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:

• Increased Total annual recurring revenue (ARR): During Q3FY22, the company reported a significant increase in the total annual recurring revenue to USD 202.9 million against the total annual recurring revenue of USD 120.4 million in Q3FY21. The sales from Enterprise & Government during Q3FY22 stood at USD 158.1 million 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

• Higher Endpoints globally: The company reported an increase of 17.2% in the active endpoints across the globe to 13.6 million in Q3FY22 from the active endpoints of 11.6 million in Q3FY21. The group’s strategy of streamlining the management of remote device fleets for the customers, helped the company to clock the growth across the endpoints globally. The higher number of active endpoints states the company's improved business capabilities because of the increase in the number of endpoint users.

Source: Company presentation

• Increased adjusted EBITDA: The company stated 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. This increase was primarily driven by higher sales, which were partially offset by the rise in operating expenses related to an increase in the employee headcount.  

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 margins 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 

• For Q3FY22, the group reported an increase in total revenue to USD 51.98 million as compared to USD 30.65 million in Q3FY21. The cloud and subscription services reported a revenue of USD 49.50 million in Q3FY22 as compared to USD 28.57 million in Q3FY21, contributing to the maximum growth in the reported revenue.

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

• During Q3FY22 the group reported an operating loss of USD 1.67 million as compared to the operating income of USD 3.22 million in Q3FY21. On account of higher operating expenses of USD 44.55 million in the similar period (Q3FY22) against the operating expenses of USD 23.15 million in Q3FY21, the group reported operating losses.

• The group reported a net loss of USD 6.45 million in Q3FY22 against the net income of USD 2.23 million in Q3FY21.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

During Q3FY22, the company reported an increase in the adjusted EBITDA to USD 13.8 million against USD 7.7 million in Q3FY21, along with an increase in the total revenue to USD 52.0 million in Q3FY22, against the total revenue of USD 30.7 million in Q3FY21. The company gave strong guidance for FY22 adjusted revenue in the range of USD 209.5 million to USD 210.5 million along with the adjusted revenue growth for YoY to be between 14.95% to 15.4%, and the adjusted EBITDA margin is estimated to be 24.5% to 25.5%. On the valuation front, the stock is measured on the EV to Sales based, and we have considered Tufin Software Technologies Ltd., Sylogist 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 at the last closing price of CAD 11.62 on May 20, 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 May 20, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Disclaimer

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