Edited Transcript of ABST.TO earnings conference call or presentation 9-Feb-21 10:00pm GMT

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Q2 2021 Absolute Software Corp Earnings Call VANCOUVER Feb 10, 2021 (Thomson StreetEvents) -- Edited Transcript of Absolute Software Corp earnings conference call or presentation Tuesday, February 9, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christy Wyatt Absolute Software Corporation - CEO, President & Director * Steven H. Gatoff Absolute Software Corporation - CFO ================================================================================ Conference Call Participants ================================================================================ * Alexander Haig Frankiewicz Raymond James & Associates, Inc., Research Division - Senior Research Associate * David Kwan TD Securities Equity Research - Analyst * Richard Tse National Bank Financial, Inc., Research Division - MD & Technology Analyst * Scott Randolph Berg Needham & Company, LLC, Research Division - Senior Analyst * Thanos Moschopoulos BMO Capital Markets Equity Research - VP & Analyst * Thomas Michael Walkley Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, everyone, and thank you for standing by. Welcome to Absolute Software's Fiscal 2021 Second Quarter Financial Results Conference Call. (Operator Instructions) 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 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 securities laws. 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 Q2 fiscal 2021 MD&A, which is now available on Absolute Software's website and will also be available on SEDAR and EDGAR. I'd also like to remind everyone that this conference is being recorded today, Tuesday, February 9, at 5:00 p.m. Eastern Time. I would now like to turn the call over to Christy Wyatt, President and Chief Executive Officer. Please go ahead. -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [2] -------------------------------------------------------------------------------- Thank you. Good afternoon, and thank you all for joining us for Absolute Software's Q2 Fiscal 2021 Conference Call. Before we get started, I would like to welcome Steven Gatoff, our Chief Financial Officer, who joined us in November, and who is joining me on this call. On today's call, I'll highlight the continued positive trends in our quarterly results, and we'll review the past quarter's development. We will touch on some of the market drivers that are contributing to our ongoing success. And finally, we'll wrap up with some commentary on our direction and the unique opportunity we see ahead of us. Q2 was a strong quarter for Absolute, highlighted by further acceleration in revenue growth, coupled with solid EBITDA margins. Revenue grew 16% year-over-year, and we delivered adjusted EBITDA of 27%. We added $5.7 million of ARR in Q2 and exited the quarter with ARR of $117.5 million, up a record 17% year-over-year, driven by an 18% increase in active devices. Our Education sector grew 30%, while our Enterprise & Government sector grew 12% year-over-year. Q2 was driven by a mix of new -- Q2 growth was driven by a mix of new customer wins and expansion within our existing customer base. Notable customer wins included Western Alliance Bank, Cypress-Fairbanks School District, Westgate Resorts, and the Royal College of Arts in the U.K. This was another strong expansion quarter for us with the continued strength across products. In Q2, we delivered a number of significant product enhancements focused on enabling deeper management capabilities and enhanced ease of use. A few notable deliverables included flexible modern reporting as well as a new mobile application designed to help IT and security teams manage endpoint devices and protect sensitive data easily and efficiently no matter where they are. Our web usage application, which we successfully launched in our Education segment in Q1, we've integrated more broadly across our enterprise offering, enabling advanced insights into software usage and employee productivity as well as a number of other key features. As a result, we've seen 158% increase in the number of accounts that have enabled this future. Enhanced software asset inventory and analytics were introduced, which will automatically scan Windows and Mac devices to help customers assess software applications, detect unauthorized installed applications that may pose security risks, and confirm the successful rollouts of new applications or updates. Application Persistence Added 2 new titles to its growing library. Customers can now monitor and apply automated self-healing to Palo Alto GlobalProtect VPN and Netskope CASB, so they remain installed, healthy and undeletable. And our rich library of automated workflows was enhanced to include return codes, giving administrators the ability to efficiently fine-tune and confirmed success of at scale remedial actions. Our ongoing investment in innovation resulted in Absolute being named as one of the top Endpoint Management solution providers by G2's customer review platform. Based on high levels of customer satisfaction, this marks the sixth quarter in a row for Absolute. We have continued to see strong traction with our OEM and channel engagements across various vertical markets and territories. Absolute was added to the HealthTrust Group Purchasing Organization offering that Lenovo and CDW sales teams are leveraging in the health care sector. Dell's Blueprint for Success program originally launched in Q1 was a focus on Education and has now been expanded to cover state and local governments and health care. Additional software bundles launched with HP in North America and EMEA supporting consumers as well as working-from-home and BYOD users. And after announcing our new channel partner program last quarter, we doubled partner engagement in Q2, which led to significant increase in channel pipeline from a year ago. As we all approach the 1-year milestone in our remote work and distance learning journeys, the massive market opportunity for Absolute remains clear and in focus. We have worked with many organizations to mature their processes around managing and securing distributed or hybrid environments while maintaining control and visibility of their devices and their data and ensuring the resilience of their security control. We are well positioned and remain focused on delivering more secured resilient security controls and deeper biased level management capabilities for our customers. In Q2, we were notified by the FedRAMP Joint Authorization Board that we've been prioritized to pursue a provisional authority to operate for the Absolute Resilience platform. FedRAMP is a U.S. government wide program that provides a standardized approach to security assessment, authorization and continuous monitoring for products and cloud services. Achieving this certification would further enhance our opportunity in the U.S. federal market over the coming years and demonstrates our commitment to ensuring the highest levels of cloud security across all government agencies. Also in Q2, we were awarded the Cyber Catalyst designation by Marsh & McLennan, who facilitate an independent evaluation of over 90 solutions by leading cyber insurers. This designation is significant as it emphasizes Absolute's critical capabilities and our ability to provide the highest level of protection against today's top cyber security risk and offers customers significant discounts on cyber insurance when Absolute is deployed within their environment. Turning to Education. We see 3 trends that are driving a structural shift in the market that has reenergized this segment of our business. Historically, education IT has not seen the scale and complexity of other enterprise verticals as many schools still largely operated under a campus model with simplified connectivity and a smaller number of applications, and we're primarily focused on learning use cases. Since the emergence of COVID, we have witnessed the complexity of the education environment increased dramatically. The number of applications and versions our Education customers are using has increased by 282% from 1 year ago. At the same time, the velocity and mix of platforms and devices that are being supported has also accelerated. And finally, the mobility of the devices these schools are managing has changed dramatically whereas many -- whereas previously many schools were managing devices on cards that moves from class to class, schools are now looking at technology deployments with enterprise scale and security challenges. The combination of complexity, velocity and mobility has fundamentally shifted and accelerated the educational approach to IT and security. And as a result, has strengthened Absolute's value proposition and our ability to help our customers manage all elements of this critical learning infrastructure. Given our long-standing position in the education market and our unique ability to provide an unbreakable digital connection to all devices, bias-enabled management and resiliency to their other core applications, we continue to see strong activity in this segment. These growth drivers are further supported by an increased flow of funds that help schools procure and deploy critical capabilities required to meet the new demands of digital learning while the CARES Act provided an initial boost of investment, there are other layers of funding flowing into the sector that support our continued growth. At the start of this fiscal year, we discussed our plans for further investment internationally starting in the U.K. and broader EMEA regions as one of the focused growth investment strategies. In line with our plan for Q2, we have hired new leadership for this region, and this team is already in motion extending the team and working with our partners to broaden our reach into the market. Over the past 2 years, we have worked hard to put in place the right team and infrastructure to take advantage of a large and growing market opportunity. We are becoming increasingly effective at capitalizing on our technology advantage, the permanent digital connection and self-healing security controls, which we believe is increasingly relevant across all market sectors that we serve globally. Looking ahead, we continue to focus on further accelerating revenue growth while maintaining our balanced profitability and have prioritized the investments required to achieve these results, which include an ongoing focus on operational efficiency and scalability, an expanded focus on international markets and global strategic account, broadening our channel and partner program and delivering new product offerings that leverage our rich data platform and secure channel embedded in over 0.5 billion devices. With that, I will now turn the call over to Steven to take us through the financial highlights. -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [3] -------------------------------------------------------------------------------- Thanks, Christy. Good afternoon, everyone. We appreciate you joining us. We're glad to provide some details and color around the business that drove our Q2 financial results and walk you through our guidance for the full fiscal year 2021. We'll, of course, wrap up by opening the call to your questions. With this being my inaugural earnings call here at Absolute, I wanted to frame this out into 3 areas: one, my personal bullishness on the large and growing endpoint resilience opportunity that Absolute Software is uniquely positioned to monetize; two, our SaaS model that's driving solid increases in year-over-year ARR and revenue growth and strong continued profitability; and three, the compelling path in front of us to drive continued revenue growth and increasing stockholder value. First off, I'm thrilled to have joined Christy and the team here. After 90 days or so on the job, I can say that I'm more bullish on the opportunity that's sitting in front of us at Absolute than when I first started. Absolute's persistence technology, which is embedded in more than 500 million devices globally by the OEMs, along with our leading technology platform, puts the company in a unique position to disrupt the $68 billion TAM. And the early signs are that we're doing just that as we continue to make progress and drive growth. Having joined the company just after our listing on NASDAQ, I've taken the opportunity to talk with many of our new and long-standing investors. There was a recurring message that I kept hearing. Given the very large market opportunity and your unique technology advantage, what is the time line that we'll see the company fully realize this? What may not be obvious from the outside is the significant transformation that the company has undergone in the past 2 years. I would offer that this is evident on 2 important fronts: one, the significant evolution of the team that Christy has driven from go-to-market to product to edge; and two, the technology overhaul of the platform infrastructure and SaaS architecture the past 2 years to support our evolving security analytics platform and product path ahead. As a result, the capabilities of the product in terms of scalability and functionality are very much new and expanding, particularly in the direction of intelligence, which is all the more relevant and important now for where the market is. Our go-to-market capabilities and approach have been transformed from direct to partner-driven and have been evolved meaningfully since Christy's arrival and the team's new focus are garnering greater economics from our land and expand SaaS model. This is what I am particularly excited about and so far is driving growth and removing friction. Helping us continue to monetize our platform model and drive ARR and revenue growth while we maintain a strong profitability profile. While Absolute is obviously not a start-up, I believe we are just now in a new position to engage with a stronger technology stack and value prop and looking to realize the potential to disrupt this massive security market opportunity that sits at the front door for our core persistence capabilities. With that perspective, let's look at the results of our SaaS model inherent in the second fiscal quarter ended December 2020 financial results. Q2 was another strong quarter for Absolute. We saw total ARR growth in excess of 17%, record revenue growth of 16% and continued strength in both adjusted EBITDA and cash flow margins. Starting off with ARR, performance in our Education sector came in strong, delivering 30% growth year-over-year in Q2. We're seeing continued growth as K-12 moves forward with their digital transformation from just deploying devices in the pandemic to now needing to manage these fleets at scale and to ensure that all their investments in security tools are deployed, active and working as intended. The bulk of our portfolio in Enterprise & Government remains solid, growing ARR a consistent 12% year-over-year in Q2 despite some COVID-related headwinds in some of our Enterprise verticals. As we've noted, while the pandemic has resulted in increased demand as IT and security professionals migrated to having to manage and secure devices off corporate networks, we've also seen some headwinds at times in particular sectors such as health care, professional services and some retail. We continue to have a diversified customer base across the portfolio, which we believe will help mitigate the impact of any particular sector weakness. And so far as our expanding global reach, we were pleased to see improvements in our newly enhanced EMEA efforts and another strong quarter from our Latin America portfolio. We continue to see significant opportunities internationally and are being strongly encouraged by our OEM partners to expand our presence there. Specifically, we're investing in our sales capabilities and go-to-market in EMEA over the second half of fiscal 2021, as I'll discuss in a few minutes when we talk about guidance for the full year. Overall, international comprised 16% of total ARR and grew approximately 43% year-over-year versus 23% growth in the prior year. Another contributor to our strong performance in Q2 was that our sales team executed well in closing a large number of deals early in the quarter. This benefited Q2 results in the form of both higher revenue and favorable cash collections. Looking at some additional business metrics that are also contributing to growing revenue and favorable economics. Net dollar retention continued to grow and came in at 109% in Q2 versus 100% in the second fiscal quarter of 2020. This very strong number is part of what we believe is a trend that reflects our continued success of expanding within our existing customer base that's driven off our initial land. In this regard, we wanted to note that we've updated the methodology of how we calculate net dollar retention to be on an annualized year-over-year basis, so that it's consistent with our year-over-year growth assessment and other performance metrics versus the in-quarter calculation that it had been. On that historical basis, NDR would have been approximately 104%, which was also an increase in growth over the apples-to-apples year ago comparable. Going forward, we will only be reporting the annualized NDR number. On the spirit of driving transparency and providing investors with helpful information in a low friction way, we have initiated 2 disclosures that are available on our IR website. First, we published a stand-alone earnings deck in addition to the company presentation that contains the financial and business highlights for the quarter and the relevant trend and performance info for previous quarters. Second, we've begun publishing a metric sheet that has tended to provide easy access to the various operating and financial metrics that we discuss. One of the metrics that you'll notice that we added is non-IFRS EPS alongside the IFRS earnings per share. While it's not a key metric as we have defined those in the MD&A, we thought it would be helpful to provide the non-IFRS EPS number that adjusts for the same adjusted EBITDA items so you have that count available as well. With that, let's look at the Q2 P&L. Our ability to deliver strong revenue growth for Q2 demonstrated the strength of our SaaS model, where we've built a solid base of recurring subscription revenue and continue to grow it. Total revenue came in at $29.9 million in Q2 for a year-over-year growth rate of 16%. We continue to have solid visibility into the SaaS revenue profile going forward. And are bullish on the several vectors of growth across international customer expansions, continued monetization of the platform and new analytics across device and predictive oriented endpoint and security products. Gross margins came in at a consistent and solid level of approximately 89% in Q2. And while we saw some efficiencies in our go-to-market OpEx, we also saw higher operating costs in G&A as a result of becoming a U.S. listed company as we messaged in the past would be the case. It's notable that sales and marketing grew a modest 7% in Q2, resulting in some efficiencies for the quarter. This all manifested itself in an adjusted EBITDA margin of 27% in Q2. This came in above expectations as a result of 2 factors: first, as I mentioned, we closed more bookings earlier in the quarter that drove higher in-quarter revenue; second, on the cost structure side, the pandemic continued to challenge the pace of hiring and dampened T&E spend for another quarter, thereby temporarily lifting margins. You can see that as well in our total employee count at quarter end, which was up marginally to 526 people globally from 517 at the end of the previous quarter. As we'll talk about in a moment, we're beginning to address this in the current Q3 quarter in terms of expanding our go-to-market hiring and some increased program spend to drive growth. And so let's now turn to our third point. On a compelling path in front of us, so we expect to drive continued revenue growth and increasing stockholder value. We're committed to continuing to drive profitable growth. As we've discussed, we benefited from recent cost savings from pandemic impacted headcount and T&E savings that drove higher adjusted EBITDA margins. For the current Q3, we anticipate a marginally higher year-over-year increase in sales and marketing expenses as we increase our investments in driving growth. We're making incremental sales headcount and channel investments as we expand our presence and growth initiatives in EMEA. We're also making decided investments to drive future increases in new logos, higher sales rep productivity and continued customer expansion. And so considering all this, our financial outlook for the full year of fiscal 2021, ending June 30, 2021, is as follows. We are raising our revenue guidance and expect full year total revenue to be in the range of $117 million to $119 million. This equates to a full year fiscal 2021 revenue growth of 12% to 14%. We're raising the lower end of expectations for adjusted EBITDA margin for fiscal 2021 and anticipate that to be in the range of 22% to 24%. We're also raising the lower end of expectations for cash from operating activities margin, where we expect that to be in the range of 26% to 34%. And finally, we're maintaining our expectations for capital expenditures for the full year fiscal 2021 to be in the range of $3 million to $4 million. In closing, we're confident that we are addressing the strategic opportunity in front of us in a thoughtful and methodical way to drive stockholder value from a combination of ARR growth and maintaining profitability. As we move forward and capitalize on this, I'm excited about contributing to our ongoing focus around driving a SaaS orientation and execution in terms of both our revenue scale and how we run the business to achieve increasing leverage and returns. From evolutions engaging with customers and customer onboarding to managing our leading indicators and investment profiles, we're driving greater operating and organizational efficiencies with our unique technology platform to make sure we're well positioned to capture the large market opportunity. We continue to have confidence in monetizing the opportunity in front of us and our path of continued revenue growth going forward. With that, we appreciate your time and support and we're glad to open the call for any questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Mike Walkley with Canaccord Genuity. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [2] -------------------------------------------------------------------------------- I hope everybody is healthy on the call. And congrats on the record ARR and execution. My question is on post the solar winds package really helping demonstrate, I guess, increased security spending cannot help stop some of the breaches that happened out there. I was curious if this is just helping generate increased awareness for your Persistence technology, both from your Enterprise customers and then from companies may be coming to your ecosystem such as some well-known companies you added such as Netskope and Palo Alto during the quarter? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- That's a great question. Thanks, Mike. So I would say that we definitely had a lot of inbound inquiries around the recent breaches. I do think that it did highlight on a pretty global scale, the value of retaining those security controls on the endpoint and making sure that they're the right version. The number of companies that I spoke to that said that the reason they were saved from being targeted was because there were too many versions behind. So therefore, that's how they -- I'm not sure -- well, it may have worked in their favor this time, there's probably more times than not it would work against them. So I think it definitely has increased the focus on endpoint hygiene and making sure that the resilience of those controls is there and in place. On the ISV side, I think we continue down that journey, both from the application Persistence as well as the Persistence of the service journey, I think we continue to grow that catalog. And I think that the awareness is definitely growing on the customer side. And from the ISV partners, what we're hearing is a lot of enthusiasm around the data. We can share about how and where their controls may be going offline. So it's an unfortunate but interesting focusing moment. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [4] -------------------------------------------------------------------------------- Okay. And just a follow-up on that, Christy. Just in terms of adding companies like Netskope and Palo Alto Networks to the ecosystem, are those companies coming to you? Or are that your current customers asking you to add them to your ecosystem? And how does this add to your sales cycle as you add more and more well-known companies to that ecosystem? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [5] -------------------------------------------------------------------------------- Yes. So generally, the list of applications that we're adding to the application in Persistence library is customer-driven. So these are the solutions that our customers are using, where they've messaged to us that these are critical controls that they want to make sure are there, and they're always working. We -- the list is long in terms of the targets and the potential opportunities. And I would say that the collaboration has only increased in the past year, mostly as a result, we've gotten a lot better at showing data with our partners about what we're seeing about the performance of their applications, and that's really sparking the interest. -------------------------------------------------------------------------------- Thomas Michael Walkley, Canaccord Genuity Corp., Research Division - MD & Senior Equity Analyst [6] -------------------------------------------------------------------------------- Great. And last question for me, probably for either Christy or Steven. You guys have a very large TAM to pursue and appreciate the updated fiscal '21 guidance. But as we think longer term to investors, is there certain balance that you're trying to reach between growth and profitability? I mean, are you trying to stay near that Rule of 40 like a 20%, 20% growth? Or what do you need to add maybe in sales and marketing to take the growth up even higher than it's currently running? -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [7] -------------------------------------------------------------------------------- Hey, Mike, thanks. It's a great question. And as we've talked about, I think, fairly consistently in the past. Yes, we believe that the Rule of 40 is a relevant and helpful measure and parsing out how we think about growth and profitability. And the bogey, if you will, that we've said we are aiming to get to is a blend, right? And it's a blend literally down to the middle of 20%, 20%, eventually looking at 20% growth -- revenue growth and 20% profitability. And so when you look at the trajectory we're on from a revenue standpoint, we continue to ship away and slowly accelerate growth to that level. And on the profitability side, you've seen in the first half of the year, EBITDA margins that are on the higher end of that. And so we've been fairly explicit in managing expectations that we have profitability is a very important metric to us, but we're also looking to invest some marginal amount of profitability back into growth into both product and go-to-market so that we would expect to see the profitability not hanging out in the upper 20s over time, but it worked its way towards the 20% as growth comes up with it. It won't be a perfectly linear, beautiful quarter-by-quarter sequential trade-off, but that's the goal that we have over time. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And our next question is from Thanos Moschopoulos with BMO Capital Markets. -------------------------------------------------------------------------------- Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [9] -------------------------------------------------------------------------------- Looking at the Enterprise segment, the growth area has been kind of comparable to what you were doing pre-COVID. And I think you called out the dynamic where you're seeing softness in certain verticals, and presumably, that's being offset by acceleration in other areas. Maybe as you look at pipeline as you think about the coming months, how do you think that dynamic plays out? Do you think the softness sort of remains sustained in the weaker verticals? Or are there signs of that getting mitigated? What's your outlook there? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [10] -------------------------------------------------------------------------------- Thanos, I'm happy to take a shot and then, of course, Steven can jump in with anything he sees. We have continued to see, as we said, both the strengths and the weaknesses of the Enterprise space, where we overall see the positive strength, and I think that the continued stability of that space. We do think that the growth has been somewhat tempered by the softness in some of those other verticals, which is why we see the difference between Enterprise and Education. I think so long as we're in this pandemic, if we're going to see some continued puts and takes on that. The one thing I would point out is that quarter-to-quarter, it's not always consistent with the same ones. It has some amount of seasonality to it. I don't think that there's -- we have any growing concern about what's coming in front of us. If anything, I think we're moving towards what looks to be stabilization, as we're making progress with the broader pandemic set of conversations. So there's nothing unusual in this quarter that we haven't been seeing in previous quarters. And I would say we continue to see healthy demand for the category. Just offset by some of these other areas where they have sort of their own things going on. -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [11] -------------------------------------------------------------------------------- Yes. Thanos, your premise was about thought there. When we look back at Enterprise in the, call it, year before the pandemic, the growth rate was actually inching up sequentially quarter-by-quarter. So it was going kind of from 9%, 10% to 11% or 11%, 12%to 13% and working its way up from a bunch of progress in a few sectors. And then the pandemic hit and it was interesting that some of those sectors were the ones like health care that had some challenges in it. And as Christy made a really good point, there's still some sectors in Enterprise that we're seeing really nice growth from, but 1 or 2 that are under pressure. And so we're bullish on the overall space and when those pressures lift, we would expect to see the overall growth benefit from that. -------------------------------------------------------------------------------- Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [12] -------------------------------------------------------------------------------- Okay. That's helpful. And then in terms of the FedRAMP certification, I'm not surprised you didn't have that, given that I know you have a significant public sector business. So maybe help us understand better what that really means, and what kind of opportunity might make them on the back of that? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [13] -------------------------------------------------------------------------------- So FedRAMP is -- we're actually very excited about this. I think that FedRAMP authorization, I think that's the one you're referring to. There's a couple of different ways you can approach that certification. It is a very long process to get through it. One way is you can go in with a -- an initial sponsor, specifically against our requirements and the others, you can work with this joint authority board to work more broadly on the program. And I think we were very excited. We were one of a very small member, many applied, we were one of the very small member that was prioritized in that queue. So we've always had a very healthy federal business. I think that we've seen a lot of opportunity there, and it's been one of our better growing segments. We do think that there's a lot of additional opportunity. If we can go deeper into that segment, it's one of the growth strategies we've talked about in previous conversations. And this is honestly an opportunity that's somewhat opened up to us because of the moves we've been making towards the public cloud. So it makes it somewhat more accessible when we're sitting on a public cloud infrastructure that's already got through that certification, we get a lot of additional benefit as a result of that. And so I think we're very excited about this. I want to sort of set expectations. It is a long-standing process. It takes a period of time, but it is a very transparent one, and we'll be able to give updates as we go through. -------------------------------------------------------------------------------- Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [14] -------------------------------------------------------------------------------- But ultimately, this helps reduce the procurement turtles that a new government agency might face as they look to bring you on board, right? Is that the fundamental principle? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [15] -------------------------------------------------------------------------------- Yes. Essentially, they're sort of assessing against a risk framework and set of security capabilities so that other agencies won't have to sort of certify on an independent basis or wouldn't be required. They can leverage that certification more broadly. -------------------------------------------------------------------------------- Thanos Moschopoulos, BMO Capital Markets Equity Research - VP & Analyst [16] -------------------------------------------------------------------------------- Right. Okay. And then last one for me in terms of the EMEA investments. Any specific countries of focus as you think about where you're spending your incremental dollars for hiring? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [17] -------------------------------------------------------------------------------- We've done very well out of the U.K., and so we're going to continue our investments out of there. We are starting to -- and just to be clear, we have been -- we do have many customers across EMEA, across the business, but we are starting to sort of stand up additional selling capacity. As I've touched on before, the place that we start is really with our partners. There's an easy way and a hard way to kind of open -- go into new markets. And so our strategy is not to land a bunch of headcount into a new territory and start with sort of the demand generation on our own. We really are going into the call centers with our partners and leveraging a lot of the same selling motion that has made us successful in North America and in the parts of Europe where we are so far. So we haven't laid out sort of a country-by-country plan, but it is a highly leveraged plan, and I think we are well on our way. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Our next question is from Scott Berg with Needham. -------------------------------------------------------------------------------- Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [19] -------------------------------------------------------------------------------- Congrats on a great quarter. I guess 2 -- yes, 2 for me. Let's start off with the Education segment. Obviously, really strong growth there, big boost in ARR, seeing some positive trends there. But how should we think about the longevity of what you're seeing there? Is this a -- that's a much bigger quarter or bigger spike than what we saw in the June quarter. Is this something that's kind of a one quarter trend? Or is there an opportunity to have something more sustainable as the pandemic hopefully subsides? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [20] -------------------------------------------------------------------------------- Scott, thank you. It's a great question. I spent a little bit longer than normal talking about sort of the color around Education on this quarter's call because we do see it fundamentally shifting. I think that what we're seeing is really this increase in complexity. And so I think that sets us up for longer term success with Education. And again, it's not simply a result of distance learning and it's not simply a result of additional funding, it's a result of kind of these educational environments are very large. They're very complex. In many ways, they're more complex than Enterprise because of the mobility and because they're using -- they have younger users. They have a lot of challenges that many Enterprises don't also have. And so this is really kind of a turning point. When we talk -- I gave the data point on the call about the number of unique applications, just to give you some perspective, and this is information that's actually up on our website at our COVID insights dashboard. Before COVID, we saw just over 1.5 million unique applications and versions across our Enterprise estate. And in the Education side, it was -- on the Education side of the business, it was just a fraction of that. I think it's several hundred thousand at this point. So it's much, much smaller. And that's the kinds of applications they were using and the amount of security controls. It was a very simplified environment. If we look at the new applications that are coming into that environment, there are certainly some -- there are some student support and distance learning tools for sure, but you're also seeing a lot more mainstream enterprise security control. And so that increase in complexity, that increase in the number of devices and the complexity around managing those devices and the diversity of the kinds of applications and security that they're having to put it around those devices really means that, that is starting to kind of get closer to an Enterprise and the use cases start to converge. It's a little bit why we've seen such great response to things like the web analytics and the web usage, which we initially put out in Education but are equally relevant in Enterprise, right? The use cases between the 2 start to get very, very similar. So our belief is, now I don't want to set the expectations that you should take a look at this quarter and assume that it's run rate. But I do think what we're seeing is not kind of a blip in a flurry of activity. What we're seeing is a vertical market going through a pretty significant transformation. -------------------------------------------------------------------------------- Scott Randolph Berg, Needham & Company, LLC, Research Division - Senior Analyst [21] -------------------------------------------------------------------------------- Excellent. Quite helpful. And then from a follow-up, question, Steven. If I look at your guidance here for the -- effectively, the second half of the year, it's implying a 12% revenue growth rate at the midpoint. Given the company has come off of a 17% AR growth quarter in the December quarter, and that was after a 13% number in the September quarter, sales obviously seem quite strong, but your guidance seems a little bit on the conservative side relative to that sales strength. How should we view the guidance in the second half? Is there some dynamic or component around rev rec that's delaying some of the revenue on these contracts, maybe some assumption on churn? Or is there anything else that we could kind of read into that number? -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [22] -------------------------------------------------------------------------------- Sure. Yes, that's a very fair question. And I think on the surface, we would offer to not read too much into it and so far as changes in rev rec or contracting or any type of fundamental business shift, there is the overall dynamic that while we are very bullish on the business and the market. And we, like everyone else, are getting used to living in this pandemic environment and are adjusting ourselves to it. For example, we understand a little better how hiring works. We understand a little bit better how engaging with customers works. And so we're now looking to expand and invest some more in that. But on the revenue side, we really just wanted to be thoughtful and consider it in laying out something that we were comfortable with, probably nothing more involved in that. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Our next question is from Adam Tindle with Raymond James. -------------------------------------------------------------------------------- Alexander Haig Frankiewicz, Raymond James & Associates, Inc., Research Division - Senior Research Associate [24] -------------------------------------------------------------------------------- This is Alex on for Adam. I'm just wondering if you could provide some color, maybe quantify some of the numbers around the COVID-related free trial. You had that expired in October, kind of just what was the uptake on that? And what was the conversion rate related to that? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [25] -------------------------------------------------------------------------------- Alex, it's a great question. So we haven't published at the conversion rate on a specific campaign. We don't -- I don't -- we don't publish sort of campaign by companion results. But what we have seen is increased acceleration on Resilience with -- we've talked about 60% of our ARR sitting in Resilience, and I think that's continued to grow. So the motivation behind the campaign was really, first and foremost, really to help our customers, where they were struggling, especially around areas like VPN or web usage or reach. And then in doing so, we introduced them to a lot of the capabilities of Resilience, so we did see a healthy conversion up to the higher tier package, whether they took it on a sort of modular license or whether they just sort of went to Resilience as a full. It did also help shape our thinking about kind of the next class of application, persistence applications, which ones were most critically needed. And I think you see that reflected in some of the new AP modules we've been adding. We just added the Palo Alto solution and, of course, the CASB solution as well. So I think that we consider it to have been a successful campaign because it really raised the awareness of how we could be more helpful to our customers. -------------------------------------------------------------------------------- Alexander Haig Frankiewicz, Raymond James & Associates, Inc., Research Division - Senior Research Associate [26] -------------------------------------------------------------------------------- Okay. That's helpful. And then sort of on that topic as well, I think you mentioned in the past about thinking about reconfiguring your product offerings based on modules for vertical-specific applications. Have you done any more work on that? Or what are your thoughts on kind of moving forward with that? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [27] -------------------------------------------------------------------------------- We have continued to do more work on that. We have been continuing to take a deeper look on sort of performance by product line. Taking a look at the modularity of our product, as I've commented on before, behind the scenes, the product itself, the configuration of the product and the capabilities is pretty flexible. So it makes it relatively simple for us to be responsive to customers who want to look at different stacks and combinations. We haven't announced any new bundles or pricing or any changes. I think that we -- it's one of the areas that we're continuing to dig in and do work as we go through this quarter. -------------------------------------------------------------------------------- Alexander Haig Frankiewicz, Raymond James & Associates, Inc., Research Division - Senior Research Associate [28] -------------------------------------------------------------------------------- Okay. And then one final one, just a housekeeping question. Just taking a dive into the Fresnos School District deal, I think that was 100,000 devices expansion deal from 20,000 devices with Resilience, if using kind of an ASP of $40 with around $20 of net revenue per year. Am I correct in thinking that's around $1.6 million of incremental annualized revenue for you? -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [29] -------------------------------------------------------------------------------- Yes. I apologize. Your math is not orders of magnitude off, but we just haven't commented on the revenue profile of a specific customer. But okay and then your numbers in like reasonable stakes. -------------------------------------------------------------------------------- Alexander Haig Frankiewicz, Raymond James & Associates, Inc., Research Division - Senior Research Associate [30] -------------------------------------------------------------------------------- Perfect. And are there any other ways you can monetize the relationship? Or have they already taken kind of the just through expanding the number of devices? Or are there any other products you can kind of upsell or cross sell? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [31] -------------------------------------------------------------------------------- So I don't want to -- we published, I think, them as a representative case study. We've been doing a series of case studies on sort of customer success. And so we're very excited about the collaboration we've had with them. When we think about upsell and expansion with customers, we have talked a little bit about the opportunity to do some new product introductions as we go later into this year and sort of early into next year, we've talked quite a bit about the work we're doing with data and analytics, we've talked quite a bit about some of the work that we think is interesting around what I'd call proactive health monitoring. So how do we actually prevent devices or applications from calling out compliance as opposed to just fixing them when they break or sort of go off-line. So without commenting on any specific or individual customer, I would say that we're always looking at the customer journey, and we absolutely think even for a customer sitting on the millions, there is much more we can do to be helpful. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Our next question is from David Kwan with TD Securities. -------------------------------------------------------------------------------- David Kwan, TD Securities Equity Research - Analyst [33] -------------------------------------------------------------------------------- Congratulations on the quarter. Just wanted to jump into the FedRAMP or back into the FedRAMP. The question is related to the timing of when you expect to get the certification there? And then also any type of hiring you might need to do to pursue that opportunity? And when we could actually start to see material revenues being generated from FedRAMP? -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [34] -------------------------------------------------------------------------------- So thank you for the question. The FedRAMP process itself is actually pretty long. I wouldn't hazard to guess when the finish line is, but I don't think it's unrealistic to think it's longer than 6 months, and some have taken sort of much longer. It is -- it has a lot to do with -- it's a little bit like SOC 2, it has a lot to do with sort of documenting, controls and processes and sort of kind of navigating our way through that process. The process is very -- and the requirements are very public and documented, we're happy to share them more broadly. So in terms of the resourcing required, this is something we've been working up to this point. So across our CIO of Dianne and world with the R&D organization and with our cloud operations team, so this is something we've been working towards with our customers. We have a number of customers who are also huge supporters of us kind of going through this process. I'm not envisioning a whole host of new headcount required. There are some contractors and consultants that we hired who've been through the process before, who are sort of coaching us and supporting us as we go through it. But I don't think you should view it as a significant investment from an R&D perspective. From this point forward, it's sort of within what we're already doing. We have been building out our federal team over the past couple of quarters. So we have been sort of beefing up the support to our federal customers, and you should continue to see us do that. But it's already in line with our hiring plan. There's nothing additional as a result of this announcement. -------------------------------------------------------------------------------- David Kwan, TD Securities Equity Research - Analyst [35] -------------------------------------------------------------------------------- That's helpful, Christy. And I guess, the Canadian dollar has been moving here over the last couple of months. Can you comment on how much of an impact it might had on your Q2 results? If you changed the FX assumption for your guidance and kind of roughly what the breakdown in expenses are Canadian dollars versus U.S. dollars? Or I guess, obviously, the 2 key countries that you're in. -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [36] -------------------------------------------------------------------------------- Sure. So we -- as we disclosed, we do hedge our Canadian exposure. We're a U.S. dollar functional company globally. And what we hedge against is our payroll based expenses in Canada that headcount is roughly 70-plus percent of our overall expense worldwide. And in Canada, it's probably even more. It's probably upwards of 80% of our expense base. And so we're hedging the majority of that, and we have it hedged out 2 quarters as of now. And so that is not a factor for the current quarter that we reported or for Q3 and so far as the P&L impact per se. Good question. -------------------------------------------------------------------------------- David Kwan, TD Securities Equity Research - Analyst [37] -------------------------------------------------------------------------------- That's helpful. I guess last one question for you, Steven, maybe on the gross margin side, it's been at the high end, I think of where it's been over the last few years, around 89% range. I think initially, it was kind of -- it may be temporary here, but maybe can you talk about how you see the gross margins playing out over the next 6 to 12 months? -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [38] -------------------------------------------------------------------------------- Sure. I think you're spot on and not to the acute. We have not yet laid out a target model. We will be doing that at some point. We look forward to that. What we have talked a little bit about is as we move more to the cloud and less away from an infrastructure-based model, we would expect some movement of costs on our geography from gross margin to OpEx. So you may see some of that as we invest more in cloud operations away from CapEx and depreciation. So probably a little bit -- a whole lot of pressure in the outer quarters, nothing material in the near term. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our next question is from Richard Tse with National Bank Financial. -------------------------------------------------------------------------------- Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [40] -------------------------------------------------------------------------------- Just one question for me. If you sort of look, I don't know, on a year-over-year basis or maybe a trend over the last 3 years. Can you maybe talk about sort of the average deal size trends with your existing business? -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [41] -------------------------------------------------------------------------------- Sure. Why don't we -- we'll tag team on that, Richard, Christy and I involve. In a nutshell, we've seen some favorable dynamics from customers in aggregate, right? There's always the topic of lower marginal pricing off of higher volume-based deals. But we've seen an expansion, success and expansion of our customers. And so we've been glad to see deal sizes if you look on 2 ways to look at that TCV basis and an ARR basis. If you look at TCV basis, that's really influenced by the -- how many years, the last time of the contract, so that's not a fantastically helpful view in our opinion, way to look at it. But we have been able to garner greater economics from customers over time. And one of the metrics that's probably the acid test on that is the net dollar retention, which has expanded nicely on a sequential basis over the past several quarters. -------------------------------------------------------------------------------- Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [42] -------------------------------------------------------------------------------- Okay. I guess, I have you. Could you also maybe give us a sense of the split here between new wins and expansions in the quarter? -------------------------------------------------------------------------------- Steven H. Gatoff, Absolute Software Corporation - CFO [43] -------------------------------------------------------------------------------- Sure. We -- I can take the new guy hit. I'm not sure what we've discussed in general in the past... -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [44] -------------------------------------------------------------------------------- I'll save you, Steven. I'll jump in then. You can build around. So I think the metric that we've always -- first of all, hi, Richard, the metric we've always talked about is the net logo number, which we've -- and I'll just sort of go back to our land and expand model. So it's -- I think about 1.5 million this quarter, and it was about 1.3 million last quarter, and that's true net new logos. So that's the true new ARR from a brand new customer, much of what we do. Everything after that is an expansion, but it has a lot to do with the way we meet new customers. If you remember, we often attach with our OEM partners and then our direct sellers are really focused on that upsell and expansion. And so when we look at that net new logo number, quarter-by-quarter, it remains very small. What we're very focused on internally is sort of the analysis of how it grows over time. And I don't think we've published kind of those cohorts. We gave a little bit of context around it at the Analyst Day, but it's something that we are spending a lot of time looking at, and hopefully, we'll be able to provide some more color on in coming quarters. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude the Q&A session. I'll now turn the call back over to Ms. Wyatt for any closing remarks. -------------------------------------------------------------------------------- Christy Wyatt, Absolute Software Corporation - CEO, President & Director [46] -------------------------------------------------------------------------------- I want to thank everybody for joining us this quarter, and we're looking forward to catching up with all of you in another couple of months. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.