Absolute Software Corporation (TSX: ABST) is a Canada-based software company, that is actively 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 majority of the revenues originate from two sources: support revenues and subscriptions.

Key highlights

• Improved adjusted EBITDA: For Q2FY22, the group came out with a higher adjusted EBITDA of USD 13.8 million as compared to USD 8.0 million in Q2FY21. The jump in the adjusted EBITDA was primarily driven by the increases in revenue, which was partially neutralized by the rising operating costs on account of increasing employee headcount.

Source: Company presentation 

• Outperformance from Cloud and subscription services: The company witnessed a growth of nearly 68% in revenues from its Cloud and Subscription services model (as part of Total Annual Recurring Revenue), bringing in a total of USD 46.6 million during Q2FY22 vs USD 27.7 million. The total revenue for the Q2FY22 grew to USD 49.0 million as compared to the total revenue of USD 29.9 million in the Q2FY21.

• Better outlook: The company increased its adjusted revenue for FY22 in the range of USD 206 million to USD 208 million, implying a revenue growth rate of 13% to 14%, which is a key positive to its top line. Further, the adjusted EBITDA for FY22 is estimated to be in the range of 22% to 24% of the revenue.
  

• Upcoming results: On May 10, 2022, the group will release its Q3FY22 (ended on March 31, 2022) results after the market close.
  

• Improved profitability margins: Below is the graphical representation of the improved profitability margins in FY21 as compared to the industry median.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The major risk to the company is the advancement of the technology which requires constant spending on the research and development costs, impacting the margins negatively. Further, the threats which always linger are a breach of cyber security, a decline in customer retention, client acquisition cost, rising wages, etc. 

Financial overview of Q2FY22 (Expressed in thousands of USD)

 Source: Company Filing

• During Q2FY22, the company reported an increase in its total revenue to USD 49.05 million vs. USD 29.85 million in Q2FY21. Almost 79% of the increased revenue was derived from the acquisition of NetMotion and the remaining 21% of the total increase was from the organic business.

• The gross margin for the Q2FY22 was reported on a higher side at USD 39.63 million as compared to USD 26.13 million in Q2FY21. The impact of increased revenue was partially offset by the increased cost of revenue which climbed to USD 9.41 in Q2FY22 against USD 3.71 million in Q2FY21.

• For Q2FY22, the company reported an operating loss of USD 2.62 million against the operating income of USD 3.07 million in Q2FY21. On account of increasing operating expenses of USD 42.26 in Q2FY22 vs USD 23.06 million, the company transitioned into operating losses.

• For Q2FY22, the company reported a net loss of USD 5.12 million against a net income of USD 1.90 million in Q2FY21.
  

Valuation Methodology (Illustrative): EV to Sales based valuation

Stock recommendation 

The company recently paid the quarterly of CAD 0.08 per share for Q2FY22 and offered a dividend yield of 3.119%. The management is taking various initiatives such as upgrading its Secure Access product portfolio which will help the customers to minimize the risks. Further, the company is coming up with various innovative products, which will help the organization to track and analyze the various key metrics such as spanning endpoints. Users, applications, etc to further enhance the user product performance. On the valuation front, the stock is measured on the EV to Sales based multiple, and currently trading at 2.5x which is lower than the industry median (Technology) of 2.8x, implying the stock is deeply undervalued as compared to its peers. For the valuation, we have considered Sylogist Ltd., Datasea Inc, etc as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing market price of CAD 10.26 on April 14, 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 on April 14, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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