Absolute Software Corporation

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.

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.

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.