JAMF - Jamf Faces Softer 2023 Demand As Operating Losses Remain High

2023-06-14 12:48:23 ET

Summary

• Jamf Holding reported its Q1 2023 financial results on May 4, 2023.
• The firm provides IT support services to companies using Apple products.
• JAMF has produced continued topline revenue growth, but is facing customer hiring headwinds and is producing high operating losses.
• I'm Neutral [Hold] on JAMF stock for the near term.

A Quick Take On Jamf Holding

Jamf Holding Corp. ( JAMF ) recently reported its Q1 2023 financial results on May 4, 2023, beating expected revenue and EPS estimates.

The company provides IT services for companies using or interfacing with Apple (AAPL) products.

With the continued softening labor market and a slowing economy acting as headwinds coupled with high operating losses, my outlook for JAMF stock is Neutral [Hold] in the near term.

Jamf Holdings Overview

Minneapolis, Minnesota-based Jamf was founded to provide a comprehensive set of services it calls Apple Enterprise Management.

Management is headed by Chief Executive Officer Mr. Dean Hager, who has been with the firm since June 2015 and was previously CEO of Kroll Ontrack and prior to that held various senior roles at Lawson Software, later acquired by Infor.

The firm enables enterprises to more easily integrate all types of Apple products and software into their existing systems 'without ever having to touch the devices.'

Jamf sells its SaaS solutions via a subscription revenue model and sells larger accounts through a direct sales force and smaller accounts via its online portal.

Company products include:

• Lifecycle Application Management

• Inventory & Device Management

• Identity & Security Management

• Threat Prevention & Remediation

• Visibility & Compliance

The firm also sells through channel partners, which include Apple itself.

Jamf's Market

According to a management-cited recent IDC survey of U.S. commercial IT decision makers, it expects the penetration of Apple Mac computers to increase from 11% to 14% by the end of 2022.

Additionally, more enterprises are seeking to allow employees to use more of the technology of their choice as solutions to integrate various platforms become more available and cost-effective.

Statcounter also reported that Apple OSs "comprised 22% of global web traffic (both business and consumer) in December 2019, up from 4% in January 2009."

The increase in the use of mobile devices is mostly the reason for Apple's use growth in the enterprise, although the Mac has been an important contributor.

Management says its focus on providing a vertically integrated suite of options means it can compete better against small startups that are usually focused on one functionality as well as against the large providers who do not offer specialized solutions.

Jamf’s Recent Financial Trends

• Total revenue by quarter has risen while operating losses by quarter have worsened since Q1 2022:

• Gross profit margin by quarter has grown in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter have trended higher in recent quarters:

• Earnings per share (Diluted) have remained substantially negative:

(All data in the above charts is GAAP)

In the past 12 months, JAMF’s stock price has fallen 19.47% vs. that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 30.53%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $200.3 million in cash and equivalents and $365.1 million in total debt, none of which was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $61.3 million, during which capital expenditures were $6.9 million. The company paid a whopping $112.7 million in stock-based compensation in the last four quarters, the highest trailing twelve-month result in the past eleven quarters.

Valuation And Other Metrics For Jamf

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.

Jamf’s most recent Rule of 40 calculation was 11.2% as of Q1 2023’s results, so the firm is in need of significant improvement in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On Jamf

In its last earnings call (Source - Seeking Alpha), covering Q1 2023’s results, management highlighted the net addition of 800,000 devices among over 72,500 customers.

However, the rate of device purchases at clients has ‘significantly slowed due to continued macroeconomic uncertainty.’

Management expects these macroeconomic headwinds to continue throughout the year.

Against this challenging backdrop, the company continues to see increasing preferences for Apple products within the enterprise, leading management to remain confident that underlying demand for Apple devices remains strong against Windows and Chrome devices.

However, the company’s net retention rate declined to 111% due to ‘muted customer hiring expectations.’

Total revenue for Q1 2023 rose 22.1% year-over-year and gross profit margin increased by 1.3 percentage points.

Selling, G&A expenses as a percentage of revenue increased by 0.9 percentage points and operating losses increased by 9.8% year-over-year.

Looking ahead, management reiterated its previous guidance for topline revenue growth in the range of 17% - 18% and for non-GAAP operating margins ‘in the low teens.’

The company's financial position is reasonably strong, with ample liquidity, long-term debt and plenty of positive free cash flow.

Jamf’s Rule of 40 performance has been subpar.

From management’s most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I’m most interested in the frequency of potentially negative terms, so management or analyst questions cited ‘Uncertain’ two times, ‘Challeng[es][ing]’ four times and ‘Macro’ 12 times.

The negative terms refer to reduced client hiring resulting in lower device growth and increased churn.

Regarding valuation, the market has lowered JAMF’s EV/Sales multiple valuation in the past several quarters, likely due to worsening hiring conditions in the technology sector.

While a rise in the cost of capital may be nearing its end and further downward pressure on the valuation multiple may be minimal, JAMF’s operating losses continue to weigh on the stock’s potential ahead.

With the continued softening labor market and a slowing economy acting as headwinds coupled with high operating losses, my outlook for the stock is Neutral [Hold] in the near term.

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