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Note how Absolute Software prices its product, when it collects its revenue and when it incurs its expenses. Why would this model result in an attractive cash flow situation? How will cash flow differ from profit in this model?

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The Wall Street Journal
Software Helps Find Stolen Computers
Every year, as many as 5% of laptops used by companies are stolen, according to Absolute
Software Corp. And Absolute, which makes software that helps pinpoint the location of stolen
computers, would like nothing better than to recover them all.
Absolute’s software, called Computrace, works by sending a regular signal from a computer to
the company’s data center in Vancouver, British Columbia. The signal, sent daily when a
computer is online, provides important information that can be used to locate the machine, such
as the computer’s IP address and serial number. When a computer is reported stolen, Absolute
flags the machine and asks it to signal the data center every 15 minutes. When the machine logs
on to the Internet, Absolute knows it almost immediately and gives information to police to help
recover the computer and apprehend the thief.
Absolute’s 96 employees include a computer-recovery team that works with police and Internet
service providers. The company recovers about 25 stolen computers a week, according to
Absolute Chief Executive John Livingston.
A laptop stolen recently from a Fidelity Investments employee, jeopardizing personal data on
196,000 current and former Hewlett-Packard Co. HPQ +0.55% workers, wasn’t equipped with its
tracing software, Absolute says. Other stolen laptops, however, have been tracked down in farflung places. Last year, one stolen machine was traced to Iraq. A U.S. serviceman had bought it
not realizing it was stolen. When contacted, the serviceman readily agreed to ship the machine
stateside and Absolute sent him a replacement, for no charge. (Absolute says this was an
exception — it doesn’t routinely replace stolen computers.)
Computrace is embedded in the BIOS, or basic input-output system, of a computer. The BIOS is
a mini-operating system that enables the computer’s keyboard and display screen, among other
things. It’s extremely difficult to remove from a computer, remaining on the machine even when
its main operating system, such as Microsoft Windows, is reinstalled. “Our reason for existence,”
Mr. Livingston says, “is to be the most tamper-resistant piece of software on the market.”
As of Dec. 31, Absolute had 550,000 subscribers, up from 370,000 a year earlier. The company
is targeting 1 million subscribers by June 30. There is a version of the Computrace software that
works with MacIntosh laptops, and Absolute says that the product will also be compatible with
Microsoft Corp.’s MSFT +0.40% new Vista operating system.
Fred Tarca, director of administration and project management at Quinnipiac University, said the
Hamden, Conn., school began selling Computrace-equipped laptops to students four years ago,
before improvements were made to the system.
The earlier version of the product was good at tracking lost computers, Mr. Tarca says, but it
wasn’t very good at recovering stolen machines, as the software could be circumvented by
deleting the contents of the hard drive. Then last year, Quinnipiac’s laptop supplier, Dell Inc.,
DELL +1.02% began embedding Computrace in the BIOS. “Not only is it a much better
technology,” Mr. Tarca says. “We have had success recovering lost and stolen laptops.”
The decision by Dell and other original equipment manufacturers to embed Computrace in the
BIOS was like finding the “holy grail,” says Absolute Chief Financial Officer Rob Chase. The
company had tried unsuccessfully for years to convince OEMs to make the move, he said. Last
year, things changed. In February, Absolute said Lenovo Group Ltd. 0992.HK +1.29% would
begin embedding Computrace in the BIOS of its machines. Gateway Inc. followed in August,
Hewlett-Packard in October and Dell in December.
Absolute pays its OEM partners half of the contract fee that it receives from subscribers.
Consumers typically pay $100 for a three-year contract for the product, called LoJack for
Laptops, under a license to use the well-known name of the stolen-car tracking device.
Corporations pay $129 per computer for a three-year contract. While that won’t make or break
the fortunes of its OEM partners, Mr. Chase says margins on computer sales are down,
prompting OEMs to look for new sources of high-margin revenue.
When the Lenovo announcement was made last February, Absolute’s stock was trading on the
Canadian Venture Exchange at 65 Canadian cents. The stock is up more than five-fold since then
and now trades on the Toronto Stock Exchange. It currently trades around 3.50 Canadian dollars
Absolute isn’t profitable yet, because accounting rules require the firm to recognize revenue from
subscriber contracts on a deferred basis, Mr. Livingston says. Contracts, which typically last 36
months, are amortized evenly over the life of the agreement, he says. However, subscribers
usually pay the fee up front, which explains how Absolute can generate positive operating cash
flow, despite posting a net loss.
In its second quarter ended Dec. 31, Absolute posted a loss of C$709,000 or three Canadian
cents a share, compared with a loss of C$467,000 or three Canadian cents a year earlier. Cash
flow from operations was C$1.2 million, up from C$243,000. The company exited the quarter
with C$14.5 million in cash and equivalents, up from C$11.9 million on June 30.
The company has 13 patents, about half of them in the U.S., and it hasn’t been shy about
asserting its intellectual-property rights. Six companies have signed license agreements with
Absolute, including CyberAngel Security Solutions Inc. last month, and another six have left the
Mr. Livingston says the company expects to add 20 employees and open a U.S. data center. The
company is also considering extending its technology to hand-held devices, he says.

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