Absolute Reports Fiscal 2016 Second Quarter Results

Vancouver, Canada: February 2, 2016 – Absolute® Software Corporation (TSX: ABT), the industry standard for persistent endpoint security and data risk management solutions, today announced its financial results for the three and six months ended December 31, 2015. All dollar figures are unaudited and stated in U.S. dollars, unless otherwise indicated.

Key Financial Metrics

• Absolute DDS and Consumer revenue of $21.0 million, representing a year-over-year increase of 4% compared to $20.2 million in Q2-F2015
• Absolute DDS commercial ACV Base increased by 1% globally and by 2% in North America
• Net ACV Retention from existing Absolute DDS customers was 100% while ACV from new DDS customers was $0.9 million
• Combined Absolute DDS and Consumer Billings were $19.0 million, representing a year-over-year decrease of 15% compared to $22.3 million in Q2-F2015. The year-over-year decrease in Billings was reflective of a similar decrease in expiring contracts in North America during the same period
• Cash from operating activities, prior to $1.3 million of transaction fees related to the disposal of the Endpoint and Service Management business unit, was $2.6 million

Operations and Corporate

• Completed the sale of the Endpoint and Service Management business unit to HEAT Software in October 2015 for gross proceeds of $11.0 million
• Completed a Substantial Issuer Bid for CAD$50 million in October 2015 with the repurchase of 6,250,000 common shares, or approximately 14% of the outstanding common shares, of the company
• Paid a $2.3 million dividend (CAD $0.08 per common share) during the quarter
• Strengthened the product leadership team with the additions of Eric Aarrestad as Senior Vice President of Product Management and Todd Wakerley as Senior Vice President of Product Development
• Announced the addition of Lance Mueller, an industry veteran in cyber-related investigations and digital forensics, to lead Absolute’s Incident Response and Forensics professional services team

Technology and Products

• Announced an agreement with Lenovo EMEA to introduce European factory activation of Absolute DDS, enabling customers to load and activate DDS prior to shipment
• Announced embedded firmware support for the Microsoft Surface Pro 4 and Surface Book devices
• Continued rapid adoption of the SCCM Healthcheck and Repair capabilities, with over a million devices enrolled

Key Financial Metrics

• Absolute DDS and Consumer revenue of $42.2 million, representing a year-over-year increase of 4% compared to $40.6 million for the same period of F2015
• Absolute DDS commercial ACV Base increased by 1% globally and 2% in North America
• Net ACV Retention from existing Absolute DDS customers was 98% while ACV from new customers was $1.6 million
• Combined Absolute DDS and Consumer Billings of $38.5 million, representing a year-over-year decrease of 16% compared to $45.7 million for the same period of F2015 and reflective of a similar decrease in expiring contracts in North America during the period
• Cash from operating activities, prior to $1.3 million of transaction fees related to the disposal of the Endpoint and Service Management business unit, was $7.6 million

Operations and Corporate

• Launched Absolute’s new corporate brand identity which reinforces Absolute’s commitment to data and device security
• Announced the appointment of Steve Munford, non-executive chairman and former chief executive officer of Sophos to Absolute’s advisory board. Steve will be joining Art Coviello, former chairman of RSA and executive vice president of EMC, in helping to refine Absolute’s information security strategy
• Announced that Phil Gardner, Absolute’s chief technology officer, will transition to an advisory role

Technology and Products

• Announced zero-day Persistence support for Microsoft Windows 10
• Released new security functionality that extends Absolute DDS reporting to include the status of Microsoft^® System Center Configuration Manager (SCCM) on each device as well as the integration of Absolute alerts with Security Information and Event Management (SIEM) solutions
• Announced that Absolute has joined the RSA Ready Technology Partnership program. This collaboration supports the interoperability of endpoint data collected by Absolute within RSA^® Security Analytics from RSA, the Security Division of EMC
• Announced an agreement with Advanced Micro Devices, Inc. (AMD) to incorporate Persistence^® technology by Absolute into AMD chip designs
• Announced the release of a new offering to specifically serve healthcare customers. Absolute DDS for Healthcare includes added support that helps customers determine healthcare compliance and regulatory exposure in the event of a security incident
• Announced an agreement with Aava Mobile Oy, a leading European mobile device manufacturer, to embed Persistence^® technology by Absolute in the firmware of Aava Mobile devices

“In Q2 we continued to make measurable progress against our strategic initiatives, resulting in positive growth in ACV, revenue, and our sales pipeline," stated Mr. Geoff Haydon, chief executive officer, Absolute. "As we move into the second half of this fiscal year, I am confident the changes we have made to the business will continue to strengthen our results. Our sales organization is on a trajectory of improved performance, our DDS offering will be enriched with new enterprise features, and the results of our branding and demand generation efforts will continue to materialize. Finally, we are facing a larger expiring contract renewal opportunity.”

“Our product strategy has been refined to focus on the information security risks associated with the users of corporate devices. This ‘Insider Threat’ accounts for nearly half of reported data breaches, and is an under-served market within IT security. With our Persistence technology, and the ability to provide a reliable two-way connection to endpoint devices and the data they contain, Absolute is uniquely positioned to lead this emerging market.”

Revenue

Total revenue in Q2-F2016 was $21.1 million, representing an 8% decrease from total revenue of $23.1 million in Q2-F2015, with the decrease being attributable to the divestment of the Endpoint and Service Management segment on October 5, 2015. Absolute DDS and Consumer revenue in Q2-F2016 was $21.0 million, compared to $20.2 million in Q2-F2015, representing a 4% year-over-year increase.

For the F2016 year-to-date period, total revenue was $45.1 million, representing a decrease of 2% compared to $46.3 million in the prior year period. Absolute DDS and Consumer revenue for the year-to-date period was $42.2 million, representing a 4% increase over $40.6 million in the prior year period.

Revenue from recurring licenses was 99% in Q2-F2016 and was 98% for the F2016 year-to-date period.

Indicative of the Company’s prepaid multi-year term license model, revenue primarily represents the amortization of deferred revenue balances from recurring term license sales from both the current and prior periods. As a result, the company views changes in the Commercial Annual Contract Value (“ACV”) Base⁽⁴⁾ as more representative of near-term sales performance.

Annual Contract Value

The DDS Annual Contract Value Base increased by 1% in both the Q2-F2016 and F2016 year-to-date periods. For North America, the DDS Annual Contract Value Base increased by 2% in both the Q2-F2016 and F2016 year-to-date periods.

Net ACV Retention⁽⁴⁾ from existing DDS commercial customers was 100% in Q2-F2016 and was 98% in the year-to-date period of F2016. Incremental ACV under contract from new DDS commercial customers in Q2-F2016 was $0.9 million and was $1.6 million in the year-to-date period of F2016.

Billings⁽²⁾

Absolute DDS and Consumer Billings were $19.0 million in Q2-F2016, representing a 15% decrease compared to $22.3 million in the prior year period. For the F2016 year-to-date period, Absolute DDS and Consumer Billings were $38.5 million, down 16% from $45.7 million in the prior year period. Billings to commercial customers represented 95% of Q2-F2016 total Billings and 94% of year-to-date total Billings.

North American commercial DDS Billings were $15.8 million in Q2-F2016, representing an 18% decrease from $19.2 million in Q2-F2015 and were $31.8 million for the F2016 year-to-date period, representing a 17% decrease from $38.5 million in the prior year-to-date period. Commercial Billings outside North America increased 5% year-over-year to $2.2 million in Q2-F2016 compared to $2.1 in Q2-F2015 and decreased 14% to $4.3 million for the F2016 year-to-date period compared to $5.1 in the prior year-to-date period. International Billings represented 12% of total Billings for both Q2-F2016 and the F2016 year-to-date period.

The decline in North American Billings was correlated with fewer expiring contract renewal opportunities in Q2-F2016 as compared to the prior year, combined with a slightly lower renewal rate. As the company’s weighted average contract term is 36 months, the renewal opportunity in Q2-F2016 corresponded with weak North American sales performance in Q2-F2013.

Q2-F2016 Billings for the combined education and government verticals decreased 17% compared to the prior year and decreased 20% for F2016 year-to-date compared to the prior year period. Billings for the combined corporate and healthcare verticals decreased 14% in Q2-F2016 and decreased 13% for F2016 year-to-date compared to the prior year period.

Adjusted Operating Expenses⁽⁵⁾

Adjusted Operating Expenses for Q2-F2016 were $19.1 million, which was unchanged from Q2-F2015. The prior year period included $2.8 million of direct adjusted expenses associated with the Endpoint and Service Management segment. In the current year period, these costs were replaced with increased sales and marketing and research and development expenditures in the DDS segment, which were partially offset by the lower Canadian dollar.

For the year-to-date period of F2016, Adjusted Operating Expenses were $38.8 million compared to $38.0 million in the prior year period, representing a 2% increase. Total headcount was 411 at December 31, 2015 compared to 444 at June 30, 2015 and 411 at December 31, 2014. Adjusted Operating Expenses represented 91% of Q2-F2016 revenue and 86% of year-to-date revenue, compared to 83% and 82% for the respective prior year periods.

Adjusted EBITDA⁽¹⁾ & Net Income

Absolute generated Adjusted EBITDA of $2.0 million in Q2-F2016 and $6.3 million for the F2016 year-to-date period, down from $4.0 million and $8.2 million in the respective prior year periods.

The company recorded a gain of $14.1 million on the divestiture of the Endpoint and Service Management operating segment. An income tax provision of approximately $3.6 million was recorded in the period relating to the divestiture.

Absolute recorded net income of $8.7 million, or $0.22 per share, in Q2-F2016, compared to net income of $2.2 million, or $0.05 per share, in Q2-F2015. For the F2016 year-to-date period the company recorded net income of $9.8 million, or $0.23 per share, compared to $2.5 million, or $0.06 per share, in the prior year period.

The Company expects F2016 revenue for the Absolute DDS and Consumer businesses to increase over F2015 levels. Total revenue for F2016 is expected to decrease from F2015 levels, reflecting the divestiture of the Absolute Manage and Absolute Service product lines in Q2-F2016. Adjusted EBITDA for F2016 is expected to decrease from F2015 levels, reflecting lower total revenue, modestly higher sales and marketing expenses and increased investments in research and development.

The Company expects F2016 cash from operating activities to decrease from F2015 levels due to slightly higher Adjusted Operating Expenses and Absolute DDS Billings roughly in-line with prior year levels.

On January 20, 2016, Absolute declared a quarterly dividend of CAD$0.08 per share on the Company’s common shares. The dividend is payable in cash on February 26, 2016 to shareholders of record at the close of business on February 5, 2016.

Management’s discussion and analysis (“MD&A”) and consolidated financial statements and the notes thereto for Q2-F2016 can be obtained today from Absolute’s corporate website at www.absolute.com. The documents will also be available at www.sedar.com.

Absolute will hold a conference call to discuss the Company’s Q2-F2016 results on Tuesday, February 2, 2016 at 5:00 p.m. ET. All interested parties can join the call by dialing 647-427-7450, or 1-888-231-8191. Please dial-in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Tuesday, February 9, 2016 at midnight. To access the archived conference call, please dial 416-849-0833, or 1-855-859-2056 and enter the reservation code 26794046.

A live audio webcast of the conference call will be available at home. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. An archived replay of the webcast will be available on the Company’s website for 90 days.

Throughout this press release, we refer to a number of measures which we believe are meaningful in the assessment of the Company’s performance. All these metrics are non-standard measures under International Financial Reporting Standards (“IFRS”), and are unlikely to be comparable to similarly titled measures reported by other companies. Readers are cautioned that the disclosure of these items is meant to add to, and not replace, the discussion of financial results or cash flows from operations as determined in accordance with IFRS. For a discussion of the purpose of these non-IFRS measures, please refer to the Company’s Q2-F2016 MD&A on SEDAR at www.SEDAR.com.
These measures, as well as their method of calculation or reconciliation to IFRS measures, are as follows:

1. Adjusted EBITDA
   Management believes that analyzing operating results exclusive of significant non-cash items or items not controllable in the period provides a useful measure of the Company’s performance. The term Adjusted EBITDA refers to earnings before deducting interest and investment gains (losses), income taxes, amortization of acquired intangible assets and property and equipment, foreign exchange gain or loss, share-based compensation, and restructuring charges and post-retirement benefits. The items excluded in the determination of Adjusted EBITDA are share-based compensation, amortization of acquired intangibles, amortization of property and equipment, and restructuring and reorganization charges and certain post-retirement benefits.
2. Billings
   See the “Subscription Business Model” section of the Q2-F2016 MD&A for a detailed discussion of why the Company believes Billings (formerly referred to as “Sales Contracts”) provide a meaningful performance metric. Billings are included in deferred revenue (see Note 8 of the Notes to the Interim Condensed Consolidated Financial Statements), and result from invoiced sales of our products and services.
3. Basic and diluted Cash from Operating Activities per share
   As a result of the nature of our revenues (please refer to “Subscription Business Model” in the Q2-F2016 MD&A), the Company uses Cash from Operating Activities as a measure of profitability. Accordingly, Absolute believes that Cash from Operating Activities per share is a meaningful indicator of profitability per share. Cash from Operating Activities per share is calculated by dividing Cash from Operating Activities by the weighted average number of shares outstanding for the period (basic), or the fully diluted number of shares using the treasury stock method (diluted).
4. Commercial ACV Base and Net ACV Retention
   See the “Non-IFRS Measures” section of the Q2-F2016 MD&A for a detailed discussion of why we believe Commercial ACV Base and Net ACV Retention provide meaningful performance metrics. Commercial ACV Base measures the amount of recurring annual revenue we will receive from our commercial customers under contract at a point in time, and therefore is an indicator of our future revenue streams. Net ACV Retention measures the percentage increase or decrease in the Commercial ACV Base at the end of a period for the customers that comprised the Commercial ACV Base at the beginning of the same period. This metric provides insight into the effectiveness of our customer retention and expansion functions.
5. Adjusted Operating Expenses
   A number of significant non-cash or non-recurring expenses are reported in our Cost of Revenue and Operating Expenses. Management believes that analyzing these expenses exclusive of these non-cash or non-recurring items provides a useful measure of the cash invested in the operations of its business. The items excluded in the determination of Adjusted Operating Expenses are share-based compensation, amortization of acquired intangible assets, amortization of property and equipment, and restructuring and reorganization charges and certain post-retirement benefits. For a description of the reasons these items are adjusted, please refer to the “Non-IFRS Measures” section of the Q2-F2016 MD&A.