Absolute Software exceeds revenue milestone in FQ3 results (NASDAQ:ABST)

A quick look at Absolute Software

Absolute Software (NASDAQ:ABST) recently reported its financial results for FQ3 2022 on May 10, 2022, with earnings and earnings estimates missing.

The company provides enterprise endpoint visibility and related cybersecurity technologies and public authorities.

While potential investors may see a potential bargain in ABST’s current market valuation, I am more cautious about its ability to take full advantage of the NetMotion acquisition and the need to service debt in the process.

I’m on hold for Absolute at short notice.

Absolute software overview

Vancouver, Canada-based Absolute was founded in 1993 to provide a range of cybersecurity software technologies embedded in firmware products.

The company is led by Chief Executive Officer Christy Wyatt, who was previously CEO of Dtex Systems and Chairman, CEO and President of Good Technology.

The company’s main offering includes:

• Secure Endpoint Products

• Secure Access Products

The company acquires customers through direct sales and marketing efforts to find OEM partners.

Internationally, the company has relationships with distributors and other partners to offer its capabilities to potential customers in various countries and regions.

Absolute Software Market and Competition

According to a 2020 market research report from Grand View Research, the global zero trust security market was estimated to be $19.8 billion in 2020 and is expected to reach $61.4 billion by 2028.

This assumes that the market will grow at a very strong CAGR of 15.2% between 2021 and 2028.

Market growth is expected due to an increasing proliferation of endpoint devices and increasing adoption of cloud computing environments.

In addition, the rise of the ‘work from home’ economy for businesses of all sizes, along with a growing number of increasingly complex malware attacks, is forcing companies to focus on enhanced security solutions.

Major competitors offering or developing zero trust security solutions include:

• McAfee

• Symantec Corporation

• Palo Alto Networks (PANW)

• fire eye

• Cloudflare (NET)

• VMware (VMW)

• Check Point software (CHKP)

• SonicWall

• Trend Micro (OTCPK:TMICF)

• others

Absolute Software’s Recent Financial Performance

• Total quarterly revenue has grown significantly over the past 5 quarters:

• Gross profit per quarter has followed roughly the same trajectory as total sales:

• Selling, general and administrative expenses as a percentage of total revenue per quarter have remained stable over the past 3 quarters:

• Quarterly operating income has fluctuated near breakeven in the two most recent quarters:

• Earnings per share (diluted) remained negative in the 4 most recent quarters:

(All data in charts above is GAAP)

Over the past 12 months, ABST’s stock price has fallen 34.8 percent from the US S&P 500 index’s decline of approximately 11.1 percent, as the chart below shows:

Rating and other statistics for absolute software

Below is a table of relevant capitalization and valuation figures for the company:

Measuring unit	Quantity
Enterprise Value	$669,970,000
Market capitalization	$466.520,000
Enterprise Value / Sales [TTM]	3.79
Price / Sales [TTM]	2.56
Sales growth rate [TTM]	51.99%
Operating cash flow [TTM]	$42,580,000
CapEx Ratio (On ​​CF/CapEx)	53.25
Earnings per share (fully diluted)	-$0.45

(Source – Looking for Alpha)

The rule of 40 is a rule of thumb in the software industry that says that as long as the combined revenue growth and EBITDA percentage are equal to or greater than 40%, the company is on an acceptable growth/EBITDA trajectory.

ABST’s most recent GAAP Rule of 40 calculation was 54% as of Q1 2022, so the company is performing well in this regard, according to the table below:

GAAP rule of 40	Calculation
Recent Rev. Grow %	52%
GAAP EBITDA %	2%
Total	54%

(Source – Looking for Alpha)

Comment on Absolute Software

In its latest earnings call (Source – Seeking Alpha), which covered the FQ3 2022 results, management emphasized achieving an annual revenue milestone of $200 million.

The company also recently launched a new product, Ransomware Response, which has the ability to “communicate with and control the [affected] endpoint to restore health and aid recovery.” Management says it has seen “strong customer interest” in this new offering.

In terms of financial results, adjusted revenue grew 18% year-over-year with approximately 70% of secure access revenue coming from subscriptions.

Management sees strong revenue in the corporate and government segments, but weak growth in education versus strong compositions due to past COVID-related demand.

Adjusted EBITDA was better than expected due to slower than expected headcount growth.

On balance sheet, the company ended the quarter with $69 million in cash after generating $17 million in operating cash flow.

Looking ahead, management raised its revenue guidance to approximately 15.2% at the midpoint and adjusted EBITDA margin to 25% at the midpoint, up from 23% previously.

Valuation wise, the market values ​​ABST at an EV/Sales multiple of about 3.8x.

While the company is not a pure SaaS company, the SaaS Capital Index of publicly traded SaaS software companies showed an average forward EV/Revenue multiple of approximately 7.5x as of June 30, 2022, as the chart here shows:

In comparison, ABST is currently valued by the market at a significant discount to the SaaS Capital Index, at least as of June 30, 2022.

The primary risk to the company’s outlook is a possible macroeconomic slowdown or recession that the US economy already appears to be in, which could slow sales cycles and lower revenue growth estimates.

ABST took on a fair amount of long-term debt for its 2021 acquisition of NetMotion, and the earnings results show the effects of higher interest charges.

It is the job of management to reduce that debt burden (which is floating rate debt) and its associated impact on earnings.

While potential investors may see a potential bargain in ABST’s current market valuation, I am more cautious about its ability to take full advantage of the NetMotion acquisition while paying off debt.

I’m on hold for Absolute at short notice.