Absolute Software Corporation. (TSX: ABST) is a Canada-based software company, primarily engaged in the development, marketing, and provision of a cloud-based endpoint visibility and control platform that provides management and security of computing devices. The company derives its revenue majorly from support revenue and subscriptions. 

Key Highlights:

• Ties with Independent software vendors: Recently the company announced that it entered into a partnership with leading Independent Software Vendors (ISV) to further boost its endpoint applications and Absolute Application Persistence-as-a-Serice (APaaS). ISVs can use APaaS to integrate Absolute's Application PersistenceTM features directly into their software packages, allowing them to retain the integrity of their endpoint applications while reducing development costs and eliminating the need for continuing code maintenance.

• Higher annual recurring revenue (ARR): The company reported an increase in the total annual recurring revenue of USD 202.9 million during Q3FY22 as compared to the total annual recurring revenue of USD 120.4 million in Q3FY21. The Enterprise & Government segment reported revenue of USD 158.1 million during the reported period (Q3FY22) which is higher than USD 78.7 million in Q3FY21. The revenue from the Education segment also increased to USD 44.8 million in Q3FY22, against the USD 41.7 million in Q3FY21.

Source: Company presentation

• Global recognition: Recently the company was named as the winner of two most previous awards by Global InfoSec Award by Cyber Defense Magazine (CDM): most comprehensive endpoint security & market leader- zero trust. This brings the company at par with various other prominent names in the industry and also validates that organizations are reconsidering their zero-trust approaches with an emphasis on resilience. Further, the group is associated with various brands which are presented below.

Source: Company presentation 

Risks associated with investment

The company is majorly exposed to changes in technology which require constant spending on the research and development costs, hampering the maraging of the company. To add more, the cyber threat, decline in customer retention and client acquisitions, and increasing costs are a few of the risks, the company is facing.

Financial overview of Q3FY22 (Expressed in thousands of USD)

Source: Company Filing 

• During Q3FY22, the group reported an increase in total revenues to USD 51.98 million versus the total revenue of USD 30.65 million in Q3FY21. The increase in sales was because of higher revenue derived from cloud and subscription services during the reported period.

• The gross margin for Q3FY22 increased to USD 42.88 million against USD 26.38 million in Q3FY21.

• The company transitioned into net losses of USD 6.45 million during Q3FY22 as compared to the net income of USD 2.23 million in pcp.

Valuation Methodology (Illustrative): EV/Sales-based Valuation

Analysis by Kalkine Group

Stock Recommendation:

The company reported an increase in the adjusted EBITDA in Q3FY22 to USD 13.8 million as compared to the adjusted EBITDA of USD 7.7 million in Q3FY21. The company reported an increase of 17.2% of growth in the active endpoints across the globe to 13.6 million in Q3FY22 from the active endpoints of 11.6 million in Q3FY21.  The business provided a solid forecast for FY22 adjusted sales in the range of USD 209.5 million to USD 210.5 million, with adjusted revenue growth of 14.9% to 15.4% year over year and an adjusted EBITDA margin of 24.5% to 25.5%.  On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is offered at 2.6x as compared to the industry (technology) mean of 4.2x, stating that the stock is still undervalued. We have considered A10 Networks Inc., Tufin Software Technologies Ltd., etc. as the peer group for the comparison. 

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock of ABST at the last closing price of CAD 9.96 on June 16, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 16, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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