Absolute Software Corporation

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.

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.

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.