Absolute Software's (ALSWF) CEO Geoff Haydon on Q2 2017 Results - Earnings Call Transcript

| About: Absolute Software (ALSWF)

Absolute Software Corporation (OTCPK:ALSWF) Q2 2017 Earnings Conference Call February 6, 2017 5:00 PM ET

Executives

Geoff Haydon - CEO

Errol Olsen - CFO

Analysts

Thanos Moschopoulos - BMO Capital Markets

Doug Taylor - Canaccord Genuity

Michael Kim - Imperial Capital

Paul Steep - Scotia Capital

Blair Abernethy - Industrial Alliance

David Kwan - PI Financial

Kevin Krishnaratne - Paradigm Capital

Operator

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to Absolute Software Corporation's Second Quarter Fiscal 2017 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions]

Before beginning its formal remarks, Absolute 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. Any such statements are subject to 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 date hereof, and Absolute does not undertake any obligation to update publicly or revise 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 company's risks and uncertainties relating to these forward-looking statements, please refer to the appropriate section of its quarterly MD&A and quarterly financial statements, both of which are available on Absolute's Web site or SEDAR. I'd also like to remind everyone that this conference call is being recorded today, Monday, February 6th, at 5:00 PM Eastern Time.

I would now like to turn the call over now to Mr. Geoff Haydon, Chief Executive Officer. Please go ahead, sir.

Geoff Haydon

Thank you, Operator. Good afternoon everyone, and welcome to our Q2 fiscal 2017 conference call. Joining me is Errol Olsen, our Chief Financial Officer.

Q2 represented another solid quarter of demonstrated progress across all aspects of our business. Our commercial ACV base exiting the quarter was $86.2 million, increasing 8% year-over-year. Growth was driven by ACV from existing customers of 100% and new customer ACV of $2.1 million. DDS revenue in Q2 of $22.5 million grew 7% from last year; 99% of this was recurring. Adjusted EBITDA was $1.7 million.

Over the past two years, we have successfully transformed Absolute to focus on leveraging our entirely unique and broadly-embedded Persistence platform to deliver the industry's first self-healing endpoint security solution, providing organizations with a unique level of on-the-present endpoint visibility and the ability to execute the remediation of emerging security breaches at their source.

Through this transformation we've delivered five consecutive quarters of sequential growth in ACV and recurring revenue. Additionally, the pace of this growth has been increasing, lead by the performance for those key targeted geographic and vertical markets we have been concentrating our investment in.

Year-over-year ACV from enterprise and healthcare customers in Q2 grew 12% overall. In North America, ACV in these segments grew 13% year-over-year and 4% quarter-over-quarter, its strongest performance to-date. Our government and healthcare business in North America also continues to perform well, with Q2 ACV increasing 4% year-over-year and 2% sequentially. This reflects continued momentum in our traditional education business and substantial progress in state and local government business expansion.

Secular shifts in IT continue to represent an increasingly substantial information risk challenge that Absolute is uniquely positioned to help enterprises overcome. These shifts include the exponential growth in the number of endpoints being deployed expected to exceed 8 billion by 2018, the growth of enterprise information, which is expected to triple every 18 months, the shift in enterprise information from the datacenter to the endpoint with almost a third of enterprise information now residing on endpoints, and most notably, the difficulty enterprises have in seeing, let alone protecting these endpoints and the information they provide access to. Traditional security solutions are highly dependent on a corporate network connection to identify and control emerging endpoint risk.

Additionally, endpoint security technologies continue to rely on endpoint agents, which are notoriously vulnerable and susceptible to being attacked or disabled. This combination of off-network devices and agent vulnerability is creating a substantial blind spot for endpoint controls, and a breeding ground for security breaches.

This set of challenges drove our largest Q2 new customer win, a major U.S. national healthcare organization that deployed DDS to over 100,000 endpoints. In their environment, Absolute technology will enable them to assess and remediate risk across their entire endpoint population, many of which were traditionally unobservable.

Moving forward, Absolute will play a foundational role in helping to protect confidential patient information, and achieve critical compliance objectives. Additionally, we will monitor and ensure the effectiveness of other broadly deployed endpoint security agents substantially enhancing their security and compliance posture overall. The accelerated growth of Absolute's business with both new and existing customers is largely being driven by a shortened feather-to-market innovation cycle, and strengthen sales execution around the monetization of new features. I'll now review specific accomplishments in both of these areas.

At the beginning of this year we announced the plan to increase investment in product development with a focus on accelerating innovation in two specific areas, our cloud-based platform and our user awareness capability or insider threat offering. Since that time we have made significant progress at executing against both of these initiatives. Our new Vietnam development facility is fully operational, and we continue to add key new hires at this location with over 50 people now on staff. We've also established an active user behavior and analytics development team here in Vancouver which we will also look to expand. Errol will provide more detail on planned hiring activity for the remainder of this fiscal year in his comments.

The ultimate objective of our R&D investment plan remains to substantially increase our total available markets, and to enable the introduction of rich, marketable new features as a key accelerant to growth. A great example of this is the development of our application Persistence offering as a standalone product. We announced a professional services version of this offering two quarters ago, which extended the value of Persistence to non-Absolute agents for the first time. Since that time we have seen enthusiastic customer interest and persisted 12 distinct agents across hundreds of thousands of customer endpoints.

With this strong validated demand we are now productizing this offering, making it easily extensible to any endpoint agent [ph] application at scale both directly to end-user customers and through ISP partnerships. We believe this unique Absolute concept of a self-healing endpoint has the potential to emerge as a de facto standard for enterprise endpoint security architecture. We'll be announcing our application Persistence product this month as an incremental upsell to our core DDS product line. Expanded R&D resources are also accelerating our API program. This allows enterprise customers to seamlessly consume the rich telemetry we collect from their endpoint population through those complementary security and asset management applications they have already deployed.

This significantly enhances the value of these applications eliminating endpoint blind spots and providing some compelling additional integration and go-to-market partnering opportunities for Absolute. In Q2, we extended our telemetry to ServiceNow, an IT service management company which has been a prominent request among large enterprises.

We also continue to strengthen our core DDS product, this quarter we introduced our DDS Security dashboard which provides brought perspective on the security path through our customers end point population, a data risk result that highlights sensitive data vulnerabilities and the associated potential financial consequences and a student technology analytics capability for our education customers, which allows schools to associate technology usage patterns with student performance.

All of these features are available in higher price additions of DDS and have been key to driving customer upgrades and incremental ACB for endpoint. In Q2, we continue to see improvements in sales productivity across our global field organization, execution against new DDS features was especially prominent; 95% of our new customer ACB was driven by the professional and prompt versions of DDS our highest adoption rate of these prompt priced Absolute offerings.

The growth in the number of enterprise wide licensing agreements or ELAs signed over the last few quarters has also been improving, in the first half of fiscal 2017. The number of completed ELAs exceeded the total number in fiscal 2016 by one and half times. This reflects our increasing effectiveness at driving customer deployments independently of new OEM device purchases and activating larger percentage of a customer's total available endpoints.

In Q2, we also saw a dramatic improvement in our new customer acquisition performance with new customer CAN exceeding $2 million for the first time ever. While new customer acquisition continues to represent our most substantial opportunity for ACB base expansion, we are also focused on realizing the enormous growth potential that exist within our 20,000 commercial customers through the renewal of existing contracts, the expansion of licenses to currently unprotected endpoints and the upsell of new ACB accretive product features.

Our proficiency at doing this was reflected in several prominent Q2 customer wins. Our largest global insurance customer upgraded from DDS Professional to DDS Premium to access our Endpoint Data Discovery or EDD feature to remote scan and monitor all devices for present and sensitive data. This requirement was driven by the need to comply with increasingly rigorous state and federal compliance regulations such as HIPAA.

The net result to Absolute was a six figure annual contract. A major U.S. aerospace and defense contractor renewed their existing DDA licenses agreement expanded their deployment of DDS to all remaining endpoints and upgraded to the prompt version, once again to access EDD. This customer uses our technology to protect IT and other sensitive information to identify and manage user related risk among employees and contractors and the need to stringent compliance obligations of their customer contracts.

Finally, we grew our business with our largest global pharmaceutical customer whose initial purchase we announced in Q4. In Q2, we expanded their original deployment by over 20% two additional endpoints including desktops and upgraded these licenses to DDS Premium, we are playing a foundational and expanding role in helping them accomplish their global risk management objectives with a focus on endpoint visibility, IT protection and inside its direct defense.

In summary, we have emerged from our substantial transformation with strength and momentum. We are executing well against our accelerated product roadmap and have planned leverage market innovation as a primary growth driver. We continue to develop and demonstrate on increasingly product go to market capability around both existing and new customers and finally and most importantly we are applying this combination of innovation and execution to deliver sequentially improved ACB and recurring growth rates.

Our focus in the second half of our 2017 fiscal year will be on executing our strategy, continuing to accelerate growth, and realizing greater operating leverage. We remain firmly on our path to accomplish our long-term operating objective of 20% revenue growth and 20% adjusted EBIDTA margins.

I will now turn the call over to Errol to discuss our financial results. Errol?

Errol Olsen

Thanks, Geoff. Good afternoon everyone. Q2 DDS segment revenue of $22.5 million grew 7% year-over-year, demonstrating continuing acceleration of our revenue performance. Recurring revenues represented 99% of Q2 total revenue compared to 98% in Q1.

Our commercial ACV base of $86.2 million at December 31 represented an 8% increase over December 31 of last year, and a 2% increase over the September 30 balance. This is the highest annual growth rate since we began measuring this metric, demonstrating that we are on the path to achieving our long-term growth objectives.

The increase in the ACV base during the quarter was driven by $2.1 million of ACV from new commercial customers and an existing customer net ACV retention rate of 100%. While we continue to land new customers across all verticals, 80% of Q2 new customer ACV came from the targeted enterprise and healthcare segments.

As we discussed earlier during Q2, we closed another marquee deal with a major U.S. healthcare organization, representing more than 100,000 endpoints. This enterprise-wide deployment represents our second new customer win with ACV greater than $500,000 in the past three quarters. From an industry vertical perspective the enterprise and healthcare ACV base increased by 12% over the prior year and increased 4% sequentially. The education and government ACV based increased by 5% year-over-year and by 1% sequentially.

At December 31, enterprise and healthcare customers represented 48% of our commercial ACV base and education and government customers represented 52% of the base. Geographically, North America remains our dominant region with 8% year-over-year ACV growth and currently representing 90% of our commercial ACV base.

Turning now to expenditures; during the quarter, we continued our planned expansion of our research and development capabilities, our research and development team exited the quarter with a total headcount of 165 including Vietnamese contractors up from 149 at September 30. Additionally we have 33 accepted offers expected to commence employment during Q3. Our expectation is to finish the year with a total R&D headcount including offshore resources of close of 250.

Total Q2 adjusted operating expenses, which exclude reorganization and non-cash charges and which are detailed in our press release and MD&A were $20.7 million relatively flat with Q1 of this year. This reflected lower sales and marketing program spend compared to the prior quarter offset by increased personnel charges.

Our total full time headcount, including R&D contractors was 448 at December 31 compared to 440 at September 30. We also completed the previously announced reorganization which resulted in a charge of $1.9 million during the quarter and impacted all departments, half of this amount was paid out in Q2 with the remainder expected to be paid in Q3.

We have now completed our reorganization initiative and we do not expect any similar or material charges going forward. Adjusted EBIDTA after the second quarter was $1.7 million or 8% of revenue down slightly from $1.9 million also 8% of revenue in Q1. The decrease from the prior quarter was largely due to our previously announced increased investment in research and development.

Turning now to cash flow; in Q2, reported cash used in operating activities was $1.2 million this was net of $800,000 of reorganization and related payments in the quarter. Cash used in operating activities was $400,000 prior to these payments.

DDS segment billings in Q2 were $21 million and the average prepaid contracting was 33 months, slightly lower than our historical average of 36 months. The average term was impacted by the previously mentioned 100,000 plus unit new customer contract, which was structured as a one year renewable enterprise license agreement or ELA.

As we increase our security value proposition we're seeing increased interest by customers to deploy our solutions across their entire device populations with contracted annual payments. These ELA arrangements differ from our traditional point-of-sale attach model where customers purchase pre-paid multi-year licenses that are attached to each new device. In most cases, ELAs represent larger deployments, more predictable renewals, and higher lifetime customer value compared to the POS attach model. ELAs also expand our total addressable market by enabling customers to purchase through operating budgets, whereas our POS attach model is generally a CapEx purchase. To be clear, the POS attach model is a very important element of our business model, and we expect continuing growth in sales under this model. However, we do expect to see it being complemented with more ELA activity over time.

Looking forward now, as detailed in our press release and MD&A our guidance for fiscal 2017 remains unchanged. We remain confident in the business and look forward to continued momentum as we progress through the second half of the fiscal year.

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 is from Thanos Moschopoulos from BMO Capital Markets.

Thanos Moschopoulos

Hi, good afternoon. Prior commentary around the ELAs is quite interesting. It sounds like you are getting some attraction on that front. Could you maybe talk qualitatively about how [indiscernible] these deals are? I mean, at this point it would still be well less than half of your typical deals or how [indiscernible]?

Errol Olsen

So hi, Thanos, it's Errol. Yes, it is a relatively small proportion of our contract activity right now, especially on a unit basis or on a per customer basis. I would say that on a dollar base if it's becoming a larger percentage of our new customer ACV. During the quarter, I can't give you the exact number, but it was slightly more than half of the new customer ACV in the quarter.

Geoff Haydon

Thanos, maybe I'll just elaborate for a minute on the ACV activity, the good news is that most of this is being done with our new healthcare and enterprise customers and is incremental to our traditional business and customer base. We think of ELAs as a very powerful opportunity for us to optimize the lifetime value of a customer. Typically, large enterprises want to buy our technology as an ELA using OpEx, so it makes our technology more accessible. These ELA agreements tend to extend to a broader population of total endpoints. They're annual contracts and so they're not associated with some of the deep discounting that we've seen around some of the multi-year contracts, and it gives us an opportunity every year to revisit an existing customer to look for expansion and upsell opportunities. If you noticed in my commentary, I referenced a number of existing customers that expanded and up-sold all of those transactions occurred in conjunction with renewal. So we love the model of being able to engage a large enterprise every year around expanding our ACV relationship with that customer.

Thanos Moschopoulos

That's great. And Geoff, can you provide some more color in terms of the vertical [indiscernible] you talk about enterprise and healthcare, but aside for healthcare what would be the other key verticals in enterprise where you're getting good momentum?

Geoff Haydon

Well, I tried to provide a variety of use case examples just to demonstrate just how broad the appeal continues to be of our value proposition. I mean, we're definitely seeing a high concentration of activity within highly regulated industries like healthcare and healthcare-related industries like insurance and the provision of healthcare products, financial services, aerospace and defense. Those highly regulated industries tend to feature more prominently, but we're really seeing interest and activity across a really broad variety of verticals.

Thanos Moschopoulos

Okay, great. And finally, can you give us an update in terms of what's happening on the partnership front, any new developments there?

Geoff Haydon

Well, I mean we really continue to invest heavily in the strengthening of our key OEM partnerships. We're starting now to participate in some joint go-to-market bundle. So with Dell, we've got a Dell data protect encryption offering that includes our technology. Lenovo has gone to market with an absolute win-magic combination. We're integrated in to the HP care pack. We're going to be making quite a significant announcement around another collaborative offering with HP in the coming weeks. And all of these are exciting, because they really reflect the extent to which we're making progress at engaging and collaborating with these partners more strategically, embedding Absolute into their longer term product visions and security strategies, and enabling them to be more self-sufficient at selling Absolute independently of our field organization.

So those would feature more prominently, and we continue to expand our bar [ph] -- partnerships, and as we move through the second half of the year we hope to make some interesting announcements around the progress that we're making specifically around some of the security on specific borrowers. We're also looking to continue to expand relationship with companies that provide complementary technologies. You saw the HP [indiscernible] Splunk announcements earlier this year. You'll continue to see announcements like that as we move through the second-half of the year, which once again, these partnerships and integrations make our offering more valuable to an enterprise and they also afford us potential go-to-market collaboration, so we'll certainly keep you posted on progress on those fronts as we move through the year.

Thanos Moschopoulos

Great, thanks. I'll go [ph] offline.

Operator

The next question is from Doug Taylor from Canaccord Genuity.

Doug Taylor

Thanks, good evening. The $2.1 million in new customer sales, I'm just trying to get a sense of how much of that was related to the large healthcare, that impressive announcement you made conform with the results. And how much was kind of the small or regular or average size deals? Is it that your sales team is now that much more productive or effective, and should we be -- or what I'm getting at is the $1 million per quarter in kind of regular business new ACV, and should we be thinking about upside to that number going forward?

Geoff Haydon

Yes, you should. So we're categorizing that healthcare deal as a major deal. And we associate revenue or ACV of $500,000 or greater as a major deal. We were not in a position to elaborate further on the characteristics of that deal, but we can tell you that the new customer ACV independent of that deal with strong and reasonably in line with the new customer ACV performance that we've seen in previous quarters. The good news is that we're seeing strength in that new customer ACV base. We do expect that to increase in Q3 and Q4. We're also seeing an increased number of major deals each quarter. And obviously we're becoming more experienced and proficient at executing against those, and we expect that as we move into the second half that these will continue to feature prominently in our story, so the good news that we're seeing consistent strength in the existing customer ACV base of 100%. The new customer ACV base, large deal activity and we think there is opportunity for us to inflect all these of these ACV components positively in the second half.

Doug Taylor

That's great. I mean, this quarter -- this year seems to be tracking towards your expectations. And I know you're not in a position probably to provide guidance past this year, but I mean I just wanted to ask, as we look out to 2018, which starts in a few months here, fiscal 2018, should we expect to start seeing or to what degree should we expect to see the recent improvements in all your sales KPIs that we're seeing here start driving operating leverage in your business as you look towards that 2020 model in the medium to long-term?

Errol Olsen

So we're really looking for operating leverage to start to take effect in Q4 and moving into the new year, both from an EBITDA and a cash perspective, increasing as we move through next year and driving towards that ultimate objective of 2020.

Doug Taylor

Okay. And I suppose any attempt to get you to quantify any of that would be futile. I'll just throw it out there.

Geoff Haydon

Sorry, it would be. But thanks for asking, Doug.

Doug Taylor

All right. No, that's it for me. Thanks. Good quarter.

Geoff Haydon

Thank you.

Operator

The next question is from Michael Kim from Imperial Capital.

Michael Kim

Hi, good afternoon guys. Geoff, could you talk a little about the product roadmap and specifically the SaaS platform and how that's progressing at relative to kind of the schedule, and also in terms of new features, functionality, the insider threat capabilities?

Geoff Haydon

Sure. So both of those are really intended to be '018 deliverables. That the SaaS platform we announced would be completed, at least the substantial offerings that we associated with that new platform would be completed moving into the second half of next fiscal year. And that includes the multiple deployment options, the private, public, and hybrid cloud, the FedRAMP certification, and the ability to support a large volume of discrete incremental offerings, so really expecting to see those in mid-to-next fiscal year, Michael.

The UBA or user awareness we expect to start to see towards the end of this year, so really -- and rich capability to observe user behavior and some of the analytics that we're looking to introduce that will help enterprises define normalized behavior and anomalous and potentially risky behavior pattern. So that's kind of later this year. We're really not expecting those to impact our results until next fiscal year, but I just want to highlight that we're not sitting still. I mean we increased our R&D spend last year, we saw in the second half the results of that with the introduction of things like Persistence services, the report and repair offering for SCCM, APIs being exposed to SIM platforms, endpoint data discovery.

I also referenced in my script today a number of features that we're also looking to announce over the coming weeks and months that are very significant in nature. The application Persistence offering, we're looking to enrich remediation capabilities around endpoint data discovery, providing enterprises with richer views around how devices are being used. I referenced the API extensions, the data risk report that provides richer visibility around where data or sensitive information, vulnerabilities exist, and what the consequences of those might be. So we've got a very rich steady planned to introduce marketable features, both in Q3 and Q4. And we expect those to effect and inflect our ACV growth rates.

Michael Kim

Great. And then just going back to the large deal activity, maybe could you highlight what you think are some of the key drivers? Is it around awareness, is it the EDD capability that's really kind of capturing a lot of the attention of the larger enterprises or some combination of factors that's really…

Geoff Haydon

Yes, I think it's a good question. I think it's a combination of a couple of things. First of all, it's visibility. It's being able to shine a bright light on that significant percentage of endpoints that enterprises cannot see or control right now. That's the consistent theme. And what they're using that for ranges from asset management to the identification of data vulnerability to insider-threat related exposure. So it's the combination of a, being able to see an endpoint, and then being able to leverage the awareness capacity of DDS to determine if something is being done on or with that endpoint that may represent risk to the enterprise. That's the common theme, Michael, that visibility. Being able to see an endpoint and being able to determine if something is being done that may represent risk to the enterprise.

Michael Kim

And these large deals are these enterprise-wide endpoint deployments typically?

Geoff Haydon

They typically are.

Michael Kim

Okay, very good. Thank you very much.

Geoff Haydon

Thank you, Michael.

Operator

The next question is from Paul Steep from Scotia Capital.

Paul Steep

Great, thanks. Geoff, could you talk a little bit on the device usage reporting, maybe the adoption in the pricing as well as the availability of what you've seen on that acceptance in the base?

Geoff Haydon

So the device usage reporting is a capability that we're offering for both our professional and premium versions of DDS. And the value of that to a school or an enterprise would really be to be able to observe what and how their endpoint devices and applications are being used. So it's really to provide some context around the usage patterns of a device. Schools are using that capability, first of all, to observe student behavior as I mentioned in my script, and to associate learning performance with the usage of those devices, a, in the spirit of optimizing their curriculum, but secondly to demonstrate to their funders that they're getting value from these technology investments.

Enterprises would use it for a different reason, really to get a sense of to what extent they're getting returns on their hardware and software technology investments. But it's also really another layer of awareness that we're introducing that will further inform the user behavior characteristics that we're ultimately working towards. And a key ingredient of that insider threat defense story that we're looking to build over the coming quarters.

Paul Steep

Great. And then just on the UBA market, what's your thoughts -- you know, there's been some M&A activity over the last -- even the last week, what's your thoughts on your current positioning and maybe your desire or thoughts around potential use of M&A? Thanks.

Geoff Haydon

So here's what we think about UBA. We think that UBA is an important feature of a broader awareness platform that companies and Absolute will develop. We do not think it's a category. We think it's an important feature, an important capability in terms of providing insider threat awareness and defense. We think that that whole insider threat space, as I'd mentioned in previous earnings calls, is an incredibly exciting opportunity. We're seeing both analysts and enterprises acknowledging that that the insider threat is one of the next big opportunities in IT. The reality is the majority of vulnerabilities associated with insider threat behavior, but the reality is that still today it's still a very nascent market, it's very fragmented, it's characterize by very small early stage under-funded but very innovative companies, which may represent an interesting acquisition opportunity for us, but when we think about acquisitions we are really thinking about access to talent and technology, that will help us execute against our insider threat strategy.

We are not thinking about something that's massively transformational or accretive. We are really looking for some good innovative talent and technology that will help us accelerate execution against the roadmap and just in closing. I will say that we continue to think that we are an incredibly unique and unfair position to confront the insider threat, just because of our persistence technology, the fact that we got the physical point of presence in over billion devices that a very vantage point from which to observe and remediate insider threat related risk. So that's going to continue to be a big focus of ours, Paul.

Paul Steep

Thanks.

Operator

Your next question is from Blair Abernethy from Industrial Alliance.

Blair Abernethy

Thanks very much. Geoff, I just wondered if you can take us through a little bit more of your thinking on the application persistent side of things and particular how are you looking at or how are you approaching now other independent software vendors to leverage install base with your technology as opposed to trying to pursue one-off enterprise deals yourselves?

Geoff Haydon

So our go-to-market strategy and it's a really good question Blair is really multiple pronged, our primary focus right now is on driving adoption among large enterprises. In conjunction with that we got a business development effort, that is focused on ISVs were we think, there may be an opportunity for us to partner and I think as we move through the second half of this year and in '18 and you will see that road to market if you will, featured more prominently, through our end user interaction, we are being pulled into conversations with our ISVs, we had a very large airline that introduced us to the next generation anti-virus provider because they were having difficulty maintaining the sensors that they had deployed across their endpoint population.

We are seeing a similar dynamic in another large consulting global, consulting enterprise that has also deployed a next-gen AB solution. So we do think that there are substantial partnering opportunities at certainly they will -- we will continue to focus on developing those but at least at this point, we are really focused on adoption, large scale adoption within end user customers and using that success as a lever to drive progress around some of these partnership opportunities but we do envision and at some point, ISV leveraging persistence to provide differentiated version, resilient versions of their offerings to the marketplace, that is the key part of our growth strategy.

Blair Abernethy

Okay, great. And just wondered if could touch on international a little bit in terms of how you are thinking about it this year and how are your resources -- are positioned?

Geoff Haydon

Yes our objective this year internationally was to establish fundamental in each of the international theater, Europe, Asia Pacific and Latin America establishing in theater leads with experience, covering the OEMs, covering the key distributors and standing up inside and direct sales capability, a foundation version of those, which we have largely done. And we are starting to see early indications of that progress both Europe and Latin America had double digit billings growth performance for example in Q2 but our focus this year is predominantly on really igniting the core North America market. I mean, it represents our largest and highest return on investment opportunity and our objective is to get the critical mass and momentum sufficiently establish North America so that as we move into next fiscal year we can start to turn our sites and direct our investment more aggressively to really igniting international markets. What I will say is they continue to represent Greenfield opportunities for us and we know they will and we intend for them to feature very prominently in our medium and long-term growth stories.

Blair Abernethy

That's great. Thanks very much.

Geoff Haydon

Thanks, Blair.

Operator

[Operator Instructions] The next question is from David Kwan from PI Financial.

David Kwan

Hi guys. I had a question on healthcare win this quarter. Was that a direct sales win or is that through a partner?

Geoff Haydon

It was in conjunction with a large OEM partner. So it was a great collaboration, and we were very actively involved, meaningfully involved with the end user customer in combination with that OEM partner, David.

David Kwan

Thanks, Geoff. And I guess when you look at the pipeline of opportunities at least among the larger deals, do you see -- is that really being driven by your partners or is that more to your direct efforts, through your customer acquisition you are seeing?

Geoff Haydon

Well, it's a combination of both, but I will see say that the OEMs as always are emerging as a very prominent lead store for us in the large enterprise, I mean they are well positioned, they have got active relationships and they were looking for opportunities to connect and leverage those. So the large pharmaceutical deal that we announced in Q4 this healthcare deal, I mean in both cases, there was a an important OEM component to discovering opportunity and to developing it.

David Kwan

And on the ELAs, is that essentially going to be kind of one-year renewal contracts or you're seeing any interest on guys looking to sign-up for multiple years?

Geoff Haydon

Well, the design goal on ELAs is to have the customer contract for multiple years, took for three years and pay annually.

David Kwan

And then finally, you guys - it sounds like this quarter you had quite a few upgrade success guys going from professional premium, can you kind of quantify that opportunity what's left in your install base, in your customer base?

Geoff Haydon

Oh boy, we think about a great deal and we are in the process of doing so and as we've got a more informed version of that analysis, we will be forthcoming with it but, on average in large enterprises, when we activate a new relationship with the exception of ELAs that we referenced during today's discussion we typically activate less than 5% or 10% of the total available endpoints within those customers and in fact, we looked at our 50 largest customers and I think we discovered less than 25% of their endpoints were activated.

So we think about our existing customer opportunity both from a renewal perspective also from an expansion perspective, there are a lot of unprotected endpoints that represent expansion opportunity for us but we are also thinking about the opportunity of upselling new features and functions or higher priced versions of DDS to those existing endpoints and realizing a high level of ACV from them. And in terms of providing some context on that opportunity, we shared during a previous call that the average ACV that we realized from our current customers is about $13 per year, per endpoint as an example, the application persistence offering is priced at $3 per agent, per endpoint, per year so that just gives you some context, in terms of how we are thinking about improving our ACV per endpoint.

David Kwan

There is potentially the much great opportunity to expand the number of endpoints versus upselling it through…

Geoff Haydon

I am sorry, Errol, just corrected that $3 is MRSP. So we would expect to receive typically half of that through our OEM partnerships, but once again just to give you some context on that.

David Kwan

Yes, but I guess it sounds like there is a still a very big opportunity, it sounds like more related to getting endpoints versus just upselling on new features.

Geoff Haydon

Yes, yes. I mean we are focused on couple of key initiatives. One is the new customer ACV as we mentioned, I mean that's largely Greenfield that represents perhaps our most substantial opportunity to inflect ACV and revenue growth but we are thinking as I mentioned in my script and through the examples that I shared much more prominently about the opportunity that exist within those 20,000 customers, where we have activated on average less than 25, 20, 15% of their total available endpoints and we have upsold very little of those and so that's why we've got a very concentrated go to market effort, that's designed to bring coverage in and conversations to existing customers in the spirit of driving more expansion and more upsell activity and we do expect through that effort over time, that 100% existing customer ACV performance will start to inflect positively, which will be a key contributor to our long-term 2020 growth objective.

David Kwan

That's great. Thanks guys.

Geoff Haydon

Thank you.

Operator

The next question is from Kevin Krishnaratne from Paradigm Capital.

Kevin Krishnaratne

Hey, guys. Good evening.

Geoff Haydon

Hey Kevin.

Kevin Krishnaratne

Couple of housekeeping clarification question for you, can you talk about again the revenue opportunity in Q3, is Q3 or Q4 are the bigger opportunity in terms of contract expiring this year?

Geoff Haydon

Hi, Kevin. Q4 is the large renewal opportunity from a billings perspective. So I mentioned on a previous call that for the year, the renewal opportunity is up mid-single digit, it's up mid-single in Q3 and then up almost double that in Q4.

Kevin Krishnaratne

From a …

Geoff Haydon

From a percentage standpoint, yes.

Kevin Krishnaratne

Great, and then so I am kind of thinking about extension outside of waiting or waiting for that contract that expired are you getting calls from customers that might be in a contract, that are seeing some of these new features and kind of wanting to be relay the contract is that something that you do, I am just thinking about terms of -- it's great that you've got a great opportunity for upselling these new features when the client expiring, but wondering if you can get ahead of that potentially.

Geoff Haydon

Yes, believe me we are not sitting still waiting for those contracts to expire, we are being very proactive at educating these customers and new features and functions and looking for expansion and upsell opportunity independently of that renewal, it's just occurs that those conversations tend to concentrate and conclude around the renewal because customers look for some type of ELA arrangement that encompasses both the renewal and the expansion and upsell opportunity and we also another comment I want to make is, we do expect to see expansion and upsell activity independently of the renewal, its just that once again the conversations tend to concentrate around that expiry and that's where a lot of the upsell and expansion at least to-date has occurred.

Kevin Krishnaratne

Got it. Okay, thanks for that. And then maybe a couple of questions more on the expense side of things, small point but was there anything kind of one-time in the quarter, costs to goods sold, the gross margin was on the 82% range last year, it's around 84%, 85% is there anything maybe one time in there or is there anything maybe related to product and services mix and how we do think about that line in subsequent quarters?

Geoff Haydon

Outside of the reorganization charge that hit during the quarter, there were no one-offs in that line item. The other charge that hit the COGS line was about $425,000 in Q2.

Kevin Krishnaratne

Okay, 425. Okay got it, so then how do we think about where are the remaining $400,000 or so in restructuring did that hit the G&A?

Geoff Haydon

It was spread across all departments and we have actually, we have laid it out in one of the notes, the financial statements, but roughly around for all-in purposes. So the costs to sales as I mentioned was about 425,000, sales and marketing was about 365,000, R&D was about 760,000 and G&A was about 355,000

Kevin Krishnaratne

Great all right, thanks guys.

Geoff Haydon

Thank you.

Operator

There are no further questions at this time. I will turn the call back over to Geoff Haydon for closing remarks.

Geoff Haydon

All right, so listen just in closing for those of you who have been in the story for a while, I want to close with a couple of comments. We are through what has been a very enduring and substantial transformation through the disruption, through the distractions, through the severance payments and we have emerged with what we feel is an incredibly exciting company and story five consecutive quarters of ACV expansion, year-over-year ACV expansion of 8%, concentrated to America, where as I mentioned, our business is up 4% year-over-year.

Our healthcare and enterprise business is up 13% it wireless up 4% sequentially in Q2 and as we move into the second half we are entirely focused now on executing against our magnificent opportunity, accelerating growth, realizing our enormous potential and starting to reintroduce a more meaningful form of operating leverage which will expand cash and profitability margins in Q4 and moving into the new year.

So, thank you for your endurance, thank you for your interest and we look forward to speaking with many of you over the coming days, thank you.

Operator

This concludes today's conference call. You may now disconnect.

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