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spk02: 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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touchtone phone. To withdraw from the question queue, please press star, then two. 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, Ju Hong Kim, Vice President of Investor Relations. Please go ahead.
spk03: Good afternoon, and thank you for joining us today. With me on today's call are Christy Wyatt, President and Chief Executive Officer of Absolute Software, and Jim Legile, Chief Financial Officer. Before beginning our formal remarks, Absolute Software would like to remind listeners that certain portions of today's 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, and 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 MD&A, which is now available on Absolute Software's website and will also be available on CDAR and EDGAR. I would now like to turn the call over to Christy Wyatt. Please go ahead.
spk01: Thank you to everyone joining us today for Absolute Software's Q2 Fiscal 2023 Earnings Call. During today's call, I will focus my remarks on three areas. First, I will recap our Q2 results and how they're 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 want to take a minute to welcome Jim Legile to his first earnings call with Absolute. Jim 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 how he 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 ARR to 225 million, representing a 15% increase year over year driven by growth of 18% in enterprise and government, with wins across key verticals, including healthcare, transportation, and public sector. Enterprise and government accounts for approximately 80% of our ARR. Education grew 6% year over year. We had some nice wins there that should help growth going forward. The sequential increase in ARR of $9.3 million was the largest in Absolute's history. This performance came despite broader macroeconomic headwinds and illustrated the critical role Absolute plays to protect corporate networks in the new remote and hybrid work world. Adjusted revenue was $57.7 million, a 9% increase from the same quarter last year. We onboarded almost 2,000 new customers this quarter, bringing our total customer base to close to 20,000. Our pipeline is strong and we're seeing growing interest in our cross-selling collaborations and 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. While 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. While these issues only impacted our revenue by approximately $1 million in the quarter, we expect the trend to continue and for it to have some cumulative impact on the revenue recognition in the second half, and that's reflected on a revised outlook. We are also seeing more customers adopting our secure access cloud offering, evidence of our solid position in the ZTNA market. However, those contracts are recognized ratably and have no upfront revenue component. One of the hallmarks of Absolute 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 ARR growth for the remainder of fiscal 23. 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 selection of industries. Healthcare 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 in keeping devices, applications, and data secure with our self-healing differentiation. Reflecting that increased awareness, we had a healthcare customer expand their deployment of our visibility and control capabilities and transitioned us into their security and compliance team from within their IT 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 CrowdStrike, BitLocker, and Zscaler. 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 and Absolute Assist software with nearly 24,000 license purchases. This design win was a great example of a 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 our resilient ZTNA 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 and self-host applications. We also signed a widely recognized global ride-hailing provider. This firm has 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 their 39,000 mobile devices, improving resilience and coverage across the force's entire patrol area. And finally, I am thrilled to share with you that we achieved our FedRAMP Ready designation. While it will still be a couple of quarters before we receive 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. G2 continues to recognize Absolute as a leader for the 12th consecutive quarter in their winter 2023 grid reports for endpoint management. But 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. Omdia named Absolute Software as an endpoint security vendor to watch. IDC recognized Absolute as a leader in European end-user experience management, citing our strength in ensuring resilient network and access performance. And Forrester is now recognizing the increasing value of firmware-level protections to ensure that software agents are functioning properly. They have included Absolute in their new research category for firmware-embedded persistence in their end-user computing tech tide. Lastly, we're collaborating with more of our OEM partners that view 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 in their ThinkShield suite of products, reflecting growing customer interest for always-on, self-healing network connections. The key takeaway is that despite a decline in PC 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 PC OEM partnerships as 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 ARR growth as we have seen a mixed shift from PCs 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 Chromebooks 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 us on nearly 200,000 new Chromebooks. As a result, they were able to improve their device loss prevention KPI by 10% bringing them into compliance with their board's mandate. While education is now approximately 20% of our ARR, 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 ARR growth and remain confident in our long-term plan to enable a reliable work-from-anywhere experience that ensures maximum security and 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 2020 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 EBITDA margin commitment. However, based on our guidance, we will not fully achieve the rule of 40 this year on revenue, though on an ARR basis, we remain on track. With that, I'm going to pass it over to Jim to provide more details.
spk04: Thanks, Christy. 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'm 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 and unassailable market position with a very large and growing addressable market. And our expanded portfolio opens up opportunities for accelerated growth. And I like the fact that we can balance attractive growth with strong margins and free cash flow. What I bring to the table is experience building a robust financial organization that positions absolute for success, which enables Christie and the 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, Absolute will soon no longer be the best-kept secret in cybersecurity. With that introduction, let me move to our Q2 results. As a reminder, we are reporting revenue in year-over-year comparisons on an adjusted basis that excludes any IFRS 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 the contract length 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, a 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 length, we ended the June quarter with average contract length 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 IFRS 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 ARR was $225 million representing growth of 15.1% year-over-year. The 9.3 million sequential growth in total ARR is a record for absolute and up from 6.2 million sequential growth in our first quarter. The ARR 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 ARR growth was moderated and it grew to 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 ARR 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 headcount. Education net dollar retention declined year over year, in part, a hard comparison due to the higher COVID remote classroom purchasing dynamics we experienced during and throughout the pandemic. Moving to margins and cashflow. Adjusted gross margin of 88% was in line with the prior quarter, but down slightly from prior year as we absorbed higher costs during the migration of our data center 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 headcount 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 debt 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 $800,000 in additional interest expense. For our Q3, our coupon has increased another 106 basis points which will result in a $650,000 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. 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 ARR growth assumptions for the remainder of fiscal 23 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 Christy cited 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 mixed shift continues, that can also impact near-term revenue recognition. but does not impact ARR, and therefore is a positive development relative to our longer-term revenue trajectory. Moving to adjusted EBITDA, while we see our top-line 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 2020 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 ARR Rule of 40 is still achievable given our expectation of improved ARR growth for the remainder of the fiscal year. With that, let me turn the call over to the operator for Q&A. Operator?
spk02: 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 you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
spk07: Great. Thanks for taking my questions and providing the clarity on the updated guidance. I guess just, you know, first question, I guess, for you, Jim, welcome aboard. And just with a lot of the upfront hiring that happened at the beginning of the fiscal year, how should we think about operating costs 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 start of the calendar year, or should we think of OpEx flatting maybe even down to hit your updated guidance?
spk05: Yeah, thanks, Mike. You know, I'm brand new, and it's a fun position to be in in terms of the team and taking over the helm from Ron, who led us pretty effectively up to the point where I joined the team. From an OPEX standpoint, I think the way to think about the Q3 and Q4 and the path to end of year is looking at our profile for Q2 and expecting that that's, so to speak, the high mark. We're going to be disciplined with regards to discretionary costs. We're going to be disciplined with regards to headcount. And as I said in the prepared remarks, be thoughtful about our balanced growth profile.
spk07: All right, thanks. And then a follow-up question, and I'll pass the line. For Chris, just on the secure access side, I think you might have some easier growth comparisons in the second half of the year, but it sounds like some deals are shortening. So is the updated guidance mainly just to the deals shortening on secure access, or is there kind of broad-based strength across, or 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.
spk01: Hi, Mike. Thanks for the question. Actually, we're seeing strength in the SA business. I think they had a solid quarter. We did have a small number of fairly sizable deals in the very late end of the quarter that pushed, as Jim said in his comments. We see those coming in this year. So I don't think we're seeing a trend in the overall strength. I think we saw 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 our revenue line sort of smooths out. I think we had signaled This is one of the things we watched 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.
spk07: Great. Thank you. I'll pass the line.
spk02: Our next question comes from Scott Berg with Needham. Please go ahead.
spk06: Hi, Christine, Jim. Thank you for taking my questions. I have three. I guess starting off with the changing contract terms, I obviously get the IFRS impact of shortening those terms. And as Christy just mentioned, that's actually kind of favorable for you in the longer term because it'll align RevRite a little bit better with ARR. But those customers that are changing those terms, is the concern there primarily just the cash outlay of paying for, say, two years up front versus one year?
spk05: Hey, Scott. This is Jim. Yeah, I think a quick answer is that is one of the concerns, is cash outlay. Clearly, customers are thoughtful about their upfront commitments. That being said, our net dollar retention is very strong. In some cases, we have a program where we extend a customer with what we call a coterminous action. This is a renewal that's coming up in the next six, nine months. The customer entertains an uplift in their engagement with us. And rather than adding a year to the current contract of nine months, we process their add-on over the remaining term. Let's call that the six or nine months. And so what we end up with is an effect of an add-on to the customer relationship, but a term length that's coterminous with the existing run out of the contract. these are all dynamics that play out in the context of engaging the customer. Obviously, we'll do the extra term, the add-on to the year if that's possible, but 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 dynamics.
spk01: Yeah, and just to add on to that, when the original expiry date comes on, then the customer will renew the entire estate. But that's Add a couple of more points to that, Scott. I think that a couple of the things we mentioned on the call, our NPS scores actually were at another record high this quarter, sort of mid to high 70s, which is astounding for something we're very, very proud of. And our net dollar retention remained strong and stable. And so, as I said, we have the revenue kind of recognition components, but I don't think it's seeing, I'm not interpreting it at this moment as any overall sentiment across the SA business as a whole.
spk06: Got it. Helpful. And then for the second question, the education segment, kind of the second quarter in the row where you've had unit growth be strong, but customers, or at least more customers, choosing the Chromebooks versus the PCs for their device choice. Do you think this is a long-term change, or is this really just reflective of the short-term supply chain issues within the PCN market still?
spk01: It's a great question. 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 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 grades. 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 as an industry tends to be more run-rate buyers. So they're one of the few parts of our business that 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 or the refresh rate of Chromebooks actually tends to be about 18 months shorter than that of a PC. So we'll see that sort of renewal, if you will, a little bit sooner on the Chromebooks as well. So while we're seeing this shift, Yes, we see some compression on ARR. It's why I am a little – you know, I share a little bit more about the unit volume growth just to sort of – so 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 as it settles down.
spk06: Tata, thank you. And then for my last question, just recently, a week or two ago, you announced two new – application persistence as a service partners, ISV partners. I know that'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 ISV partners for your solution? Thank you.
spk01: Yeah, absolutely. Thank you for asking. So, I think we're getting close to a dozen. I don't think we have the final number of APAS partners We are starting to see some of them go into commercialization. As we said, this is sort of a slow roll for us as we're standing those partners up and 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 over time.
spk06: Great, Josiah. Thanks for taking my questions.
spk02: Our next question comes from Thanos Moshappos with BMO Capital Markets. Please go ahead.
spk08: Hi, good afternoon. On the secure access business, remind us what proportion of that business is currently on a cloud model versus being on, you know, under IFRS as being type of recognition?
spk01: I'm trying to think of what we've put out publicly. I think 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 they were just starting on their cloud journey at the time of acquisition. What is very exciting to us is the number of new customers, especially, and especially some of the larger customers that are starting to look at cloud adoption. So we are starting to see an uptick in interest on that, but the current percentage of the overall portfolio, it's still very small.
spk08: 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 as a function of the weaker macro?
spk01: They were all on the SA side. There was three of them. Actually, I think we see them all coming in this year, two of them in the half, and actually some of them have kind of grown in value. Now, 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 of the sort of traditional enterprise staff, as opposed to the SE business, which you know, it's got a lot more small, medium business and sort of diversity across the install base. And so I don't, you know, I don't think we've seen or observed anything unusual on the SE side outside of the PC hardware attached comments that I made earlier, which was relatively small.
spk08: Okay. And then finally, Christy, if you can remind us in terms of the FedRAMP opportunity, you alluded to it, recognizing that, you know, it'll take a few months to get the final results. you know, certifications and then to go through sales cycles and so forth. But how do you think about, you know, quantifying what this will mean for your addressable market?
spk01: I mean, it depends on whose numbers you're going 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 Biden talking about the shift to zero trust. So we see it as a significant market expansion opportunity and not just within the U.S. Already 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 sort of work with within those regions. And so We're working very closely with our partners to look at how we introduce that, both on sort of the zero trust and software opportunity side, but also opening that conversation about how we make federal devices more resilient as a whole and how we make all of the security happening within those environments work better.
spk08: Great. I'll pass the line. Thanks.
spk02: Our next question comes from Mark Cash with Raymond James. Please go ahead.
spk09: Thanks for taking the question. This is Mark on for Adam. I just want to look at the updated guidance in decreasing by about 4.5% in the midpoint for revenue. In the commentary about duration and 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 4Q?
spk05: Hey Mark, 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 ARR performance. And then setting against that a disciplined oversight on our spend to achieve our ARR rule of 40 goal post. With respect to the, I'm losing the point, sorry. Ask the second part of your question again, because as I was looking at my notes.
spk09: I mean, the question was just, if you had deals slipping out of, you know, from 2Q and you have confidence in signing them, you previously, you know, the commentary last quarter was, exiting 4Q with that 20% growth. So I guess I'm getting at is 2Q kind of the trough of revenue growth that you'll expect for fiscal 23?
spk05: Yeah, thank you. That's helpful. Yeah, I think the quick answer is yes. And, you know, therein lies some of the framing of why we're notably focusing on ARR as the right reflection of the growth of the business, but we're being disciplined with respect to how we set expectation on the revenue side.
spk09: 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 1Q. So I guess how long does it typically take to see growth take hold? It looks kind of people ramping, getting trained up. And then if I kind of think about looking at 2Q and endpoints declining while new logo are increasing, Is this at all a reflection on sales and more focused on hunting new accounts versus renewals?
spk01: That's a great question, Mark. So, first of all, yes. I think from the beginning of the year, we said that the majority of our 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's going to vary a little bit by which team and which product set, et cetera, but generally – Yes, our expectation is that a lot of that sales capacity is coming online. Another investment we made was around demand generation and some of the investments we made in FDRs, for example. We set expectations as well 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 remains to be true. I think you should expect that that capacity is sort of coming online.
spk09: Okay, I just have one more. Just how did customer behavior trend throughout the quarter? Did it start out kind of as you expected and got worse as the weeks and days progressed, or what did you guys see on your end?
spk01: Yeah, I mean, I think as we come into this quarter even, right, we see stable, growing pipelines. I think that a lot of the customers still have very real problems they're trying to solve within their environment. In some cases, that's only amplified by the other parts of the organization that may be undergoing stress within their environments. That's why I say I don't think on the ARR side we're seeing a significant impact on demand. In some cases, as Jim pointed out, they may opt for a one-year contract as opposed to a two- or three-year contract as opposed to you know, optimizing unit volume. They want to sort of optimize for sort of cash flow management. And so that's 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 happen in the last couple of weeks of the quarter, and this was just a case where a handful of those moved around.
spk05: You know, Mark, one thing I'll add is recalled it 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 radibly recognized our revenue from the net win motion acquisition from the time we purchased to the time that we reported last quarter, and he gave a what would our ARR growth be if everything was radibly recognized. We did the same exercise for this quarter. And what we've reported as a 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 ARR have been had we enjoyed this ratable recognition dynamic. And the analysis said that the growth would have been around 13%. So 13%, if everything was ratable, From an ARR perspective, we performed at 15.1%, which is actually pretty good. So your question about the profile of the quarter, your question about the profile of the quarter, did things get worse? And the answer is I think it was a steady state of business with this dynamic of shortened term based on just a buying pattern. And I don't know that I would characterize it as worse. 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 ARR perspective, Q3 and Q4.
spk01: Yeah, and just to want to make sure I heard that correctly, it was 13%. would have been the ratable adjusted revenue growth if you ran that same calculation on a 15%, 15.1% ARR growth. Yeah, thank you.
spk05: That's right.
spk09: Understood. Thank you so much for the answers.
spk02: Thank you, Mark. Our next question comes from David Kwan with TD Securities. Please go ahead.
spk10: Good afternoon. You talked about, I guess, the much larger renewal base in the second half that you're expecting for secure access. Can you talk about what the contract lengths were that are coming up for renewal? Because it sounds like many of the customers that you're talking to are maybe looking to sign shorter contracts.
spk01: Hi, David. Yeah, so what we had talked about was that a lot of the early contracts when NetMotion was making their first move from perpetual to subscription prior to the acquisition had multi-year terms, and that in time we wanted to bring the average term rate back down to closer to one year so that we'd smooth out that revenue line. And so the renewal period doesn't always reflect what the original term on the contract was, that we will sort of work to sort of balance that out with the field organization. But, you know, we've long said, you know, the ideal place for us is probably, you know, in that sort of 1.2, 1.3 space. And sometimes, you know, what's going on with the customer will kind of move that up or sort of move that down. And just a reminder that it is very specific to the SA side, right? The
spk10: What happens on the SE side, it does have an effect on cash flow, but it doesn't really have any effect on... Yeah, so it sounds like, I guess, it sounds like the majority, maybe, of these contracts are coming up for renewal. The customers are kind of giving indication that they're looking to sign maybe one-year contracts versus the multi-year that they'd signed previously.
spk01: Yeah, I don't think so. I don't... I guess the way I would rephrase that is, you know... With an eye on what's going on in the economy around us, we're taking a position and managing the business 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 we've sort of thought that through. I wouldn't go so far as to say customers are giving us that signal yet because I think in some cases we're talking about expiries at end of Q3 and Q4.
spk10: Maybe a better way to put it is, what are you guys assuming in your guidance? Are you assuming that the vast majority of the renewals that are coming up are going to be for a one-year term?
spk05: I think the right way to frame it is, we looked hard at Q2 and the fact pattern that emerged, and we applied that on a go-forward basis. Given the condition of the macro market, it's wise for us to be prudent here and be thoughtful about what to expect. Obviously, there's a spectrum here. You can have a spectrum of optimism and pessimism, and we tried to be balanced about where we fell out on that. The key here is the ARR component of our business, and that, as you know, is the normalizing factor of all of the mix of various contract types that we sell, and so the If you want to peer into the business and get a real sense of the momentum we're executing in market, ARR is the key to do that.
spk10: I understand that. I appreciate the color, Jim. Last question. I was just looking at the presentation. I'm seeing all the metrics come out, but there's a slide in there that indicates that the number of SE endpoints dropped sequentially from 14.1 million to 13.9. Is that just kind of cleaning up the data, or was there something else going on?
spk01: Yeah, it's not unusual. So remember, just for folks who weren'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 is not necessarily a reflection of the seats sold. 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 are not connecting to the cloud, so that would be an SAA, specific piece, whether or not in that number. And it's also just not unusual for that to slow down during the end of the year. You're talking about a quarter with Thanksgiving and the holidays, and a lot of IT programs sort of freeze deployments as they go through their end of year. So it's not unusual to sort of see that slow down. Thanks.
spk02: This concludes our question and answer session. I would like to turn the conference back over to Christy Wise for any closing remarks.
spk01: All right, thank you. Let me close by thanking everybody again for joining us today. And again, while we weren't immune to the macro environment, we are very pleased with the progress we're making and with a solid quarter on ARR growth, and we feel very confident in continuing to deliver against our long-term plan. Thank you, everybody.
spk02: conference is now concluded thank you for attending today's presentation you may now disconnect
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