Absolute Software Corporation

Good afternoon, everyone, and thank you for standing by. Welcome to Absolute Software's fiscal 2022 first quarter financial results conference call. All participants will be in a 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 telephone keypad. To withdraw your question, please press star then two. Before beginning its formal remarks, Absolute Software would like to remind listeners that certain portions of today's discussion may contain forward-looking statements that reflect current views with respect to future events and conditions. Any such statements are subject to assumptions, risks, and uncertainties that could cause actual results to differ materially from those projected in these forward-looking statements. Any forward-looking statements contained in today's conference are made as of today's date and Absolute Software undertakes no obligation to update or revise publicly any of the included forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required by applicable securities laws. For more information on the assumptions, risks, and uncertainties relating to the forward-looking statements, please refer to the appropriate section of the company's MD&A which is now available on Absolute Software's website and will also be available on CDAR and EDGAR. I'd also like to remind everyone that this conference call is being recorded today, Tuesday, November the 9th, at 5 p.m. Eastern Time. I would like to now turn the call over to Christy Wyatt, President and Chief Executive Officer. Please go ahead.

Thank you, Operator, and thank you, everyone, for joining us today for Absolute Software's Q1 Fiscal 2022 Earnings Call. As you know, this is our first quarter, including the results of our acquisition of NetMotion, and we are delighted to report a strong start to the year. We achieved year-over-year ARR growth of 17% in the quarter, accompanied by year-over-year adjusted revenue growth of 15%, and an adjusted EBITDA margin of 26%. I am also proud to announce that we achieved a Net Promoter Score of 62, well above the SAS industry average of 31, and an all-time high for our company. Our strong start to the year gives us increased confidence in our full-year outlook, which Stephen will cover following my remarks. Turning to the business, while we have observed the effect of the ongoing chip shortages and supply chain issues, which impacted some of our partners and customers, we continue to see steady growth in activations across our cloud-hosted products and reported approximately 13 million active endpoints this quarter. Our enterprise and government business posted one of its strongest quarters with year-over-year ARR growth of 16.9%, reflecting strength across both the Absolute and NetMotion product lines. Notable wins include Under Armour and the international law firm Slaughter & May. Our education business continues to see strong demand with a notable win in Latin America. As additional U.S. federal funding makes its way through the regulatory system focused on helping schools, we are working with our partners to support customers through this transition. We've been working on additional education offerings, including the development of student-specific SKUs and managed services. As we look at our progress in Q1, I want to touch on two areas of particular importance, our NetMotion integration with a specific focus on go-to-market and our products. First, the integration of NetMotion business has been proceeding smoothly, enabling us to accelerate the integration of sales and marketing functions earlier than planned. With Matthew Schoenfeld completing his first quarter as Absolute's Chief Revenue Officer, we formally integrated the NetMotion selling teams into his organization at the end of Q1. We also announced the promotion of NetMotion's Chief Marketing Officer, Joel Windels, as Absolute's Chief Marketing Officer. The go-to-market teams have developed and delivered combined messaging and joint processes and have begun to operationalize joint marketing campaigns across both pre-existing customer sets. Matthew and his team also initiated the rollout of force management as a sales program and we have already started to see the positive effect on both the pipeline and sales performance. We also saw continued growth of our partner program in the quarter, adding 18 new reseller partners, thereby expanding our reach to 1,700 total active partners. In July, AT&T named Absolute's NetMotion product as one of four solutions to help power their first net offering, the only nationwide network built with and for America's first responders. As Lenovo recently named, Absolute as a strategic security partner in the launch of their global everything-as-a-service strategy. Turning our focus now to products, to assume responsibility of our combined product strategy and roadmap, we announced the addition of John Harama, a seasoned security product leader whose experience includes BlackBerry, Microsoft, and Sprint. John and the combined product teams have been working steadily on the integrated product roadmap. We announced the first step in our product integration with the addition of application persistence into NetMotion products, making NetMotion Complete the industry's first truly resilient, undeletable, and self-healing zero-trust secure access application. Other notable product capabilities made available to customers would include, as a part of our data strategy, we announced Absolute Data Explorer, a unique and flexible endpoint data exploration tool. As a part of our endpoint resilience offering, we added more than a dozen new applications and updates to our application persistence catalog, including Microsoft Intune and Defender, Zscaler, and Palo Alto Cortex, to name a few. And finally, I am pleased to share that this morning we announced the next phase of our application persistence as a service, or APaaS program, with two new partners, SmartEye and Pluralock. Persistence as a service enables independent software vendors to independently embed our application persistence capabilities into their mission critical security and business applications, helping ensure they stay installed, healthy, and working effectively across their entire customer base. This creates a stronger security posture for their customers and an additional monetization opportunity for our platform. As we look forward with a strong start to this fiscal year, we have a unique market opportunity before us. As the world entered the new work from anywhere era, what is needed for employees to connect securely from anywhere with a greater user experience. Our opportunity is to enable enterprises to deliver on that promise and to realize the full value of cloud, mobility, and remote working by providing the industry's only truly resilient, undeletable, and self-healing ZTNA solution. We will achieve this by applying zero-trust principles all the way from firmware to the network. Leveraging our self-healing technologies will enable us to automatically detect and repair unhealthy applications and connections for optimal security and experience. To combine endpoint and network intelligence for enhanced risk assessment that cannot be disabled, and to intelligently apply endpoint application and network access controls to fit risk conditions. And of course, we continue to be able to lock, freeze, and wipe any device when no other access control is appropriate to remediate the risk. ZTNA is the most highly prioritized segment within the broader SASE category, estimated to grow from $1.2 billion to $4.1 billion by 2025, with a combined annual growth rate of 26.4%. We have been steadily building a world-class team. We have unique IP and technology and the ability to deliver significant value to customers in this arena. The investments we are making in both product development and go-to-market capabilities help to position us in this rapidly growing market segment for the future. For today, we remain focused on execution against our plan. And with that, I would like to hand it over to Stephen for more details on the financials.

Thanks, Christy. Good afternoon, everyone. We appreciate you joining us. We're off to a strong start in fiscal 2022, driven by solid ARR growth in total and across our enterprise and government customers, and a record quarter for new logo bookings. I'll talk more about this in a few minutes. Overall, I'd like to cover two topics with you today. First, talk through our Q1 fiscal 2022 financial results, and second, go through our financial outlook and updated guidance for the full year, fiscal 2022, which started July 1st, 2021. As Christy mentioned, Q1 is the first quarter that our financial results include the operations of NetMotion as the acquisition closed on July 1st, 2021. 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 net motions deferred revenue. In addition, 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 do 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 on September 13th and that is available in the investor relations section of our website and on CDAR and EDGAR. We believe this adjusted revenue metric provides a more meaningful and transparent view of the combined business and helps our investors evaluate the progress we're making over time. Now on to the results. Adjusted revenue was $49 million for Q1 fiscal 2022, up 15% from the prior year on an as-if combined basis for Q1 fiscal 2021. The strong revenue performance was driven by robust growth in our ARR base, as well as a large multi-year net motion complete deal that was signed in Q1. As we discussed in prior calls, revenue recognition on these on-premise subscription deals is subject to IFRS 15 accounting rules that result in half of the value of the contract being recorded as revenue upfront when the contract is executed. The upfront revenue recognition of this deal contributed approximately $1.2 million in incremental revenue over ratable treatment. The remaining value of the deal will be recognized ratably over the duration of the contract. As I'll talk about in a moment, this revenue favorability also benefited adjusted EBITDA in Q1. As we previously discussed, the NetMotion core complete products are in the process of two important migrations that will support future growth and scalability, but that will also have an impact on the revenue accounting and resulting revenue growth rates. The first dynamic is the migration of customers from legacy perpetual license agreements, to recurring subscription arrangements. This business migration results in on-prem subscription arrangements that are subject to upfront revenue recognition that ebbs and flows with the size of underlying customer contracts. The second migration that is earlier on in its lifecycle is the move of the core complete products from on-prem to cloud delivery, which is a typical SAS subscription model. With this dynamic, we do not expect to see and accounting fluctuations in revenue. Looking at the underlying business activity for the quarter, total ARR came in at $187.4 million in Q1, an increase of 17.1% year-over-year on an as-if combined basis. Unlike revenue, ARR is not impacted by the IFRS revenue recognition accounting requirements and will be free of the complexity and volatility that result from the on-prem subscription and license revenue. The strong ARR performance reflected strong growth of 17% in our enterprise and government customers, which represented 77% of total ARR in Q1. Importantly, we saw record new logo ARR of $4.7 million, which grew 98% year over year on an as-if combined basis. Education ARR came in at $43.5 million at the end of fiscal Q1, up 18% from the prior year on an as-if combined basis, and represented 23% of total ARR. On a sequential basis over fiscal Q4, education ARR grew by approximately $2 million, a strong overall performance. And closing out ARR growth, business from our top OEM partners also showed a nice sequential uptick in the first quarter in terms of both dollars and growth rate. Moving on to profitability for the quarter, adjusted EBITDA for Q1 was $12.8 million, or 26.1 percent of adjusted revenue. This was stronger than expected and higher than the 25.1 percent in the prior sequential quarter as a result of the upfront revenue accounting of the large deal that I just discussed. Excluding the effects of the revenue accounting rules, Q1 adjusted EBITDA margin would have been about 24%, reflecting the incremental investments in the business that we discussed on the last few calls. As we've said, we're investing in our go-to-market efforts, and we're continuing to invest in R&D to build new products that leverage Absolute's persistence and unique view of the endpoint that only the combination of Absolute and NetMotion can provide. Taking a quick look at the balance sheet, Cash ended the quarter at $56 million as of September 30th. The decrease from the prior June quarter end is completely a result of the cash expenses paid on the Net Motion Acquisition that resulted in a negative IFRS operating cash flow. Backing out the acquisition-related expenses, OCF, would have been approximately $8 million in Q1. Additionally, compared to the prior year fiscal 2021, Q1 2022 OCF is lower by approximately $5 million from more cash being collected, primarily by longer average contract terms, in the prior year. We continue to believe that the solid profitability and profile of the combined business supports the approximately 4.4 times leverage and will enable us to delever going forward. As we've discussed, we're targeting a net debt to adjusted EBITDA ratio below two times in a two-year timeframe. With that, let's turn to our outlook for the balance of fiscal 2022 and our updated guidance. Overall, we expect our combined operating model and business traction to drive solid revenue results from our growing ARR base as we continue to invest in the business in fiscal 2022. We continue to see the gross margin profile for fiscal 2022 remaining consistent with the overall level for fiscal 2021 with a similar dynamic as our investments in sales and marketing and R&D that we expect to increase as a percentage of adjusted revenue in the second half of the year, as we've indicated previously. We expect these investments to further drive our platform innovation and product differentiation, as well as to support the expansion of our go-to-market presence across additional product lines and geographies. where our OEM and channel partners are pulling us into significant opportunities. And so, with that context, we're pleased to update our outlook for the full year fiscal 2022, ending June 30, 2022, as follows. For the full year fiscal 2022, we are raising our adjusted revenue guidance from a previous range of $203 to $207 million to now be in a range of $204.5 million to $207.5 million. This equates to an implied full-year fiscal 2022 adjusted revenue growth rate of approximately 12% to 13.5% from a previous range of 11% to 13%. 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 19% to 21% from the previous issued guidance of 18 to 20 percent. In closing, we also wanted to reiterate that our adjusted revenue growth rate guidance for fiscal 2022 and our other year-over-year growth metrics presented on an as-if combined basis are calculated based on the combined company fiscal 2021 financials and does not include any adjustments for purchase accounting or gap to IFRS conversions. With that, we appreciate your time and support. We're glad to open the call for any questions. Operator?