ABST - Absolute Software Moderates Guidance As Customer Headwinds Develop

Summary

• Absolute Software reported its FQ2 2023 results on February 14, 2023.
• The company provides an array of cybersecurity software to organizations worldwide.
• ABST has produced solid growth but is noting softness in new orders, likely due to macroeconomic headwinds.
• Until we see the extent of the expected economic downturn, I'm on Hold for ABST.

A Quick Take On Absolute Software

Absolute Software ( ABST ) reported its FQ2 2023 financial results on February 14, 2023, missing revenue and EPS consensus estimates.

The company provides endpoint visibility and related cybersecurity technologies for enterprises and public agencies.

Given the current uncertain macroeconomic picture and greater caution among some of its customer base, ABST will need to show better results to be a Buy in my book.

I’m on Hold for ABST in the near term.

Absolute Software’s Overview

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

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

The company’s primary offerings include:

• Endpoint Products

• Access Products

The firm acquires customers via direct sales and marketing efforts to obtain 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’s Market & Competition

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

This assumes 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 the growing adoption of cloud computing environments.

Additionally, the rise in 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 improved security solutions.

Major competitors that provide or are developing zero-trust security solutions include:

• McAfee

• Symantec Corporation

• Palo Alto Networks

• FireEye

• Cloudflare

• VMWare

• Check Point Software

• SonicWall

• Trend Micro

• Others

Absolute’s Recent Financial Performance

• Total revenue by quarter has risen per the following chart:

• Gross profit margin by quarter has trended lower in recent quarters:

• Selling, G&A expenses as a percentage of total revenue by quarter were lower in the most recent quarter, year-over-year:

• Operating income by quarter has neared breakeven recently:

• Earnings per share (Diluted) have remained negative, per the chart below:

(All data in the above charts is GAAP)

In the past 12 months, ABST’s stock price has dropped 4.3% vs. that of the Nasdaq 100 Index’s drop of 12.8%, as the chart indicates below:

Valuation And Other Metrics For Absolute Software

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

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

ABST’s most recent GAAP Rule of 40 calculation was 42.7% as of FQ2 2023, so the firm has performed well in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Absolute Software

In its last earnings call (Source - Seeking Alpha), covering FQ2 2023’s results, management highlighted 15% growth in ARR, with 18% growth in enterprise and government verticals.

However, the company ‘did see a reduction in the average contract length…attributable to the more cautious macroeconomic environment as customers seek to limit or defer large cash expenditures.’

In the education vertical, the company is seeing a mix shift away from PCs to Chromebooks, negatively impacting its business in some respects.

As to its financial results, total revenue rose 9% year-over-year as customers exercised ‘more caution in their purchasing actions due to macro concerns.’

The company’s net dollar retention rate was stable at 107%, indicating reasonably good product/market fit and sales & marketing efficiency.

The firm’s Rule of 40 result has been excellent, with a very strong revenue growth result coupled with a small positive operating result contributing to a good figure for this metric.

GAAP operating income came closer to breakeven, while earnings per share remained substantially negative.

For the balance sheet, the firm finished the quarter with $49.9 million in cash, equivalents and short-term investments and $260.2 million in total debt.

Over the trailing twelve months, free cash flow was $39.6 million, of which capital expenditures accounted for only $2.2 million. The company paid $23.4 million in stock-based compensation in the last four quarters, a record high figure for the last several years.

Looking ahead, management is expecting 11% at the midpoint of the range for total revenue growth for fiscal 2023, a slightly ‘moderated’ growth figure given uncertain economic conditions and customer behaviors.

Regarding valuation, the market is valuing ABST at an EV/Sales multiple of around 3.3x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 6.2x on February 6, 2023, as the chart shows here:

So, by comparison, ABST is currently valued by the market at a significant discount to the broader Meritech Capital Index, at least as of February 6, 2023.

The primary risk to the company’s outlook is an increasingly likely macroeconomic slowdown or recession, which may accelerate new customer discounting, produce slower sales cycles and reduce its revenue growth trajectory.

A potential upside catalyst to the stock could include a ‘short and shallow’ downturn or no downturn at all which is a possibility given recent strong economic reports.

Given the current uncertain macroeconomic picture and greater caution among some of its customer base, ABST will need to show better results to be a Buy in my book.

I’m on Hold for ABST in the near term.

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