Description

Absolute Software (ABT-CN, ALSWF-US)

Summary / Thesis Overview

ABT has been written up before on VIC, but I’m not super into just linking to everyone else’s old stuff, so I put a pretty lengthy background below. The (very) short version here is that I view ABT as the opposite of the SaaS short - this is a real subscription business that was SaaS before SaaS was a common term, the company is profitable, has excellent retention over long periods of time, and isn’t burning mountains of cash on S&M expenses. Plus, the company is actually fairly unique in what they do and how they do it. 

It’s also a sleepy, backwater Canadian equity with low volume/liquidity, which adds to the intrigue, but obviously limits viability for many funds. 

Nevertheless, the pitch boils down to the fact that multiple factors - including a limited founder vision, multiple disruptive mgmt changes and consequential strategy start/stops, and previously-limited feature functionality relative to the possibilities of its core technology - ABT’s business has lagged the quality and uniqueness of its product/technology. I often think about it in the context of a math equation - ABT’s core tech > ABT’s product set > ABT as as a company/business. Recently-stabilized mgmt and a new, enterprise-grade feature-set should enable growth acceleration and greater monetization of ABT’s unique technology / capabilities. 

Company Background - Understanding the Business

ABT is a software vendor specializing in endpoint / device tracking, visibility, and control. ABT’s software allows an organization (typically the IT department) to 1) track the physical location of the device, regardless of its corporate network status (i.e., as long as it was/is connected to the internet, ABT can track the device’s location); 2) view the granular details of a given device’s usage (e.g., apps used, files accessed or created, etc.); and 3) remotely control or execute certain actions on the device (e.g., wipe the data, lock the device, reconfigure or “self heal” other important applications, or otherwise execute a range of scripts or commands). 

What differentiates ABT - both in terms of the usage of their products, as well as the potency of their solutions - is its primary route-to-market. ABT embeds an aspect of their technology (a small software module) into the BIOS of almost every single PC / laptop in existence (every major and minor PC OEM sans AAPL and Chromebooks) at the point of manufacture, running dormant unless activated by the purchase / installation of ABT’s software. This makes it near-impossible (if not impossible) to remove or otherwise tamper with its software. For example, a hard-drive wipe might momentarily get rid of the full-blown software installation, but the BIOS-embedded module would reinstall the software on the newly-wiped drive (in addition to potentially re-installing important software, such as endpoint security and device management applications). Similarly, ABT can remotely remediate, or otherwise correct, incorrect or unauthorized changes to security or device configuration.  Anyone following the company will notice that ABT often uses the terms “persistence” and / or “resilience” to refer to its technology and / or products (e.g., ABT’s “patented Persistence technology”). The term - though mostly for branding - is an apt description of what the products aim to do. 

[As an aside - for those not familiar - BIOS stands for “basic input/output system” and acts as the firmware for a PC. Further, “firmware” is a term used to describe basic device operating software, which can act as an operating system for rudimentary devices (e.g., a  TV remote control or a web camera) or as a “boot system” for basic functions of more sophisticated devices (e.g., a PC, tablet, smartphone, etc.). For example, in the case of a PC, the BIOS is what boots the OS and runs basic pre-boot system diagnostics. Without the BIOS, a chicken-or-egg problem would ensue, where the OS wouldn’t be able to access the boot function on the hard drive to boot itself. The BIOS is typically written into flash memory on the motherboard of a PC - not on the hard drive.]

ABT’s relationship with PC OEMs has both financial and technical considerations. Financially, PC OEMs act as ABT’s primary channel partners, with ABT taking “the first 50%” of MSRP and the PC OEM taking the other 50% less any discounts they offer. For example, a $120 annual subscription nets ABT $60, with the other $60 being at the discretion of the PC OEM, so any discounts offered by the OEM come out of the OEM’s cut. On a practical level, the PC OEMs list ABT in the price list and loop in ABT sales to a given pitch. PC OEMs love it because straight hardware margins are paper thin and they are always looking for upsales to drive extra margin. While this could apply to any re-sold software, some software is easier to sell in a PC sales pitch than others (i.e., an IT buyer looking to buy some PCs is unlikely to make a major purchase decision on ERP software or major security software at the same time, but selling a basic form of device protection and visibility is an easier sell). Further, regardless of how much work the OEM does, they still get their cut (e.g., even on renewals, upsells, etc.), so the OEMs are well-compensated to maintain the channel relationship. 

From a technical perspective, there are several aspects to ABT’s competitive position; 1) a PC’s BIOS is not meant for robust development and it typically sits on a very small (in terms of capacity) memory chip. As mgmt puts it, there isn’t much room for anything else on the BIOS chip, so it’s not like 5 other vendors can “co-locate” with ABT; ABT’s presence in the BIOS is mutually exclusive; 2) ABT has patents around how its software (or at least the specific module) is written into the BIOS. There used to be more competition in the area, particularly a company called Phoenix Technologies (who was originally famous for “legally cloning” the original IBM BIOS that helped kickstart the entire PC industry as we know it; there’s easily available literature that discusses it) and there was litigation involved, up until ABT bought Phoenix; and 3) quality-control - other companies have ventured into embedding things into the BIOS before and it often ended in disaster. Most notably, INTC tried to develop a BIOS-embedded module to anchor their own management and security product. It resulted in buggy PCs and perennial “blue screen of death” problems for users downstream. At some point OEMs kicked them out because of the poor reliability. Conversely, ABT has been doing this, with nearly every single PC OEM, for 25 years without problems; they’re trusted and a known quantity. 

Based on the above, it’s important to understand that ABT is a specialist of sorts and is neither traditional endpoint security (e.g., SYMC, CBLK, CRWD, Tanium, etc.), which deals with securing a device against cybersecurity threats (e.g., anti-virus), nor traditional mobile device management software (e.g., Airwatch from VMW, XenMobile from CTXS, MOBL, etc.), though of the two it more closely resembles the latter. In fact, ABT’s software / products are often (and increasingly) seen / used as a complement to both such categories of device software, particularly because of the ability to self-heal or otherwise remediate and manage/view any issues going on with other key pieces of endpoint software.

ABT runs a true “land and expand” sales model and a typical “good / better / best” pricing model. While “land and expand” is a throw-around term, ABT’s primary route to market runs through the PC OEMs pitching ABT as an add-on to whatever deal they are looking to close. An original sale may only be for a limited amount of endpoints and / or a basic level of service, i.e. “landing”. At that point, ABT sales goes to work more directly in looking to expand covered devices and upsell a higher level of service. 

The good / better / best model can fairly simply be described as: Good ($40 annual subscription list price) comprises “find my device and / or wipe or lock it”; Better ($80) adds on visibility (what data is on the endpoint, what’s being used, etc.); Best ($120) allows for more granular control, such as “persisting other agents” (i.e., making other important applications tamper-proof, such as the ability to reinstall or reconfigure tampered-with or hard-drive-wiped endpoint security, etc.) or executing scripts / commands remotely. Intuitively, “good” is most popular in education (31% of annual contract value as of Dec-19 qtr) and government (12% of ACV; currently all state and local), while “better” and “best” are more popular in the enterprise (57% of ACV). Additionally, mgmt has recently spoken about a nascent push into white-labeling that ABT is calling “persistence as a service”. Essentially, ABT will sell a white-labeled version of its product to either ISVs (like endpoint security vendors) or MSPs, whereby the customer incorporates ABT’s persistence technology into its own offerings. This is a different kind of sale / customer, but mgmt is quite bullish on the potential opportunity.

ABT’s model is based on cloud-based delivery (i.e., SaaS). Historically, ABT’s subscription terms averaged ~3 years as education was historically the primary customer group and those customers tended to opt for multi-year, set-it-and-forget-it arrangements. As ABT has shifted increasingly into enterprise, average contract term has come down to ~2 years, given enterprise contracts are typically annual. Regardless, ABT’s retention has been outstanding - dollar-based retention (for which mgmt provides data qtrly) is rarely ever below 100% (only 3 qtrs since mgmt began disclosing it explicitly in the Sep-15 qtr) and has only hit as low as 99% at that. What’s important to note, within all this, is that metric(s) of import - given average contract length is well beyond 1 year, billings (which is disclosed) in any given qtr has very little to do with new sales and very much to do with renewals and renewal “classes”. A common mistake by the Street has been to read too much into billings in any given qtr - vast majority of the figure is based on choppy renewal schedules vs. success at landing new business. Alternatively, mgmt provides an annual contract value (ACV) figure - broken down by both geo and customer vert - which is defined as recurring annual revenue to be received from customers under contract at a point in time. In other words, the sum of the annual revs to be derived from customers under contract at qtr-close. Particularly given the strong retention figures, ABT’s ACV figure is the most accurate measure of future revenues. 

Recent History / Setting the Context

ABT was founded by John Livingston, who was the long-time CEO until retiring at the end of 2013. ABT started out with effectively a singular focus on education, with a value-prop of recovering stolen devices. To this end, ABT did a bunch of gimicky stuff to further this branding angle, such as teaming up with local police forces, licensing the LoJack brand from LoJack (“LoJack for PCs”), and offering guaranteed $$ if devices weren’t recovered (which made buying the product essentially a no-brainer insurance policy).

The problem was effectively 3-fold: 1) the possibilities of the tech and BIOS positioning were significantly under-utilized as essentially LoJack; 2) original mgmt was more-than-happy to pursue a more passive strategy and clip the dividend coupon than more aggressively look to grow the business; and 3) education became a poor place to play over time, given that segment is highly price-sensitive, which while playing into ABT’s hands when PCs were expensive purchases (i.e., cost sensitivity would make “insurance” a no-brainer), started to hurt ABT as PC costs came down over time (easier/cheaper to replace than to insure).

Late in Livingston’s tenure, mgmt started to move toward enterprise and look to expand the possibilities of their core positioning. This included a natural extension into mobile-device-management (MDM), where ABT could extend into the smartphone world. Livingston retires and Geoff Haydon is brought in; Haydon came from EMC and was “enterprise” up-and-down. Of course, Haydon refreshed the exec team with “his” guys, in addition to making 2 fundamental changes to the strategic plan: 1) stick to core BIOS/visibility value-prop and develop that, vs. getting involved in mobile MDM, which is highly competitive with minimal differentiation, and where ABT is outgunned on capital (e.g., vs. VMW) and doesn’t have a BIOS positioning; and 2) pivot go-to-market towards a more enterprise-sales-focused approach (hire a bunch of sales people, develop the channel outside the PC OEMs, etc.). 

As a result, under Haydon, ABT sold-off its MDM assets, refreshed the sales and exec leadership, and invested a bunch in building out the sales motion (somewhat leaning away from the PC OEM-focused land-and-expand model) and rebranding. Haydon’s plan hits some snags - somewhat predictably in retrospect - given the overhaul of execs and sales motion. Compounding this, Haydon himself jumped ship in early 2018 (so, effectively <4 years on the job). It’s not super-integral to the thesis, but Haydon went to SCWX (partially IPO’d out of DELL post-EMC), which was staffed with many of his former colleagues, to be the Chief Rev Officer; some could say leaving a CEO role to be a CRO would be a jump-ship / step-down move, but its a C-level role at a company 4-5x the size, with all his old buddies, and he was not exactly doing a bang-up job at ABT.

Interim CEO was a board member - Steve Munford - who started reversing (or at least froze) some of Haydon’s actions (given they were costly and not necessarily successful). Whether the right move or not, this precipitated yet more direction/strategy change and a whole other round of exec turnover (Haydon’s people either left with him or left when they realized the strategy they were brought in to execute was no longer “THE strategy”). 

During Haydon’s time though, ABT underwent a full overhaul of their platform, basically “major-leaguing” a product that was originally built to track stolen laptops for schools into something that could be deployed for enterprises looking to leverage the power of having a software presence built into the BIOS of a device. This included both building it as a multi-tenant (read: true cloud-based) solution, but also adding features, upgrading the interface, etc. Absolute 7 was released in Aug 2017 and included 2 key product developments: 1) the ability to persist other applications (i.e., the ability to not only repopulate ABT from the BIOS, but to also repopulate a given application, say MDM or endpoint security, with the correct settings/configuration, so it can’t be removed or tinkered with); and 2) the ability to remote script (i.e., IT managers can write custom programs - aka scripts - and push them out to ABT-enabled devices remotely). These 2 features had obvious enterprise use-cases and would make for a more compelling enterprise pitch beyond legacy device tracking/visibility/analytics.

Eventually - in Nov 2018 - ABT hired Christy Wyatt as the new CEO. Wyatt has a nice resume and was fresh off of running Good Technology and selling it to BlackBerry. We’ve done a bunch of calls and all references for Wyatt have been exceedingly positive. Most commonly noted is that, apparently, she is both a good operator/businesswoman, but also has legit technical chops. Several checks have said things to this effect. She has respect from the R&D org and has a hand in that area, in addition to running the business. Certainly, Wyatt has ushered in more exec change, but it looks like the exec team (sans very-long-time CFO Errol Olson) and strategy is more firmly in place today than it has been in ⅔ of a decade. Wyatt is going with a more hybrid approach to Haydon and Livingston on sales - develop an enterprise GTM, but lean-in to the PC OEM relationships for the “landing” and get more enterprise-y on the “expanding”. 

So, ultimately where we sit today is with a technology > product > company that looks to finally have the pieces in place to make those “>” into “=”. The key here is that you don’t have to pay all that much for the execution risk here - ABT is loaded with cash, pays out a fat dividend, generates nice FCF, and continues to grow a solid MSD rev rates with excellent retention. With a rev multiple around the low-2s, its a fairly compelling risk/reward.

Primary Thesis Points / Bull Case

1) Management Stability / Strategy Cohesion

Regardless of the state of the core product and business (which has been decent enough), the mgmt and strategy changes have severely hampered the company’s ability to execute properly. This is on top of questionable strategic approaches by prior mgmt. Livingston had a narrow vision and wasn’t a “prime time guy”. Haydon looked and smelled like the right guy, but got overly aggressive on what he wanted to do, stumbled, then bailed. Munford was a placeholder for nearly a year. Everyone had a different view of the world and different people involved in their team. 

Could Wyatt also jump ship like Haydon? Of course, anything is possible, and I can’t read her mind. That said, she’s quite well-regarded (a lot of “if anyone can pull this off, its her”-type talk from those we spoke to), she’s had success in private markets and this is her first shot in public markets. Given her age (47) and ambition, I’m guessing she’s unlikely to jump ship without leaving a fairly positive mark. As far as strategy, her approach seems fairly intuitive in the context of ABT’s business and core strengths - instead of blowing a hole in the balance sheet and operating model to build an entire “traditional”enterprise sales effort from scratch, lean in to the existing relationships (PC OEMs) and the incredible go-to-mkt cost-efficiency it provides and build around that. Obviously, developing the enterprise side here is key and that’s clearly her intention. 

2) Recent platform overhaul adds enterprise features needed for acceleration

Bottom line here is that asset management (device tracking/recovery/analytics) is a tough pitch to get deeper into the enterprise. It only carries so much value on its own. The consistent theme from nearly everyone in the IT landscape is that there are so many vendors that its causing a problem and IT projects far outweigh IT budgets, so the name of the game is consolidation and cost efficiency / improvement. If ABT isn’t consolidating functions from multiple vendors (which they aren’t), then they need to justify themselves from a cost efficiency perspective. Device tracking will only be compelling to the segment of the market that is highly data security sensitive (like highly regulated industries) or where costs of the device are meaningful. Device costs increasingly are less meaningful, and data security sensitive companies will only have a subset of employees for whom such tech is really necessary. 

The ability to leverage their own tech to persist other applications, as well as meaningfully broadening the scope of “remote control” over a device are far more compelling in a pitch to IT orgs as reasons to deploy ABT across large swaths of employees (if not company-wide). For the record, in speaking to a bunch of formers and customers, most noted that the features sounded quite interesting and could be fantastic if packaged correctly, which is really what the entire mgmt angle here, noted above, is all about. 

3) Existing business profile establishes low downside

This is a real SaaS business, that’s been around a long time, with compelling attributes in that regard. Visibility is great (average contract duration is 19 months currently), $-based ACV retention - tracked quarterly - has never trended below 99% as far back as I built my model (starting Sep 2015 qtr) and its only been sub-100% 3 times in those 18 qtrs. Rev and ACV have typically grown 3-6% every year. 

On a $308M mkt cap, the company is holding $39M in cash and investments with no debt. 100% of FCF has typically been paid out as a dividend, which is why this carries a div yield >3%. GM% is excellent (high-80s) and S&M here should be structurally more efficient than typical enterprise tech, so long-term EBITDA% could very realistically be >high-30s (from low-20s today) based on how big the business can scale. 

Bottom-line here being that if Wyatt is even moderately successful in really accelerating the enterprise business (and fed gov when FedRAMP approval gets done), the business will look exactly the same, but with double-digit rev growth, instead of MSD, with a greater potential for 30+ EBITDA%. In the meantime, you get a ~5% top-line grower, translating to HSD earnings grower, with a >3% dividend. Pretty compelling upside/downside in my view. 

4) Potential Acq Tgt; Mgmt + BoD w/ History of “Selling Out”

I don’t like betting on this, but the paint-by-numbers analysis just screams buyout. Wyatt and several members of the BoD have basically made a history of selling companies. ABT seems like an easy one in this regard. There are a wide range of companies that would benefit from owning ABT’s tech positioning (MSFT, nearly any MDM vendor, nearly any endpoint security vendor). As noted, not relying on this whatsoever, and I’m certainly sensitive to the idea that the M&A case would’ve made sense for ABT at any time in the last 20 years, so “why now?” is a very legitimate response to this.  That said, it continues to make sense as a possible “exit scenario”.

5) Strong Investor Base

Nearly 50% of shares are owned by 4 investors, all long-term, concentrated, semi-activist funds, one of whom is a long-time board member

Key Risks / Negatives /  Bear Case

1) Potentially decreasing relevance of core technology

ABT lacks position / presence in smartphones, all Apple devices, and Chromebooks, endpoints in general come at a lower cost, and data is increasingly centralized in the cloud, leaving endpoints as less of an exposure risk than in previous times. 

-- where ABT doesn’t play is somewhat of a concern, but not new and is mostly an issue in education. Enterprise and government are still largely (and for the foreseeable future) operating on Windows-based machines and are increasingly mobile (laptops and tablets). Also, smartphones are actually less of a big deal in the sense that very little content is created on a smartphone (as opposed to a laptop). Given content creation and increasing regulation around data privacy, there is an argument for decreasing relevance, but there is an equal or better argument for increasing relevance as well. 

2) Potential displacement

ABT is highly dependent on PC vendors, who have vested interest in improving their own security portfolios (i.e., could potentially go it alone and cut out ABT). Further, MSFT gives away a similar product (albeit w/o BIOS-embed) for free and, in theory, if MSFT decided to go closed-system, it could present extra hurdle and/or displacement scenario on the software side (i.e., they can get on the BIOS but can’t run their core software on the OS

-- Based on multiple conversations we’ve had with multiple parties, this is a risk that is much more theoretical than practical. PC vendor relationships are strong and most organizations have multiple PC vendors, so one of them insourcing doesn’t present a more compelling solution to the customer and thus ultimately not a more compelling solution to the vendor. The OEMs love the “free money” that comes with ABT sales relative to razor thin HW margins. Also, the key selling point is the BIOS placement, so even giving away a free product doesn’t really answer the issue that ABT is solving for (guaranteed persistence).

3) Uptake of new enterprise features

How much do customers (potentially) care? The upsale beyond asset mgmt could potentially be a tough sale

-- This is the most legitimate risk we have run into and can’t really get around. This comes down to management execution as there appears to be enough of a market (or potential market) for the new features being provided, based on conversations we’ve had. Ultimately, we believe this is solid mgmt team to bet on.

4) Declining education segment

As the education value-prop has declined, so has ABT’s education-related revs and the success of mgmt’s initiatives to add education-focused features are a big unknown

-- Similar to the risk above, hard to whitewash, but ultimately comes down to management execution. We believe this is a solid mgmt team to bet on.

Primary Catalysts

1) Uptake of new enterprise features (acceleration of enterprise rev)

2) FedRAMP approval (opens up fed gov vertical)

3) Uptake of new education-focused analytics features (stabilization of education segment)

Secondary Catalysts / Accelerators

1) Mobile device re-entry via strategic partnership

2) Sale of company

Valuation Thoughts

On current Rev/EBITDA/EPS consensus, ABT trades at 2.4x/11.5x/19.4x on FY21 (ending June). Given the sub-scale nature of the company, the rev multiple indicates out cheap it is (given high-80s GM%) relative to what more scaled earnings would look like. Even at 11.5x next year’s EBITDA, that’s not all that bad today (and remember, the div yield is already >3% despite a large cash pile and no debt). Mgmt expects FCF to run fairly close to EBITDA long-term (billings timing impacts year-to-year levels), particularly as more contracts become annual vs. multi-year (so instead of chunky FCF years, it runs smoother year-to-year). That would put normalized FCF for FY21 at sub-20x, despite being sub-scale.

Bottom-line, everyone can pick their own appropriate multiple, but a multi-year outlook of double-digit earnings growth is nice on its own, while the multiple is more likely to expand than stay where it is or decline if there is even moderate success in Wyatt’s plan.

Catalyst

1) Uptake of new enterprise features (acceleration of enterprise rev)

2) FedRAMP approval (opens up fed gov vertical)

3) Uptake of new education-focused analytics features (stabilization of education segment)