Absolute Software Corporation (OTCPK:ALSWF) Q4 2020 Earnings Conference Call August 10, 2020 5:00 PM ET

Company Participants

Christy Wyatt – President and CEO

Leigh Ramsden – Interim CFO

Conference Call Participants

Daniel Chan – TD Securities

Doug Taylor – Canaccord Genuity

Kevin Krishnaratne – Eight Capital

Thanos Moschopoulos – BMO Capital Markets

David Kwan – PI Financial

Operator

Good afternoon, everyone and thank you for standing by. Welcome to Absolute Software Corporation’s Fiscal 2020 Fourth Quarter and Annual Financial Results Conference Call. At this time all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]

Before beginning its formal remarks, Absolute would like to remind listeners that certain portion 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 the today’s date and Absolute 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 maybe 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 quarterly MD&A which is now available on Absolute’s website and SEDAR. I’d also like to remind everyone that this conference call is being recorded today, Monday, August 10 at 5:00 p.m. Eastern Time.

I would like to turn the call over now to Christy Wyatt, President and Chief Executive Officer. Please go ahead.

Christy Wyatt

Thank you. Good afternoon and thank you for joining us for Absolute’s Q4 fiscal 2020 conference call.

Joining me on call is Leigh Ramsden, our Interim Chief Financial Officer. On today’s call, I’ll briefly review our Q4 and full year results then focus my comments on how we are addressing the rapidly evolving endpoint security market.

Q4 revenue of $27.2 million was up 7% compared to the prior year period, while annual fiscal 2020 revenue of $104.7 million was up 6%. You will notice in our earnings we’ve begun reporting annual recurring revenue in lieu of annual contract value and we will comment on later the calculation of the two is the same. We added $6.9 million of ARR in Q4 and exited fiscal 2020, with a total ARR of $108.3 million, up to $10.3 million or 11% year-over-year.

The rapid increase in ARR this quarter was driven by strong demand from new and existing customers across enterprise and Education segments. Adjusted EBITDA in Q4 was $8 million or 29% of revenue. And for the year adjusted EBITDA was $27.4 million or 26% of revenue. This term EBITDA result was consistent with our disciplined cost management throughout the year, and the cost benefit resulting from the transition to remote work during the third and fourth quarters.

Cash flow from operations was $11.6 million for the quarter and $25 million for the year, a 143% increase versus fiscal 2019. We fund uptick in multiyear contracts specifically in Education which contributed to the strong level of cash generation. And as a result, we continue to maintain a solid balance sheet and exited fiscal 2020 with $47.1 million of cash and short-term investments with no debt.

Through the quarter, we saw significant increases in new activations resulting in a total of 13,000 customers globally, with $9.4 million active devices. We achieved a record $3.5 million in ARR for new customers and expansions during the fourth quarter. Notable among names were NTT, Georgia Tech Authority, Shelby County Schools, Partnership for Connecticut, and BBVA to name a few.

As we started our journey into fiscal 2020, we declared that our unique opportunity as the leader in Endpoint Resilience was to establish the value and criticality of having a permanent digital tethered to every endpoint in the enterprise that could enable self healing, visibility and control. By leveraging our unique persistence, resilience and intelligence capabilities, we enable customers to stay connected and to service their entire endpoint estate no matter where those devices may be.

We made significant progress as we executed on our strategy in the first half of the year. As we entered into the second fiscal half, the industry and the world experienced a series of events that brought a tremendous amount of focus on the need for these capabilities. As almost every organization sent their employees to work from home. Many companies realized they could no longer rely solely on network or appliance based security applications to monitor and protect their endpoint to state.

The need for permanent digital tether and the ability to monitor and remediate devices remotely was never clear. And as a result, we saw adoption and demand increased broadly. Education as a segment has fluctuated in recent quarters as Absolute was viewed primarily as an enabler for student devices. And the mix of those devices continue to incorporate Chromebooks at a lower price point.

In Q4, we saw this segment react sharply with an increasing schools procuring and mobilizing systems not just for students, but also for teachers and administrators in essence, moving to more of an enterprise model. For educational customers, we launched our new web usage capabilities to provide school administrators and educators with deep visibility into remote devices, and specifically to students and supportive distance learning initiatives.

Also in quarter, we announced the Absolute Resilience ecosystem now includes nearly 40 independent endpoint security agents healed both by our customers and continues to expand based on customer demand to ensure their mission critical security controls remain healthy and undeletable.

As a part of our intelligence initiatives, we’ve published two pieces of research since our last call. The first was our remote work in distance learning insight center that is updated weekly and is designed to share insights across our installed base, giving our customers a view of the industry so they can benchmark their own environments. And in June, we announced the second annual Endpoint Resilience report that underscores the vulnerability of enterprise devices.

The resiliency of critical endpoint controls, and also highlighted opportunities to optimize security investments, new to this version was the pairing of security combinations and controls to the extent to which they influenced one another’s resiliency. Our go-to-market efforts remain focused on our land and expand model. Some notable partner collaborations included Absolute’s listing as the key component in Dell’s fiscal 2021 Global Security portfolio.

Lenovo featured Absolute in their work from home bundle in response to COVID-19. Absolute was also included in a four-year Lenovo ThinkShield bundle that is already underway. HP featured Absolute in a consumer laptop promotion on QVC, reaching more than 110 million homes and CDW promoted our COVID-19 offers reaching over 1,500 sales reps. We continue to make significant progress on our long-term plan.

The structural fit to remote work and distance learning has focused the market on the need for permanent undeletable connection to all endpoint assets. And is our belief that Resilience is increasingly becoming a critical capability for the enterprise. Absolute is uniquely positioned to deliver Resilience Endpoint’s security capabilities as the only solution embedded in over a 0.5 billion endpoint devices.

As we embark on fiscal 2021. We are working to extend our leadership position and accelerate our growth trajectory. Despite limited visibility as a result of macro events, we remain convinced that we can deliver double-digit ARR growth in the year while retaining healthy margins. Leigh will provide our outlook for the year during his prepared remarks.

Our focus in the coming quarters will be on high growth opportunities such as our global strategic accounts, international expansion continuing in EMEA, broadening our channel and partner programs and new capability and product offerings that leverage our rich data platform and secure channel. The endpoint security market is expanding rapidly and Endpoint Resilience is emerging as a critical capability in a time when the industry is redefining the modern endpoint computing architecture.

We are well organized to capitalize on this opportunity and you should expect the company to invest and focus on growth with continued balance given the underlying economic environment.

With that, I’ll now turn the call over to Leigh.

Leigh Ramsden

Thanks, Christy and good afternoon everyone.

Q4 was a stellar quarter for Absolute highlighted by continued double-digit ARR growth in the combined enterprise and government verticals, a rebound in Education and continued strong EBITDA margins.

Before we get into the numbers, I want to call out a change and how we refer to our recurring revenue base. Beginning in the fourth quarter, we have changed our nomenclature from ACV Base to total Annual Recurring Revenue, or ARR. That we believe it’s a more appropriate description and is in line with industry standards. Similarly, Net ACV Retention and ACV from New Customers are now referred to as net ARR Retention and ARR from New Customers.

I will point out that there are no changes in how we calculate any of these measures from previous periods. And total ARR remains the amount of annual recurring revenue under contract and generating revenue at a point in time. With that said, we will now get into our financial results.

Total ARR was $108.3 million at June 30, representing an increase of 11% over the prior year, and an increase of 7% in the fourth quarter. This record quarterly performance was buoyed by strengths across all verticals, from both upsell and expansion of existing customers, as well as initial sales to new customers.

In Q4, we added ARR from new customers of $3.5 million, up from $1.0 million in the third quarter, and up from $2.1 million in the prior year. Net ARR retention from existing customers was 103% in the fourth quarter, up from 100% in each of the third quarter, and the fourth quarter of the prior year. The increase in total ARR and our Net ARR Retention and ARR from New Customers all represent the best results we have experienced since we began measuring the business in this way in fiscal 2016.

In the fourth quarter, we experienced an uptick in demand resulting in part from the shift to work from home and learn from home arrangements. The macroeconomic disruption being experienced globally is yet to have any significant negative impact on our customer base. However, the potential future impact on our customers and any associated expense reduction measures is currently unknown.

The combined enterprise and government portion of total ARR increased 14% year-over-year, but these customer segments representing 68% of total ARR at June 30. We achieved ARR from new customers of $2.4 million in these segments, compared to $1.0 million in the third quarter, and $2.0 million in the fourth quarter of fiscal 2019. This improved performance did not include any single customer wins greater than $500,000, which we believe is indicative of broader success in our efforts to accelerate ARR from new customers.

Overall, we remain encouraged by the continued momentum we are seeing in these verticals along with the current success of our solutions helping customers deal with remote working arrangements. The Education vertical, which represented 32% of total ARR at June 30, was up 4% year-over-year and increased 11% from the third quarter. The acceleration we saw in this market at the end of the third quarter, in part as a result of K-12 educational organizations contending with new distance learning requirements continued throughout the fourth quarter.

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As Christy mentioned, we believe that educational organizations are now having to focus not only on students, but also on teachers and administrators in order to effectively enable learn from home initiatives. We achieved ARR from new customers of $1.1 million in Education compared to $0.1 million in the third quarter and $0.2 million in the fourth quarter of fiscal 2019.

The $3.5 million increase in total ARR in the fourth quarter represents only the third time we’ve seen a sequential increase in Education in the past three fiscal years, showing early evidence of a shift in this market. We continue to believe the increased complexity faced by IT and security teams in order to enable users to work and learn from home will have a lasting impact on how organizations will plan and manage their workforces, with a greater reliance on endpoint control and visibility.

Turning to our geographical performance, international total ARR was up 20% year-over-year, and 8% from the third quarter. Our performance in the quarter was bolstered by a large customer expansion in the Latin American Theatre. Total ARR in North America was up 9% year-over-year and accounted for 86% of total ARR at June 30. Revenue in Q4, fiscal 2020 was $27.2 million up 7% compared to Q4 fiscal 2019.

Absolute delivered record annual revenue of $104.7 million for the full year in fiscal 2020 and increase of 6% from fiscal 2019. Revenue growth is primarily driven by trailing year-over-year growth in total ARR. Adjusted EBITDA which is defined in our press release and MD&A was $8.0 million, or 29% of revenue in the fourth quarter. Our Q4 fiscal 2020 adjusted EBITDA reflected the impact of IFRS 16 the leases accounting standard, which resulted in a benefit of $500,000 or 1% of revenue when compared to fiscal 2019.

Please refer to our financial statements and MD&A for further details of the impact of IFRS 16 on our financial results. On a pre-IFRS 16 basis, Q4 adjusted EBITDA was $7.5 million, or 28% of revenue, up from $4.9 million, or 19% of revenue in the prior year. The continued strength in EBITDA as a result of consistent revenue and gross margin growth coupled with the impact of a slightly lower expense base in the fourth quarter.

Our gross margins remains strong at 89% in the fourth quarter, compared to 86% in the prior year. Margins were particularly strong in the quarter as a result of lower service guarantee expenses year-over-year. Compared with the fourth quarter of fiscal 2019 in addition to the decreased service guarantee costs, our expense base reflected the impact of lower travel and entertainment expenses, partially offset by increased headcount related expenses, resulting from increased levels of commission and bonus accruals. Total headcount at June 30 was 499 compared to 477 at the end of Q4 fiscal 2019 and 501 at March 31, 2020.

Now turning to cash flow in the fourth quarter, we generated strong cash from operating activities of $11.6 million or $11.1 million prior to the implementation of IFRS 16. This compares to cash from operating activities of $3.5 million in Q4 of fiscal 2019. Our operating cash flows were positively impacted in the quarter by increased billings in the third and fourth quarters of fiscal 2020. And the impact of working capital changes which will fluctuate based on collection and payment cycles.

In the fourth quarter, primarily resulting from our improved performance in the Education sector, our average prepaid contract term increased to 21 months. This resulted partially from seasonality, as our fourth quarter is typically weighted more heavily to Education customers who generally purchase longer term contracts than our enterprise customers.

Finally, I’d like to shift our expectations for fiscal 2021. Please be reminded that the following expectations constitute forward-looking statements and financial outlook, and are qualified in their entirety by the detailed cautionary statements contained in our Q4 MD&A.

As Christy mentioned, we plan on making targeted investments in fiscal 2021 in a number of areas in order to drive continued growth, while maintaining our healthy EBITDA margin profile. While we believe Absolute can deliver double-digit ARR growth in fiscal 2021 the challenges and uncertainties in the macro-environment brought about by the pandemic led us to be balanced in our financial outlook for the year.

Our financial outlook for fiscal 2021 is as follows: revenue is expected to be between $112 million and $118 million representing 7% to 13% annual growth. Adjusted EBITDA is expected to be 20% to 24% of revenue. Cash from operating activities is expected to be between 22% and 34% of revenue. Capital expenditures are expected to be between $3.0 million and $4.0 million.

This concludes our prepared remarks for today. Operator, please open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Daniel Chan with TD Securities. Your line is open.

Daniel Chan

So your next year guidance is for 7% to 13% growth. If you come in the midpoint of that that will be the highest growth rate we’ve seen in a while. So what’s driving your confidence for this accelerated growth and what the assumptions that get you to the high end of that range versus the low end?

Christy Wyatt

Thanks for the question I can give a little bit of color on what we’re seeing in the guidance right now. As we’ve talked about many times before, I think we’ve seen steady growth and improvement in the enterprise and government space. We continue to see that – we expect to see that continue. We’ve also seen as we’ve talked about strengthening in the education space, which has largely been kind of the negative drag on the overall growth rate. And so, we’ve seen some different behavior on that side.

In addition, we see a lot of opportunity outside of North America, as we spoke about briefly, about 86% of our business is currently happening within North America, although some of our fastest growing segments have been in EMEA specifically in the U.K.. And so, one of our investment strategy as we go into the coming years to put more time and attention on the international markets as well with our partners clearly.

Daniel Chan

Yes, that makes sense. Any visibility on your ability to converse some of the prolongs that end in August?

Christy Wyatt

We’re taking a lot of look – we’re taking a deep look at a lot of the data. So our promotions were to make a certain set of capabilities available to customers who didn’t have an existing license at no additional charge until the end of August. We’ve seen tremendous uptake of those capabilities.

And so, we are looking right now at the usage patterns and given that the current set of events are taking a little longer then in the market than we had expected, where we’ve not yet made a decision on whether those promotions will extend or how we will see those going into the fall. So I expect to see us update more on that in the coming weeks.

Daniel Chan

And then just one more question on EBITDA, again nice speed EBITDA line again this quarter. Where are the surprises coming from and then again in your guidance for next year, I think you’re looking for margins to decline a little bit, but you’re expecting revenues to be up. So just kind of wondering about the assumptions that gone into that margin guidance as well? Thank you.

Christy Wyatt

Sure, I can start and then Leigh can add some color. So I think that clearly we had been doing a lot of work on optimizing margins in the first half of the year. I don’t know that I would called them surprises so much as accelerators, as we’re seeing the effect of extended time not travelling, people getting comfortable working from home and our ability to drive additional efficiencies.

Out of that, I think one other unusual trend that we saw is within the education space, and we’ve talked historically about education customers, typically purchasing longer term contracts. And so, we did see some of that in this quarter as well. Leigh anything to add?

Leigh Ramsden

Just as the year-over-year compare on cost of revenue was interesting because in the prior year, we had a large service guarantee charge that didn’t recur this year. And then the other thing I would point out is, we did have some investments in the business plan for the second half of the year this year. And once March came along, we took a step back and took a bit of cautious approach in the in the back half of the year. So that contributed to the EBITDA performance.

Operator

Your next question comes from the line of Doug Taylor with Canaccord Genuity. Your line is open.

Doug Taylor

I’m going to follow-up a question about the guidance in the top line 7% to 13%, which is a great number relative to where you’ve been punching over the last couple of years. But with 11% ARR growth built in right at the outset here do you think your guidance reflects a degree of conservatism at the low end of that range?

Leigh Ramsden

Yes, Doug it’s Leigh so I think you’re right. I think that – when we looked ahead for our outlook for next year, we wanted to take a balanced approach, given some of the uncertainty we see and putting a number out there for the entire year. At the same time, we’re very encouraged by what we’re seeing in the business right now. So, we thought we just be balanced in how we approach that.

Doug Taylor

I can appreciate that, would you say that some of your areas where you just want to be a little conservative, at least at the outset, are focused on the education sector. I mean, very strong much stronger this quarter, but – is that related to some kind of acute things that happened there over the last couple months?

And maybe, could you talk to us about whether what you’re seeing in education, now versus in April and May when they were really scrambling has changed if the conversations have changed, or the I guess, the last couple months versus the initial COVID impact?

Christy Wyatt

Sure, I can speak to the education segment. And so, in my comments I touched on a little bit of not just the acceleration, but also the shift and the behavior. A lot of times when education customers were using our technology, they were really focused on enabling students systems to a percentage or a subset of the population. With the rapid shift to distance learning, similar in the enterprise, we saw a lot of those organizations needing to accelerate digital adoption, but also not just for the students, but across the entire district or the entire state.

And really, we don’t believe as the quarter went on, that continued to grow and accelerate. And I think we’ve seen some of that as we’ve continued past there. And we don’t believe we believe it stabilizes at some point. Although, I don’t believe that we go back to just looking at digital or something just within the classroom. I think what we’re seeing is, is an expectation that these organizations are going to need some level of agility and some level of connection to these devices.

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As the coming year is so unpredictable about whether students will be going home or coming back to the class. So in my comments, I think I referred to it more as an alignment between the education behavior and the enterprise behavior in terms of managing the technology.

Doug Taylor

And just to wrap that up, I mean would you say then you think that the education sector is on a firmer, better trajectory or stabilization coming out of COVID than it would have been going, otherwise? Is that a fair assessment?

Christy Wyatt

I would view this as a third chapter. I don’t believe – in there being sort of a before versus an after. I think we have seen some accelerated activity of people needed to make and then a sharp shift over to the new model. But I do think that there is some fundamental change in how these individuals are viewing their broader enterprise or their broader institution.

And so, we do think that that’s fundamentally changes how technology is used within the classroom and across the district. I don’t think we have any visibility into the second half of the year now that unfolds in the coming months. But that’s a little bit of what we’re seeing right now.

Doug Taylor

Okay and then healthcare, obviously, a lot of distraction within that vertical for your customers with COVID. And so, can you speak to the trends you’ve observed there? Are you seeing any I mean, not – shown not in the numbers yet, but any pause in terms of deal flow in your sales funnel in the healthcare sector, and has that abated yet?

Christy Wyatt

I think it’s too early to understand the long-term effect of COVID on any one of these vertical markets. I think we’re sort of only midway through the game. I would say that in some of these segments like healthcare, we did see a tightening of budgets and we did see a bigger impact in some of those segments than we did in others for example, government or financial. So I don’t think we’re predicting a long-term impact at this point in time, but we definitely have seen the tightening in some of these areas.

Doug Taylor

Last question from me M&A hasn’t been a big part of the story for several years now. But I’m just curious now that with work from home, seeming to be more permanent for many industries scenario. Is there some features or tools or anything that you feel like you might, be interested in acquiring or adding to your software suite that you didn’t – hadn’t thought about before? Has that changed your thinking on M&A in the near term or even developing tools organically which we can see, you’ve done a little bit of…?

Christy Wyatt

Yes, I tend to think of the previous couple of months as a real focusing event, not just for ourselves, but for the industry. I think that the definition of Resilience and the importance of having that connection to that device has become incredibly clear. We do spend quite a bit of time thinking about how do we drive more value for our customers. And I have consistently said, we’ll always be open to opportunities to expand the value we deliver to our customers.

I don’t think we have anything to announce at this point, but we are spending a lot of time listening to our customers and understanding their pain points in what I would call really the modern endpoint architecture. I think a lot of the security tools that these organizations were relying on depended on these devices living either in the network or accessing the network through a VPN.

And that’s where we’re seeing a lot of these pain points and a much greater reliance on endpoint capabilities. So, nothing to announce at this point, but I think that, we’re always looking for opportunities to drive more value for our customers.

Operator

Your next question comes from the line of Kevin Krishnaratne with Eight Capital. Your line is open.

Kevin Krishnaratne

Just following on some of the positive comments that you’ve been mentioning on, confidence in longer lasting impact. I’m wondering if you can kind of elaborate on the trends that you were seeing within the quarter. How was sales activity progressing, sort of month-over-month, any sort of commentary you can provide on inbound activity. And just, how busy your sales team has been and how that activity has been increasing as the as the quarter evolved and as without giving guidance for Q1, just sort of what you’re seeing in the current period?

Christy Wyatt

Absolutely, so thank you Kevin. I would say, we talked a little bit already about the trends in the education side. I think on the enterprise, I touched on briefly. We saw similar trends as employees were mobilized. We did see some budget tightening in certain sectors. But I would say the bigger trend was really – so many employees going home, some who had never worked from home before and many of those employees requiring devices. We saw a lot of old devices getting reactivated. We saw new devices reappearing, as I mentioned – and our new activations took quite a bit of a jump during this period as well.

I would say we’re continuing to see a fair amount of activity within the customer base and within the pipeline as organizations are trying to figure out, which tools they can rely on and what the new normal is going to be that that modern architecture. We don’t think that customers sort of revert back and assume that they believe the throw the doors open and everybody goes back home. And so, they are – they really is I think a twiddling that’s going to take place over the coming months of security tools that fit within that framework of the modern architecture and those that that don’t based on where they sit.

I think that we have an important role to play within that. We did see a certain number of large RFPs, or new opportunities come across. Again, many of them within education, where those new device purchases were coming through in Absolute was a critical part of that.

So, as I said, as we entered into the summer, we’ve continued to be incredibly busy. I think one of the things that worked in our favor was we had spent so much time focused on renewals, and we had started the partnership with ServiceSource, which we’ve talked about on previous call.

We said this was the first quarter that ServiceSource was starting to assist with some of the renewals during the period albeit a small percentage of the portfolio. But that did give the selling team some of that additional capacity that we’ve talked about to be able to go and be more responsive to those customers that were looking for growth. And that’s something we’re looking to continue to see as we go into the first half of this year.

Kevin Krishnaratne

Great, great color. Thanks for that.

Leigh Ramsden

Okay. Kevin, I’ll just jump in and remind you that there is some seasonality to the business with our first quarter historically being a stronger education quarter as opposed to enterprise and the second quarter being more heavily weighted to enterprise and education. So some of those dynamics we expect to play out as we will go ahead.

Kevin Krishnaratne

Okay, thanks for that Leigh. Maybe to continue on with the education, I understand that there could be sensitivity on discussing specific customers, but if you look at the education market was up $3.5 million on ARR, $1.1 million from new and I think you called out maybe there was one in there that was greater than $0.5 million. I’m wondering if you can maybe comment on that particular win. Is that something that had been in the works for some time? Is that something that maybe got accelerated due to COVID? Sort of what was the nature of that? Did it include any student analytics? Any commentary on that?

Christy Wyatt

I’m sorry, Kevin. Which opportunity are you referring to?

Kevin Krishnaratne

So in the education, ACV was up $3.5 million, and I think the disclosure was $1.1 million of that came from new ACV. And within that there might have been one customer that was greater than $0.5 million, or did I read that incorrectly?

Christy Wyatt

Leigh?

Leigh Ramsden

No, that’s correct. That’s correct, Kevin. So yes, there was one large customer when there. And I think, if you’re thinking about how that deal came together, it did come up quite quickly. And it was primarily as a response to the COVID-19 impact.

Kevin Krishnaratne

And then if you’re thinking about education, again, the remainder, 2.4 million of just the ACV from existing customers, was that largely – was – how was that spread without expansion of devices, as you mentioned, obviously, school districts and administrators taking their devices home? Or were there any – was there any student analytics uptake that drove some of that that ACV growth?

Leigh Ramsden

Yes, I think we saw a good growth across all sizes of our customers and education. But there were two significant large customer expansions, really increasing the number of devices that they were having under management.

Kevin Krishnaratne

Great. And I wanted…

Christy Wyatt

And just to answer your question, Kevin on student analytics, we spoke a little bit earlier about the web usage capabilities, which was really the first piece of student analytics, so that is the product name for that sort of capabilities. And that’s one of the COVID offers we made at the end of the Q3 going into Q4. So all of the new ACV wouldn’t be directly attributable to that set of features, because that set of features was really given away at no additional charge during this period.

Kevin Krishnaratne

Right. Okay, thank you for the clarification. I just want to – so next question for me just on your confidence in double-digit ARR growth, you had highlighted a bunch of drivers of global strategic accounts in EMEA. I think one that you mentioned in there was new products and data, correct me if I’m wrong there. And if that’s correct, what are – how do we think about that opportunity? I know it’s early days, but any commentary could you provide there? And how that kind of rolls into your thoughts on guidance for next year?

Christy Wyatt

Absolutely. So we’ve spent quite a bit of time talking this past year about our intelligence efforts and our desire to give customers access back to their data in a more interactive way. Up until now, we’ve done that largely through reporting. So, existing reporting capabilities within our existing product, or additional pieces of research or tools that we can give customers that allows them to benchmark against that product.

We’ve talked a lot about how – data more accessible for the customers, either through accessibility through existing tools they already have, our new products or offers coming from coming from ourselves. So as you said, it’s a little ways out there, and these are some of the innovation initiatives we’ve been laying out over the previous couple of months, but we’re making good progress.

Kevin Krishnaratne

Your R&D count went up, I think it was 210 at the end of June and then 218, goes marketing slightly down. So can you comment on where that spending is going? Is it going towards – are you hiring within the data analytics teams? Or where did you see the increases coming?

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Leigh Ramsden

Yes, a large part of the R&D increase was the data analytics side and also just some backfill some open positions that we had at the end of March.

Operator

[Operator Instructions] Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Your line is open.

Thanos Moschopoulos

Can you speak to what – how your go-to-market and how demand generation looks like in the current climate? Is there a shift that you’re seeing in terms of the importance of partner driven demand generation versus your internal sales force? And generally speaking, how have you adapt – how you adapt your sales process and sales cycles through the current climate?

Christy Wyatt

Hi, Thanos. Certainly, so I don’t think very much has changed around the program in terms of how we’re approaching the market. We’ve talked before about landing with the partners and extending directly there. There was a lot of partner collaboration activity happening through the quarter. And I touched on some of them in my comments and some of the new initiatives where we’re working on either soft or hard bundles with our partners as a part of their work from home or COVID response.

I think that from our own efforts, as I mentioned before, we had a little bit more capacity to focus on growth and expansion with our direct sellers, as we were transitioning some of the renewals. So, this was – these were initiatives we had started last year. Generally, this quarter was a quarter where we were just really starting to kind of get traction and it just happened to be the same quarter where we were seeing this increased market activity.

I think as we go into the coming quarter, you should expect to see more of the same. We continue to have a lot of support interaction with our OEM partners. And so, I am increasingly focused on resellers and VAR partners as well, which I touched on in my – with – in my comments as well. So we’re increasing our activity with our channel partners. And in parallel, our direct sellers are increasingly focused on expansion in upsell as we move more of those renewals over to ServiceSource and the new renewals team.

Thanos Moschopoulos

You mentioned that the average contract term went up to 21 months. Just remind us where that’s had been coming previously.

Leigh Ramsden

Yes, it trended – it has been trending in the 18 month range lately and it didn’t dip down in the third quarter to close to 15. And then that’s really a – in the third quarter we have a large customer and that’s on an annual renewal, so it does dip down in the third quarter, but that’s definitely off the trend that was going more towards 18, 19 months.

Thanos Moschopoulos

And then I think in your prepared remarks you alluded to more international investment in the upcoming year. What will be your areas of focus in that regard as far as extending your sales capacity?

Christy Wyatt

The first place you’ll see a focus thing as additional resources in EMEA. As I have said before, when we go into a new region, we go in most effectively with our partners. So you shouldn’t expect to see a big shift in sort of selling and marketing or change to that model. But you have seen us – see some accelerated growth and some success in selling internationally when we go in with a partner.

So EMEA will be the first place, we’ll think about other territories as we go into the second half of the year.

Operator

Your next question comes from the line of David Kwan with PI Financial. Your line is open.

David Kwan

Just wanted to ask, I guess as it relates to some of the successes that you’ve had, as you’re selling in this COVID environment. Given that, IC Groups and departments have more time to kind of assess, what they need to be felt from a security perspective. Obviously, from an endpoint perspective, which would be beneficial for you?

Have you seen any pickup in terms of, customers looking to accelerate the deployment across their footprint as opposed to waiting typically when they buy new laptops as a part of a corporate refresh?

Christy Wyatt

That’s a great question David, thank you. And the answer is, absolutely we did so if customers have been working with us as a way to manage their mobile assets, but maybe had not deployed as broadly internal to the organization. And that was a common trend, as we were originally viewed as something you deployed on laptops in case they went missing. We did definitely had a certain number of customers who have this only partially deployed.

And as most devices and employees went home, there definitely was an acceleration of activity to try to cover employees wall-to-wall either new systems they were buying or existing systems. In fact in some cases, we saw supply constraints in the channel, preventing them from getting the access to the new systems.

They were trying to bring on board, but still pushing software across the existing systems that they had either just sent home or we’re trying to send home. So we definitely saw a fair amount of that as the quarter went through.

Leigh Ramsden

Yes in the past, we’ve talked about enterprise and site licenses, those are our volume licensing arrangements and there is very healthy activity on that front in the quarter.

David Kwan

So that’s helpful. So did you guys see I guess, average sales prices or average deal sizes increase because of that?

Leigh Ramsden

Yes, we did have a very strong quarter from a – health of the pricing that we were seeing. So it was up across all verticals and across all products.

David Kwan

Okay, that’s perfect. And as it relates to some of the promotions that you talked about, with your OEM partners, particular kind of work from home bundles? I assume that you’ve probably seen the tax rates increase significantly versus pre-COVID?

Christy Wyatt

So for – well so, in the cases where we’re doing bundles where some of those partners, they could be hard or soft bundles, which means they could be baked into a particular either software or hardware software bundle that they’re a baking out or sending out or they could be a soft bundle, which means it’s in their configuration tool. And the sales rep needs to be to selected or unselected in order to include it as it’s going out in sort of a preconfigured bundle.

So I would say, as a result naturally it is attached at the sales point increase. I’d say it’s too early on the activation side. Clearly at this moment, this is where our customer success team engages and really focuses on driving activations and ensuring that customers are seeing value very quickly. We did see accelerated activation – through the quarter from both new and existing customers.

So in fact, clearly we have something called an overhang, which means the customer may purchase a set number of licenses, but their deployment plan may take several months for them to ramp up and use all of them. And we did have a fair number of customers that accelerated their activation plans to sort of accelerate up to capacity or even beyond capacity and then come back to sort of relicensed the overage as they were struggling to get employees home and activated.

David Kwan

That’s great. Thanks, Christy. I guess when you look at – that you talked about that’s the increase to 21 months in terms of the average term, I guess. Most likely you talk about coming from the education side, have you seen some of the education customers have to sign longer contracts than normal, maybe beyond the three years given some of the government funding that’s available these days?

Leigh Ramsden

Yes, we did have one large customer sale in the quarter that was a four year deal. They do tend to cluster around three years, however. And there actually was one significant one that was a one year deal as well. So, I would say that there’s no discernible pattern that we’re seeing, but we’re seeing contract terms of all sizes.

Christy Wyatt

Maybe I can fill out a little bit of context without kind of where some of that is coming from. There’s been a lot of stabilization funds funneled into education, from things like the CARES Act. And so, a lot of these educational organizations may not be as certain about the ongoing funding. And so, when they’re thinking about how do they provide stability to their organization for a period of time.

We had several requests for organizations that looked to essentially buy out their current estate with an intention that they’ll activate absolute on our new hardware going forward. So it’s sort of an opportunity to buy out the existing environment and build a solid base so that in the out years, they can continue that that licensing strategy going forward. And so, part of the accessibility of funding is a part of the dynamic as well.

David Kwan

Thanks Christy. Just couple more questions on the cash flow guidance you have pretty wide range there. Could you comment on as to what’s driving that?

Leigh Ramsden

Yes, so that’s really a function of the wide range that we have on the revenue guidance. So when we think about how our total ARR might come in the next fiscal year. We did incorporate a relatively large range of performance for that. And there’s a multiplier effect on the ARR performance when it turns into billings, and then the billings convert to cash flow. So that really explains why the cash is a such a wide range.

David Kwan

That’s make sense? Thanks Leigh. And just finally, just as it relates to the seasonality. You talked about from a revenue perspective. Can you talk about how we should think about that for the OpEx side. We saw that the sales and marketing drop this past quarter, not surprisingly, given COVID?

I think in Q1 you have your company wide kickoff, which I assume is going to help virtually. But just understanding how we should be looking at that as you progress throughout the year?

Leigh Ramsden

Yes, so when we look into fiscal 2021, we’ve talked a bit about some of the investments that we’re going to be making. And I think we’re taking a balanced approach on those and a prudent approach. And we’re not jumping in to the deep end of the pool with both feet, so to speak. But we will be making those investments on a measured basis. And I think I would expect to see the EBITDA percentage coming down throughout the course of the year.

Operator

There are no further questions at this time. I will turn the call back over to Christy Wyatt.

Christy Wyatt

Thank you. I want to thank you all again for your time today. We appreciate your interest in Absolute and we look forward to speaking you all again next quarter.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.



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