallel in the first half of the year, and we're just now starting to kind of have those products touch one another. So you'll see more of that as we go forward.
spk03: Thanks. And then actually just to double-click on kind of the international motion, I know you mentioned in the past that one of the things you look forward to leveraging with NetMotion and Salesforce is some of their international footprint and international presence. Have you seen any traction as a result of kind of leveraging NetMotion's international footprint for absolute core offerings yet, or is that kind of still on the roadmap and some longer-term strategy there?
spk05: 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, APJ is an example where NetMotion was doing much more actively than Absolute had been in the past couple of years. And so, you know, we definitely are leveraging, I would say, relationships and channel partners on both sides. As we look at OEMs, distribution, and direct sales, I think that's probably where we've seen the tightest sales integration. They're less running in parallel in the international markets than they have been in North America.
spk03: Awesome. Thank you very much.
spk01: And the next question will come from David Kwan with TD Securities. Please go ahead.
spk02: Good afternoon, Christine Stevens. I wanted to talk about on the guidance side, particularly on the adjusted EBITDA margin guidance. You know, the new guidance we've provided, it's up, I think, 400 points roughly from the initial guidance. 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 with hiring, but wondering what else is out there that's driving that increase.
spk04: 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. One, T&E spend is less this quarter, and we expect to be a little bit less than we had anticipated. I think we had, like others, expectations that – or hopes, as the case may be – that the pandemic would have subsided earlier than it obviously came back, so to speak. And so that was one dynamic that's contributing to some less anticipated spend. Two, the topics that Christy was talking about insofar 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 generating headcount that the rest of us are, as far as getting things done. So that combined with more favorable results, we had a more positive Q2, for example, on the ARR side, and on the revenue side that we anticipated, that that all flows through to the full year impact.
spk02: Well, that's helpful, Stephen. And I know you're not providing guidance for 2023 yet, but, you know, how should we think about the margin profile for next year, you know, understanding the commitment to the rule of 40? You know, the guidance, I think, kind of based in evidence margins falling closer to the 20% level in the second half of this year, And so just wondering whether you see that kind of closer to 20% level is where you might see margins for next year, and then I guess the related pickup and the revenue growth hopefully as well.
spk04: Sure. Well, Chris and I will tag team on that as usual. So, 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 are making in sales and marketing and R&D in the second half 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'll enter the next fiscal year in a better cost structure and productivity standpoint. And so to the crux of your question, when you talk about EBITDA margin, you know, we expect to see a lift headed into next year. We When we talk about what we perceive as a floor of 20 and the second half of this fiscal year in June being in the low 20s, 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 of the conversation, the March to 2020, 20% top line, 20% profitability as 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 top-line growth on our way there. And the bottom line, solid profitability will be kind of the constant, you know, the floor, if you will. They're like, okay, they can always maintain this healthy profitability while growth ebbs its way up there.
spk02: That's helpful, Steve. And I guess if you run the numbers that you talk about, I guess, on the on-as-if basis, trying to do an apples-to-apples comparison on the growth in particular, that converting the net motion from US GAAP to IFRS, is there much of an impact to that 17% growth that, say, you generated this quarter? Would it vary significantly if you did that calculation?
spk04: Good. I'm glad you called it 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-if adjusted basis. So thank you for saying that. The main difference really is probably on the cost side, not really on the revenue side. IFRS and GAAP are pretty darn similar close on the revenue. So that wouldn't really be a difference at all. One item that comes up, for example, is the capitalization of lease expense. That happens to be a U.S. GAAP and IFRS difference. Other than that, there are really not tremendous differences.
spk02: Well, that's helpful. And the last question is just on the education side. You guys talked about the tougher year of your comps. We start to see this quarter. 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 the education business? Do you see that revenue growth, the error growth starting to pick up again, or do you see it kind of settling in maybe in the low to maybe mid-double-digit range?
spk05: Hi, David. Hi, David. So 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 had a particularly strong quarter, so I don't think we were surprised. I think we were 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, 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, you know, we've been working quite closely to make sure that customers can take advantage of that funding specifically with Absolute Software. I think our long-term view remains unchanged, which is, you know, I've 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 big surges of 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 likely looks like an enterprise in terms of its use cases. Their seasonality and their buying patterns are a little bit different, so it's probably on the lower end of the enterprise space. I always expect a little bit of a lag between edge and enterprise and government. So I think if we were guessing, you know, 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 double digits. Sorry, that was low double digits as opposed to high double digits. And I don't think that's changed, right? I think that we've said pretty consistently that once we get through this period of rapid activity, we're going to see things settle down, but they're going to settle down into a nice, healthy, stable business as opposed to what they looked like pre-pandemic.
spk02: That's helpful. Thanks, Christy. That's it for me.
spk05: Thanks, David.
spk02: Thanks, David.
spk01: And this will conclude our question and answer session. I'd like to turn the conference back over to Christy Wise for any closing remarks.
spk05: Thank you. I want to thank you all for joining us again today. As we enter into the second half of our fiscal year, I'm very pleased with what the team has accomplished. We have a clear view on what we need to do as a team, and with a strong start to the fiscal year, we remain focused on executing our plan. Thank you all so much for joining us today.
spk01: 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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