Absolute Software Corp

Absolute Software Corp (TSX: ABST) is engaged in the development, marketing, and provision of a cloud-based endpoint visibility and control platform that provides management and security of computing devices.

Key highlights

• Registering sequential growth in operating matrix: Despite the turmoiled period in 2020, the Company maintained its pace and witnessed the spirited performance across the annual recurring revenue, revenue and adjusted EBITDA. The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. 

Source: Company

• Higher guidance on FY21: The management highlighted strong revenue growth and expects it to be in a range of USD 117-119 million, an increase by 12-14% from 2020 achieved numbers. Furthermore, it expects the adjusted EBITDA margin to be between 22-24%.

Source: Company

• Growth strategy: The group argues that the need for security and control of computer devices, software, and data has expanded as a result of increased remote work and distance learning. Since the company does not want to rely entirely on network-based security, it is focusing more on endpoint system security. The company sees an opportunity for further growth across North America and in other global regions in each enterprise, government, and education verticals.

• Strong balance sheet: The company is having a strong balance sheet with no debt and sufficient liquidity to support its business objectives in the fiscal year. Liquidity was further bolstered by USD 64 million on October 30, 2020, with the completion of a public offering of common shares. On December 31, 2020, its cash & cash equivalents and short-term investments stood at USD 132.0 million, compared to USD 47.1 million at June 30, 2020. 

• Event update: The company would release its Q3 FY21financial results on Tuesday, May 11, 2021 after the financial markets close. 

Financial overview of Q2 FY21 (In USD)

Source: Company

• In Q2 FY21, the company posted higher revenues at USD 29.8 million, against USD 25.8 million in the previous corresponding period. The rise was represented by a 16% increase in recurring revenue while non-recurring professional services and other revenue remained constant.
• On the back of higher operating expenses, the company posted a lower operating income of USD 3.0 million in Q2 2021, against USD 3.9 million in the previous corresponding period.
• The company reported a net income of USD 2.4 million, against USD 2.7 million in pcp. Higher foreign exchange losses dragged the net income, although it got support from lower-income tax and unrealized gain on derivatives.

Risks associated with investment

The Company is exposed to risks of varying degrees of significance, affecting its ability to achieve the strategic objectives for growth. There is a significant risk of technological changes. Other risks are also there, such as the Company’s business strategy, evolving industry standards, intense competition, Currency fluctuations etc.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company posted strong Q2 2021 numbers, which reflects an increased demand for the Absolute Resilience platform. The group is continuously working closely with customers; thus, its presence increases along volume and registered sequential growth in the operating matrix. We expect that the company’s ARR would continue to provide revenue stability, profitability, and cash flow. Moreover, the management has shared its guidance on FY2021 revenue, which they expect to be in a range of USD 117-119 million, an increase by 12-14% from 2020 achieved numbers. On top of all, the company do not want to be solely reliant on network-based security. It is increasing the focus on securing the actual endpoint devices, which is a large addressable market. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 18.380 as on May 03, 2021. We have considered Tecsys Inc, Open Text Corp, Enghouse Systems Ltd. as the peer group for the comparison.

1-Year Price Chart (as on May 03, 2021). Source: Refinitiv (Thomson Reuters)

Sierra Wireless Inc

Sierra Wireless Inc (TSX: SW) is a leading wireless communication equipment designer and Device-To-Cloud IoT solutions provider. The company's product and services portfolio contain high-speed cellular modules and services such as connectivity services, cloud platforms, etc.

Key Highlights

• Launched IOT solution for asset tracking: Acculink Cargo, a new managed IoT solution for tracking the location and condition of high-value and sensitive assets, was recently launched by the company. Asset tracking and other supply chain visibility solutions are a large and rapidly growing market, which is expected to grow with a CAGR of 13.45% to USD 34.82 billion in 2026 from USD 17.14 billion in 2020. 

• A rising trend in revenue: The company shows spirited performance as it continued to improve in Q4 2020 with 6.3% sequential revenue growth to USD 120.5 million and overall gross margins improving to 36%. The rising trend of revenue reflects that the business transformation is proceeding well.

Source: Company

• Guidance for Q1 2021: The company expects its revenue to be around USD 109.9 million as it witnesses strong demand for its products and services in Q1 2021. Moreover, the group also secured hardware orders and recurring revenue of approximately 15% above Street Consensus for Q1 2021. These guided numbers are excellent, keeping in view the current economic conditions. 

• Increase in cash and cash equivalents: Cash and cash equivalents at the end of Q4 2020 stood at USD 171.4 million, increased by USD 99.4 million, compared to USD 72.0 million in Q3 2020. The increase in cash was mainly due to net proceeds from its Automotive Business's sale, partially offset by repayment of short-term borrowings and long-term debt, and M2M New Zealand acquisition.

Source: Company

• Event update: The company would be releasing its financial results for the first quarter ended March 31, 2021, on Thursday, May 13, 2021.

Financial overview of Q4 2020 (In thousands of USD)

Source: Company

• In Q4 2020, the company reported revenue of USD 120.4 million, compared to USD 125.1 million in the previous corresponding period. Although on a sequential basis, the revenue recorded a positive growth.
• The gross margin stood at 36.0% in Q4 2020 as compared to 35.8% in pcp. The modest increase was driven by product and customer mix changes in its Embedded Broadband and IoT Solutions segment.
• The company posted a higher loss from operations at USD 22.3 million in the reported quarter compared to the loss of USD 17.1 million in pcp. The higher operating loss was primarily due to higher cumulative operational expenses.
• The company managed to report a net income of USD 0.9 million, against a loss of USD 10.9 million in Q4 2019, primarily due to net earnings from discontinued operations. 

Risks associated with investment

The current economic downturn impacted the Company's operating segments adversely through lower automotive revenue and weak demand for its hardware products. Any further shutdown could result in material and adverse effects on the Company's ability to conduct business. Other risks such as currency fluctuations, technology risks, regulatory risks are also present. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company is presently working on developing Fifth Generation (5G) cellular embedded modules launched in Europe in Q4 2020. Moreover, the group would strengthen its focus on device-to-cloud IoT solutions, driving high-value recurring revenue and would invest additional in 5G embedded modules and routers, which would lead to improved business prospects. The management expects revenue to be around USD 109.9 million in Q1 2021. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating at the closing price of CAD 18.630 on May 03, 2021. We have considered NETGEAR Inc, TESSCO Technologies Inc, Digi International Inc, etc. as the peer group for comparison.

1-Year Price Chart (as on May 03, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.