ABSOLUTE SOFTWARE CORP ABT.TO
February 17, 2012 - 3:31pm EST by
bentley883
2012 2013
Price: 5.41 EPS $0.25 $0.41
Shares Out. (in M): 43 P/E 21.6x 13.2x
Market Cap (in $M): 235 P/FCF 8.2x 7.9x
Net Debt (in $M): 0 EBIT 11 27
TEV ($): 173 TEV/EBIT 15.1x 6.4x

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  • High ROIC
  • Small Cap
  • Software
  • SaaS
  • Industry Consolidation
  • Potential Acquisition Target
 

Description

Investment thesis: ABT is a mis-priced small-cap software stock. The Company has completed a major transformation in its product offering and business model that has gone mostly unrecognized by investors. The Company has re-positioned itself as one of the leaders in a large and fast growing market. ABT has a high RIOC, rich FCF, somewhat sticky business model and a balance sheet with about one-quarter of its market cap in cash and no debt. The combination of accelerating order momentum and stabilized operating expenses is translating into a period of financial leverage, which should continue in the near future. With the shares valued at an EV/EBITDA ratio of about 5.4x my FY 2013 (June) forecast and a 14.5% FCF/EV yield, the shares are attractive on an absolute (no pun intended) basis. Additionally, the stock is attractive when compared with similar well positioned software-as-a-service (SaaS) vendors and private market valuations in the sector.

A major transformation of the Company and its product line: Over the past few years, ABT has made significant investments to transition itself from a single product company focused primarily on the consumer centric theft recovery market to a more diversified vendor of client management tools (CMT) with a broader go-to-market strategy and increased focus on both commercial and international markets. Historically ABT focused almost exclusively on marketing its Computrace thief recovery product (including LoJack for Laptops). These products imbed source code in the BIOS, using the Company’s unique “persistence” technology to remotely locate and/or scrub clean any information stored on a hard disk. To date the Company has successfully recovered over 23,000 devices and currently has no real competition for this product offering. Theft has gained significant traction with commercial accounts, helped build partnerships with most of the major PC OEM’s and gave the Company visibility with enterprise IT managers. Management believes that the market for Computrace is growing 10%-15% per year. ABT’s reported growth for this product over the last few quarters has been negatively impacted by a change in the OEM revenue recognition from a royalty per PC unit shipped to a payment for every user who opts-in. This transition will be completed in Q3 (March), which should result in growth returning to more normalized levels thereafter. 

The Computrace product is a good solution for one of IT’s major needs centered on the issue of theft of notebooks and the security of the information contained on the device. However, many IT managers are looking for a broader solution to manage the proliferation of devices and content within their organization. While ABT offered a relatively plain vanilla set of asset management tools centered on devices, it did not offer a broad enough set of tools to meet the evolving needs of its customers. Aided by the acquisition of LANrev in December 2009, ABT began an effort to expand the Company’s capabilities from devices to include content and broaden its product focus to the broader CMT market. LANrev gave the Company a technology rich, seamless, multiplatform client solution for managing both Windows and Mac OS devices in a single unified console. A LANrev agent resides on all the devices, collects data on hardware and software, and communicates to the system console. The LANrev lifecycle management suite includes functionality such as: asset tracking/inventory, software distribution, license management, patch management, remote configuration, OS migration, power management, theft tracking, application repackaging and remote control. Client verticals include corporate, government, and education.

Over time this product offering, re-labeled Absolute Manage, has been enhanced with new features/functions and expanded to support multiple devices, including employee-owned mobile devices. Today ABT’s product offering stacks up well in the marketplace. Finding technology companies with true sustainable competitive advantages are rare. However, I would submit that the combination of the Company’s embedded “persistence” theft management, OEM relationships with the major PC system vendors and partnerships with numerous law enforcement agencies gives ABT some of these structural charasterics. Notable in February 2011 Gartner Group, for the first time, included ABT in its “Magic Quadrant” as a “visionary” for client management tools. Underscoring the magnitude of the transition in the Company’s product line, management made the following comments on their Q2 (December) conference call:

“not only are we securing devices, but really for the first time in 17 years of building this Company, we're also securing content as well.”

Aided by improvements to the sales force enacted over the last 18-24 months, Absolute Manage has gained significant momentum in new orders as well as deepening relationships with existing customers and opening the door with new customers. This momentum has translated into accelerated growth in sales contracts (the primary metric used to gauge orders) from commercial non-theft recovery products (mostly Absolute Manage). In Q2 (December) sales of these products increased 183% y/y and now account for 33% of overall sales contracts versus only 14% a year earlier. Noteworthy, the Q2 y/y growth compares with y/y growth of 142% in Q1, underscoring the building momentum for the product offering. Management indicates that the order pipeline for the product is strong with significant opportunities with new customers. Noteworthy in this regard are the following management comments from their Q2 (December) conference call:

“the pipeline overall continues to grow. It's growing in all geographies in all segments. I'd say some of the areas that are growing more rapidly than others certainly would be in the non-theft recovery category. As for (Absolute) Manage, the pipe is growing at an accelerated rate. And the international pipe is growing at a rate faster than it is in North America

Right place at the right time, a solution to the proliferation of mobile devices: The diversification in ABT’s product line is consistent with the changing needs of the market and positions the Company well to provide a solution to the problem that the proliferation of bring-your-own-devices (BYOD) posses for corporate IT managers. One of the dominant trends in the client management tools market is how to deal with the management and security of employee owned mobile devices in the workplace. According to one study by the independent technology and market research firm Forrester Research, more than 50% of firms surveyed said they support employee owned mobile devices and smartphones in the workplace. Other surveys put the figure closer to 70%. These employee-owned devices pose a number of technical, security, compliance and legal challenges for corporate IT managers. According to Forrester these issues include:

-- device theft/loss increases with portability

-- mobility and portability increases threats to data protection

-- employee have yet another way to leak data

-- malware increasingly targets mobile devices

-- organizations could be liable for employee misdeeds

-- local privacy laws limit control of personal devices

-- companies cannot seize the device, even if ordered to do so

Effectively dealing with this trend of BYOD will likely increase in importance in the future. ABT management describes this trend as “a point of pain” for IT managers, which is disrupting their client management strategy. The Absolute Manage suite of products offers an effective solution to address this challenge. Thus, the BYOD trend is effectively creating a demand pull-through scenario from IT managers looking for products that help them manage this issue. Recent estimates from Gartner size this market opportunity at about $2.2 billion. Thus, the size of this market is many times larger than the size of the theft recovery market and represents a significant opportunity for the Company. While there are a number of competitors in the market (i.e. LANDesk, Altris from Symantec and IBM Tivoli being the largest), Absolute Manage is one of richest from a technology perspective and one of the few that offers support for both Mac OS and iOS (iPad and iPhone) as well as other major mobile devices (including Android). In this regard, the Company’s “persistence” embedded technology is a key differentiator in that it increases the reliability of its solutions and enables IT managers to do things that other competitors cannot do unless they have physical control of the device. 

Past investments translating into improved order momentum and significant financial leverage: Beginning about 24 months ago, in concert with the product expansion, management began making major investments in its salesforce and infrastructure to correct internal deficiencies and reposition its go-to-market strategy. Part of this effort has been to add partners and resources to expand the Company’s international presence. These investments resulted in increased operating expenses as well as pressure on operating profitability and cash flow. The good news is that the Company has begun to see benefits from its salesforce restructuring by more deeply penetrating existing accounts and acquiring new customers. Additionally, ABT’s international expansion is beginning to bear fruit. Sales in these regions increased 79% in the six month period and 98% in the last quarter. Management has commented that the new order pipeline in these markets is strong, underscored by the following comments during its Q2 (December) conference call:

“what we're finding now that is that now that our sales team is getting more confident with the product, that they're stepping outside and we're sort of at a bit of a transition period now where probably half of our sales are to existing customers, half are to new customers. And I think we'll start seeing the pendulum swing further as we get more and more confidence with each sale as the sales force is more confident and willing to step a little bit further out of their comfort zone.”

These efforts have translated into an acceleration in order momentum. Noteworthy, ABT has recorded six consecutive quarters of double digit growth in sales contracts, as highlighted in the following table:

 

Absolute Software

 

 

 

 

Yr/Yr Chg Sales Contracts ($US)

 

Qtr.

TTM

Q2 FY12

17.2%

20.0%

Q1 FY12

20.2%

19.9%

Q4 FY11

22.0%

19.9%

Q3 FY11

20.5%

15.4%

Q2 FY11

16.3%

12.5%

Q1 FY11

20.1%

11.5%

Q4 FY10

5.6%

6.0%

Q3 FY10

7.3%

-1.4%

Q2 FY10

12.0%

-5.0%

Q1 FY10

0.6%

-9.6%

Q4 FY09

-17.1%

-13.1%

Q3 FY09

-9.7%

1.3%

Q2 FY09

-10.5%

13.9%

Q1 FY09

-13.4%

26.4%

 

 

 

Source: Company Reports

 

 

For its part, management appears to be excited about the transformation in its product line and its prospects for future growth. Noteworthy are the following comments from its Q2 (December) conference call:

“I think we've reinvented the Company over the last couple of years. It -- certainly we went through some hard yards, but we've got a phenomenal solution portfolio and we're here to conquer. We're here to conquer some ground. So I'm putting everybody on notice right now…we're coming after them all. And we're going to win.”

The increased order momentum is occurring at a time when operating expenses have stabilized, translating into financial leverage and accelerating cash flow. The operating expense ratio began to drop beginning in the June 2010 (Q4 FY 2010), driven by a significant y/y decline in sales & marketing expenses. Notwithstanding this, R&D spending has remained healthy over the period, supporting continued new product development. These trends are illustrated in the table below:

Absolute Software

 

 

 

 

 

 

Operating Expense Ratio Trends*

 

G&A

S&M

R&D

Total Op. Exp.

Q2 FY12

8.0%

38.3%

13.5%

59.8%

Q1 FY12

7.2%

30.8%

11.1%

49.0%

Q4 FY11

9.5%

31.9%

12.4%

53.7%

Q3 FY11

11.4%

46.8%

16.9%

75.1%

Q2 FY11

12.2%

44.7%

16.5%

73.5%

Q1 FY11

7.4%

42.2%

13.9%

63.5%

Q4 FY10

8.3%

56.2%

11.8%

76.3%

Q3 FY10

14.9%

53.2%

14.0%

82.1%

Q2 FY10

12.1%

56.9%

12.6%

81.7%

Q1 FY10

10.0%

42.5%

8.5%

60.9%

Q4 FY09

17.1%

37.0%

10.0%

64.0%

Q3 FY09

10.6%

45.2%

10.7%

66.4%

Q2 FY09

12.0%

38.0%

10.5%

65.0%

Q1 FY09

9.4%

26.6%

9.4%

56.8%

 

 

 

 

 

Note: * Operating expenses as a percent of sales contracts

 

Source: Company Reports

 

 

 

 

The financial leverage associated with the improvements in order momentum and operating margins has lead to a notable improvement in EBITDA and FCF. The chart below illustrates the improvement in both categories over the last few quarters:

Absolute Software

 

 

 

 

 

 

EBITDA

FCF

 

Qtr.

TTM

Qtr.

TTM

Q2 FY12

3,923

11,429

7,085

20,989

Q1 FY12

3,916

8,366

4,964

17,822

Q4 FY11

3,034

4,194

5,673

17,996

Q3 FY11

556

235

3,268

14,458

Q2 FY11

860

1,719

3,918

12,315

Q1 FY11

(256)

391

532

11,632

Q4 FY10

(925)

526

2,135

10,286

Q3 FY10

2,039

(310)

1,125

11,118

 

 

 

 

 

Notes: $M, EBITDA based on reported sales

 

Source: Company Reports

 

 

With order momentum re-established and stabilized operating expenses, ABT produces an attractive, high ROIC, rich cash flow business model. Another appealing characteristic of the Company’s business model is the stickiness of its sales. Roughly 80%-85% of sales to existing customers are due to its recurring term license model. ROIC has rebounded to a level of greater than a 20% annualized rate. Given further leverage, I believe that ROIC will expand to 2x-3x the current level. 

The company has a liquid balance sheet with $62 million ($1.44 per share) in cash and no debt. Deferred revenue is roughly $120 million (compared with TTM revenues of about $71 million), which provides a high degree of visibility for future revenues. In the past management has used its cash to repurchase stock (8 million shares in the last three years) and to make acquisitions (i.e. LANrev). I suspect that both activities will continue in the future.

 

For modeling purposes, I have assumed the following:

-- total sales contract growth of 17% in FY 2012 (June) to roughly $93 million and a conservative 10% growth in FY 2013 to approximately $102 million.

-- further leverage in EBITDA from the growth in sales and the stabilization of operating margins, with expectations of  $19 million in FY2012 and $32 million in FY2013.

--- Growth in FCF to about $22 million in FY 2002 and $25 million in FY2013.

A mis-priced stock, attractively valued on a number of different metrics: I believe the shares are mis-priced and offer value investors an attractive investment opportunity for a number of reasons. First and foremost, investors have not fully understood the significance of the transition that has taken place in moving the Company from basically a single niche product line vendor to a major competitor in the much larger and faster growing client management tools (CMT) market. In addition, the significant decline in the share price resulting from a period of slowing growth and disappointing financial results during its investment period will likely mean some investors will want to take a wait-and-see attitude before investing in the stock. The Company’s small market cap is also a contributing factor.

I believe the shares of ABT are selling below intrinsic value and are attractively priced on an absolute basis, compared with comparable SaaS vendors and relative to recent private market transactions. Given the company’s deferred revenue accounting and the significant non-cash items that flow through its income statement, I believe the two most appropriate financial benchmarks to value the shares on an absolute basis are EBITDA and FCF. On that basis, the stock has an EV/EBITDA ratio of about 9.1x / 5.4x my FY 2012 /2013 (June) estimates. Relative to cash flow, the FCF/EV yield is about 12.8% based on my FY2012 estimate and 14.5% on my FY 2013 forecast. I believe these valuations are attractive on an absolute basis.

Additionally, the shares are also attractive when compared with other business software-as-a-service (SaaS) vendors. The following table highlights the significant valuation gap in the valuation of the shares of ABT compared with other comparable sized SaaS vendors.

Valuation Comparison

SaaS Companies (revenues below $125 m)

 

 

 

 

 

 

 

 

 

 

 

FY 2012

 

 

 

 

Company

Stock

Rev. (ttm)

Rev. Growth

EV

EV/Rev (ttm)

EBITDA (ttm)

EV/EBITDA

Carbonite

CARB

60.5

34%

171

2.83

(15.68)

(10.91)

Convio

CNVO

80.4

15%

242

3.01

7.26

33.33

Cornerstone OnDemand

CSOD

61.8

40%

832

13.46

(19.12)

(43.51)

LogMein

LOGM

118.0

23%

783

6.64

18.01

43.48

SciQuest

SQI

50.2

18%

276

5.50

7.03

39.26

SPS Commerce

SPSC

58.0

17%

267

4.60

3.78

70.63

Vocus

VOCS

110.4

15%

364

3.30

1.38

263.77

 

 

 

 

 

 

 

 

Absolute Software

ABT.TO

74.5

14%

172.6

2.32

14.3

12.07

 

 

 

 

 

 

 

 

Note: dollars in millions

 

 

 

 

 

 

 

Source: Company reports and consensus forecasts

 

 

 

 

 

 

As the Company continues to deliver strong financial results, which underscores its transformation, either the market will reward ABT with a more appropriate valuation or it will be recognized in a private market transaction. Given the intense M&A activity in the SaaS sector in the last few years, this is a very realist possibility. According to analyst reports, historically most acquisitions in the sector are valued at an EV/LTM sales ratio of 3x-5x. A recent report by Barrington Research dated1/23/12states the median P/Rev. purchase price for recent SaaS deals was 4.7x. On that metric, ABT is currently trading at about a 2.4x multiple, which makes its valuation attractive. Using the mid-point of the above mentioned range translates into roughly an $8.00 price. However, remember that as the Company is in the process of a financial turnaround, using LTM data may not fully reflect the current order momentum accurately and understate its potential value.

Catalyst

  • Increased investor awareness of the company and its transformation.
  • New customer wins and growth in the Absolute Manage product.
  • Completing the transition in OEM revenue recognition for its Computrace product in the current quarter.
  • Continued growth in EBITDA and FCF.
  • A potential aqcuisition.
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    Description

    Investment thesis: ABT is a mis-priced small-cap software stock. The Company has completed a major transformation in its product offering and business model that has gone mostly unrecognized by investors. The Company has re-positioned itself as one of the leaders in a large and fast growing market. ABT has a high RIOC, rich FCF, somewhat sticky business model and a balance sheet with about one-quarter of its market cap in cash and no debt. The combination of accelerating order momentum and stabilized operating expenses is translating into a period of financial leverage, which should continue in the near future. With the shares valued at an EV/EBITDA ratio of about 5.4x my FY 2013 (June) forecast and a 14.5% FCF/EV yield, the shares are attractive on an absolute (no pun intended) basis. Additionally, the stock is attractive when compared with similar well positioned software-as-a-service (SaaS) vendors and private market valuations in the sector.

    A major transformation of the Company and its product line: Over the past few years, ABT has made significant investments to transition itself from a single product company focused primarily on the consumer centric theft recovery market to a more diversified vendor of client management tools (CMT) with a broader go-to-market strategy and increased focus on both commercial and international markets. Historically ABT focused almost exclusively on marketing its Computrace thief recovery product (including LoJack for Laptops). These products imbed source code in the BIOS, using the Company’s unique “persistence” technology to remotely locate and/or scrub clean any information stored on a hard disk. To date the Company has successfully recovered over 23,000 devices and currently has no real competition for this product offering. Theft has gained significant traction with commercial accounts, helped build partnerships with most of the major PC OEM’s and gave the Company visibility with enterprise IT managers. Management believes that the market for Computrace is growing 10%-15% per year. ABT’s reported growth for this product over the last few quarters has been negatively impacted by a change in the OEM revenue recognition from a royalty per PC unit shipped to a payment for every user who opts-in. This transition will be completed in Q3 (March), which should result in growth returning to more normalized levels thereafter. 

    The Computrace product is a good solution for one of IT’s major needs centered on the issue of theft of notebooks and the security of the information contained on the device. However, many IT managers are looking for a broader solution to manage the proliferation of devices and content within their organization. While ABT offered a relatively plain vanilla set of asset management tools centered on devices, it did not offer a broad enough set of tools to meet the evolving needs of its customers. Aided by the acquisition of LANrev in December 2009, ABT began an effort to expand the Company’s capabilities from devices to include content and broaden its product focus to the broader CMT market. LANrev gave the Company a technology rich, seamless, multiplatform client solution for managing both Windows and Mac OS devices in a single unified console. A LANrev agent resides on all the devices, collects data on hardware and software, and communicates to the system console. The LANrev lifecycle management suite includes functionality such as: asset tracking/inventory, software distribution, license management, patch management, remote configuration, OS migration, power management, theft tracking, application repackaging and remote control. Client verticals include corporate, government, and education.

    Over time this product offering, re-labeled Absolute Manage, has been enhanced with new features/functions and expanded to support multiple devices, including employee-owned mobile devices. Today ABT’s product offering stacks up well in the marketplace. Finding technology companies with true sustainable competitive advantages are rare. However, I would submit that the combination of the Company’s embedded “persistence” theft management, OEM relationships with the major PC system vendors and partnerships with numerous law enforcement agencies gives ABT some of these structural charasterics. Notable in February 2011 Gartner Group, for the first time, included ABT in its “Magic Quadrant” as a “visionary” for client management tools. Underscoring the magnitude of the transition in the Company’s product line, management made the following comments on their Q2 (December) conference call:

    “not only are we securing devices, but really for the first time in 17 years of building this Company, we're also securing content as well.”

    Aided by improvements to the sales force enacted over the last 18-24 months, Absolute Manage has gained significant momentum in new orders as well as deepening relationships with existing customers and opening the door with new customers. This momentum has translated into accelerated growth in sales contracts (the primary metric used to gauge orders) from commercial non-theft recovery products (mostly Absolute Manage). In Q2 (December) sales of these products increased 183% y/y and now account for 33% of overall sales contracts versus only 14% a year earlier. Noteworthy, the Q2 y/y growth compares with y/y growth of 142% in Q1, underscoring the building momentum for the product offering. Management indicates that the order pipeline for the product is strong with significant opportunities with new customers. Noteworthy in this regard are the following management comments from their Q2 (December) conference call:

    “the pipeline overall continues to grow. It's growing in all geographies in all segments. I'd say some of the areas that are growing more rapidly than others certainly would be in the non-theft recovery category. As for (Absolute) Manage, the pipe is growing at an accelerated rate. And the international pipe is growing at a rate faster than it is in North America

    Right place at the right time, a solution to the proliferation of mobile devices: The diversification in ABT’s product line is consistent with the changing needs of the market and positions the Company well to provide a solution to the problem that the proliferation of bring-your-own-devices (BYOD) posses for corporate IT managers. One of the dominant trends in the client management tools market is how to deal with the management and security of employee owned mobile devices in the workplace. According to one study by the independent technology and market research firm Forrester Research, more than 50% of firms surveyed said they support employee owned mobile devices and smartphones in the workplace. Other surveys put the figure closer to 70%. These employee-owned devices pose a number of technical, security, compliance and legal challenges for corporate IT managers. According to Forrester these issues include:

    -- device theft/loss increases with portability

    -- mobility and portability increases threats to data protection

    -- employee have yet another way to leak data

    -- malware increasingly targets mobile devices

    -- organizations could be liable for employee misdeeds

    -- local privacy laws limit control of personal devices

    -- companies cannot seize the device, even if ordered to do so

    Effectively dealing with this trend of BYOD will likely increase in importance in the future. ABT management describes this trend as “a point of pain” for IT managers, which is disrupting their client management strategy. The Absolute Manage suite of products offers an effective solution to address this challenge. Thus, the BYOD trend is effectively creating a demand pull-through scenario from IT managers looking for products that help them manage this issue. Recent estimates from Gartner size this market opportunity at about $2.2 billion. Thus, the size of this market is many times larger than the size of the theft recovery market and represents a significant opportunity for the Company. While there are a number of competitors in the market (i.e. LANDesk, Altris from Symantec and IBM Tivoli being the largest), Absolute Manage is one of richest from a technology perspective and one of the few that offers support for both Mac OS and iOS (iPad and iPhone) as well as other major mobile devices (including Android). In this regard, the Company’s “persistence” embedded technology is a key differentiator in that it increases the reliability of its solutions and enables IT managers to do things that other competitors cannot do unless they have physical control of the device. 

    Past investments translating into improved order momentum and significant financial leverage: Beginning about 24 months ago, in concert with the product expansion, management began making major investments in its salesforce and infrastructure to correct internal deficiencies and reposition its go-to-market strategy. Part of this effort has been to add partners and resources to expand the Company’s international presence. These investments resulted in increased operating expenses as well as pressure on operating profitability and cash flow. The good news is that the Company has begun to see benefits from its salesforce restructuring by more deeply penetrating existing accounts and acquiring new customers. Additionally, ABT’s international expansion is beginning to bear fruit. Sales in these regions increased 79% in the six month period and 98% in the last quarter. Management has commented that the new order pipeline in these markets is strong, underscored by the following comments during its Q2 (December) conference call:

    “what we're finding now that is that now that our sales team is getting more confident with the product, that they're stepping outside and we're sort of at a bit of a transition period now where probably half of our sales are to existing customers, half are to new customers. And I think we'll start seeing the pendulum swing further as we get more and more confidence with each sale as the sales force is more confident and willing to step a little bit further out of their comfort zone.”

    These efforts have translated into an acceleration in order momentum. Noteworthy, ABT has recorded six consecutive quarters of double digit growth in sales contracts, as highlighted in the following table:

     

    Absolute Software

     

     

     

     

    Yr/Yr Chg Sales Contracts ($US)

     

    Qtr.

    TTM

    Q2 FY12

    17.2%

    20.0%

    Q1 FY12

    20.2%

    19.9%

    Q4 FY11

    22.0%

    19.9%

    Q3 FY11

    20.5%

    15.4%

    Q2 FY11

    16.3%

    12.5%

    Q1 FY11

    20.1%

    11.5%

    Q4 FY10

    5.6%

    6.0%

    Q3 FY10

    7.3%

    -1.4%

    Q2 FY10

    12.0%

    -5.0%

    Q1 FY10

    0.6%

    -9.6%

    Q4 FY09

    -17.1%

    -13.1%

    Q3 FY09

    -9.7%

    1.3%

    Q2 FY09

    -10.5%

    13.9%

    Q1 FY09

    -13.4%

    26.4%

     

     

     

    Source: Company Reports

     

     

    For its part, management appears to be excited about the transformation in its product line and its prospects for future growth. Noteworthy are the following comments from its Q2 (December) conference call:

    “I think we've reinvented the Company over the last couple of years. It -- certainly we went through some hard yards, but we've got a phenomenal solution portfolio and we're here to conquer. We're here to conquer some ground. So I'm putting everybody on notice right now…we're coming after them all. And we're going to win.”

    The increased order momentum is occurring at a time when operating expenses have stabilized, translating into financial leverage and accelerating cash flow. The operating expense ratio began to drop beginning in the June 2010 (Q4 FY 2010), driven by a significant y/y decline in sales & marketing expenses. Notwithstanding this, R&D spending has remained healthy over the period, supporting continued new product development. These trends are illustrated in the table below:

    Absolute Software

     

     

     

     

     

     

    Operating Expense Ratio Trends*

     

    G&A

    S&M

    R&D

    Total Op. Exp.

    Q2 FY12

    8.0%

    38.3%

    13.5%

    59.8%

    Q1 FY12

    7.2%

    30.8%

    11.1%

    49.0%

    Q4 FY11

    9.5%

    31.9%

    12.4%

    53.7%

    Q3 FY11

    11.4%

    46.8%

    16.9%

    75.1%

    Q2 FY11

    12.2%

    44.7%

    16.5%

    73.5%

    Q1 FY11

    7.4%

    42.2%

    13.9%

    63.5%

    Q4 FY10

    8.3%

    56.2%

    11.8%

    76.3%

    Q3 FY10

    14.9%

    53.2%

    14.0%

    82.1%

    Q2 FY10

    12.1%

    56.9%

    12.6%

    81.7%

    Q1 FY10

    10.0%

    42.5%

    8.5%

    60.9%

    Q4 FY09

    17.1%

    37.0%

    10.0%

    64.0%

    Q3 FY09

    10.6%

    45.2%

    10.7%

    66.4%

    Q2 FY09

    12.0%

    38.0%

    10.5%

    65.0%

    Q1 FY09

    9.4%

    26.6%

    9.4%

    56.8%

     

     

     

     

     

    Note: * Operating expenses as a percent of sales contracts

     

    Source: Company Reports

     

     

     

     

    The financial leverage associated with the improvements in order momentum and operating margins has lead to a notable improvement in EBITDA and FCF. The chart below illustrates the improvement in both categories over the last few quarters:

    Absolute Software

     

     

     

     

     

     

    EBITDA

    FCF

     

    Qtr.

    TTM

    Qtr.

    TTM

    Q2 FY12

    3,923

    11,429

    7,085

    20,989

    Q1 FY12

    3,916

    8,366

    4,964

    17,822

    Q4 FY11

    3,034

    4,194

    5,673

    17,996

    Q3 FY11

    556

    235

    3,268

    14,458

    Q2 FY11

    860

    1,719

    3,918

    12,315

    Q1 FY11

    (256)

    391

    532

    11,632

    Q4 FY10

    (925)

    526

    2,135

    10,286

    Q3 FY10

    2,039

    (310)

    1,125

    11,118

     

     

     

     

     

    Notes: $M, EBITDA based on reported sales

     

    Source: Company Reports

     

     

    With order momentum re-established and stabilized operating expenses, ABT produces an attractive, high ROIC, rich cash flow business model. Another appealing characteristic of the Company’s business model is the stickiness of its sales. Roughly 80%-85% of sales to existing customers are due to its recurring term license model. ROIC has rebounded to a level of greater than a 20% annualized rate. Given further leverage, I believe that ROIC will expand to 2x-3x the current level. 

    The company has a liquid balance sheet with $62 million ($1.44 per share) in cash and no debt. Deferred revenue is roughly $120 million (compared with TTM revenues of about $71 million), which provides a high degree of visibility for future revenues. In the past management has used its cash to repurchase stock (8 million shares in the last three years) and to make acquisitions (i.e. LANrev). I suspect that both activities will continue in the future.

     

    For modeling purposes, I have assumed the following:

    -- total sales contract growth of 17% in FY 2012 (June) to roughly $93 million and a conservative 10% growth in FY 2013 to approximately $102 million.

    -- further leverage in EBITDA from the growth in sales and the stabilization of operating margins, with expectations of  $19 million in FY2012 and $32 million in FY2013.

    --- Growth in FCF to about $22 million in FY 2002 and $25 million in FY2013.

    A mis-priced stock, attractively valued on a number of different metrics: I believe the shares are mis-priced and offer value investors an attractive investment opportunity for a number of reasons. First and foremost, investors have not fully understood the significance of the transition that has taken place in moving the Company from basically a single niche product line vendor to a major competitor in the much larger and faster growing client management tools (CMT) market. In addition, the significant decline in the share price resulting from a period of slowing growth and disappointing financial results during its investment period will likely mean some investors will want to take a wait-and-see attitude before investing in the stock. The Company’s small market cap is also a contributing factor.

    I believe the shares of ABT are selling below intrinsic value and are attractively priced on an absolute basis, compared with comparable SaaS vendors and relative to recent private market transactions. Given the company’s deferred revenue accounting and the significant non-cash items that flow through its income statement, I believe the two most appropriate financial benchmarks to value the shares on an absolute basis are EBITDA and FCF. On that basis, the stock has an EV/EBITDA ratio of about 9.1x / 5.4x my FY 2012 /2013 (June) estimates. Relative to cash flow, the FCF/EV yield is about 12.8% based on my FY2012 estimate and 14.5% on my FY 2013 forecast. I believe these valuations are attractive on an absolute basis.

    Additionally, the shares are also attractive when compared with other business software-as-a-service (SaaS) vendors. The following table highlights the significant valuation gap in the valuation of the shares of ABT compared with other comparable sized SaaS vendors.

    Valuation Comparison

    SaaS Companies (revenues below $125 m)

     

     

     

     

     

     

     

     

     

     

     

    FY 2012

     

     

     

     

    Company

    Stock

    Rev. (ttm)

    Rev. Growth

    EV

    EV/Rev (ttm)

    EBITDA (ttm)

    EV/EBITDA

    Carbonite

    CARB

    60.5

    34%

    171

    2.83

    (15.68)

    (10.91)

    Convio

    CNVO

    80.4

    15%

    242

    3.01

    7.26

    33.33

    Cornerstone OnDemand

    CSOD

    61.8

    40%

    832

    13.46

    (19.12)

    (43.51)

    LogMein

    LOGM

    118.0

    23%

    783

    6.64

    18.01

    43.48

    SciQuest

    SQI

    50.2

    18%

    276

    5.50

    7.03

    39.26

    SPS Commerce

    SPSC

    58.0

    17%

    267

    4.60

    3.78

    70.63

    Vocus

    VOCS

    110.4

    15%

    364

    3.30

    1.38

    263.77

     

     

     

     

     

     

     

     

    Absolute Software

    ABT.TO

    74.5

    14%

    172.6

    2.32

    14.3

    12.07

     

     

     

     

     

     

     

     

    Note: dollars in millions

     

     

     

     

     

     

     

    Source: Company reports and consensus forecasts

     

     

     

     

     

     

    As the Company continues to deliver strong financial results, which underscores its transformation, either the market will reward ABT with a more appropriate valuation or it will be recognized in a private market transaction. Given the intense M&A activity in the SaaS sector in the last few years, this is a very realist possibility. According to analyst reports, historically most acquisitions in the sector are valued at an EV/LTM sales ratio of 3x-5x. A recent report by Barrington Research dated1/23/12states the median P/Rev. purchase price for recent SaaS deals was 4.7x. On that metric, ABT is currently trading at about a 2.4x multiple, which makes its valuation attractive. Using the mid-point of the above mentioned range translates into roughly an $8.00 price. However, remember that as the Company is in the process of a financial turnaround, using LTM data may not fully reflect the current order momentum accurately and understate its potential value.

    Catalyst

    Messages


    SubjectPrivate market update
    Entry03/13/2012 02:38 PM
    Memberbentley883

    Earlier today Dell announced the acquisition of security vendor SonicWALL. Relative to ABT.TO, the merger is significant for two major reasons.

    • First the acquisition is the latest in a spade of mergers of various software vendors in and around the security sector by some of the leading system vendors. The combinations appear to be driven by an increased understanding by IT users of the need to better manage and secure their data. With customers looking for more complete solutions and system vendors looking to fill various holes in their product offerings in this area, this trend is likely to continue. As discussed in my original report on ABT.TO, the Company’s AbsoluteManage product line is well positioned to address the security/management problem that the proliferation of bring-your-own-devices (BYOD) posses for corporate IT managers.
    • Second, with speculation suggesting a purchase price of over $1 billion (Dell did not disclose the actual purchase price), the transaction is valued at roughly 4x-5x TTM revenues of about $260 million. Relative to ABT.TO’s EV/TTM revenue ratio of 2.6x, the shares are attractive compared with both this transaction and other recent deals in the SaaS sector. Noteworthy, while Gartner positions the SonicWALL product offering in the lower left part of its “Magic Quadrant” for enterprise network firewalls, the AbsoluteManage product is more favorably positioned as a “visionary” in Gartner’s “Magic Quadrant” for client management tools.

    I continue to believe that either the market will more appropriately value the shares of ABT.TO or it will be recognized in a private market transaction.


    SubjectUpdate?
    Entry07/27/2012 12:04 PM
    Memberstraw1023
    bentley,
     
    Update?
     
    Has the thesis here changed? Q3 orders/def'd revenue cash flow slowed, but at this price, I like more than ever.
     
    thanks,
    straw 

    SubjectRE: Update?
    Entry08/01/2012 11:17 AM
    Memberbentley883
    Straw
    Our checks indicate that the quarter finished in good shape, particularly in NA.  We do not have much visibility outside the US, but we have not heard of any disappointments from ROW.  Of course after the disappointing March results for Absolute Manage, performance from this product will be key to how investors view the results.  We continue to hear of a strong pipeline for Manage, but recognize that it needs to show-up in the numbers for investors to give the Company credit.

    Because the June quarter is the Company's fiscal year-end, management will not report results until mid-August.
    Hope that is helpful
    Bentley

    SubjectRE: Update? - WSJ story
    Entry08/02/2012 11:03 AM
    Memberbentley883
    As an FYI and follow-up, I want to call your attention to an interesting ad-sponsored story in today's WSJ on page B7 ("A Delicate Balance, Employee-Owned Devices in the Workplace") on the growing BYOD trend in corporations worldwide and the challenges that IT departments face in managing this issue. There are some interesting quotes from IT consultants ("the BYOD trend is unstoppable"...."it's somewhat to extremely challenging to balance security and the needs/desires of mobile workers"...."many employees are not even aware of the potential dangers") that suggest this is a significant business opportunity and supports my thesis that Absolute Manage is well positioned to benefit from the BYOD trend, which should help order trends for the product.

    SubjectToo tied to PCs?
    Entry10/23/2012 11:42 AM
    Memberstraw1023
    Bentley,
     
    I continue to hold and even add down here.
     
    FY Q4 was dis-appointing. Could be lumpy and those deal will show up in FYQ1.
     
    Is it possible that PCs was their entry point into the enterprise? With that weakening, does that weaken their business model and growth? They alluded to this on the call while continuing to insist that only they had a complete solution across all devices. But I wonder if this 100% solution is less compelling in light of the "death of PCs."
     
    The valuation is more compelling than ever and management appears very competent to me but q3 and q4 results are worrying.
     
    Thoughts?
     
    Thanks
     
     

    SubjectBentley, anyone . . . Samsung?
    Entry04/03/2013 11:17 AM
    Memberstraw1023
    Anyone else have thoughts here? Today's Samsung news could be transformative and produce huge value both in direct terms and as a takeover target. However, no financial terms were released, and so I remain skeptical. Does anyone have insight into the terms of this relationship? Is it simply embedded free and then ABT gets paid if the user subscribes for the service? This would be my guess.
     
     

    SubjectRE: RE: Bentley, anyone . . . Samsung?
    Entry04/03/2013 07:30 PM
    Memberstraw1023
    andreas,
     
    I also like it here quite a bit.
     
    It is terrific in positioning them as a strategic acquisition target.
     
    This development also addresses their potential weakness in being too tied to PCs (of which I expressed concern in my October posting). 
     
    On the downside, I do not think it means any immediate revenue.

    SubjectThoughts on Samsung/Stock
    Entry04/05/2013 12:19 PM
    Memberbentley883

    Andreas

    I believe the partnership with Samsung to embed Absolute's Computrace persistence technology within its soon to be announced KNOX comprehensive mobile security platform is strategically important to the Company and the stock on a number of fronts. The following are some thoughts on the partnership and the stock.

    • As this is the first partnership with a major smart phone manufacturer, this news highlights the fundamental transition taking place at the company (which I believe is mis-understood by investors) in moving Absolute from purely a PC-centric company to a vendor increasingly focused on the mobile      centric/BYOD market with more of a focus on the IT/enterprise customer. As we have seen with other stocks, there is a significant difference in the valuation accorded those companies who are well positioned to benefit from the growth opportunities in mobile as opposed to being tied to the no      growth PC world. If management is successful in this transition, the valuation of the shares, as well as its appeal as an acquisition target increases significantly.
    • As one of the major vendors of smart phones and tablets, Samsung (with shipments of ~100M Galaxy smart phones, ~20M tablets and a lot of market share momentum) is a very attractive and visible partner for Absolute. As Samsung is one of the best positioned vendors in the consumer market, this partnership gives Absolute a terrific opportunity to both broaden its penetration/brand from the laptop market to the rapidly growing smartphone and tablet market. Moreover, given the upcoming roll out of its KNOX mobile security platform and the investment Samsung is making with KNOX as its lead product to reach the enterprise market (including building its own salesforce), this is both a major endorsement of its unique persistence technology (the only one of Samsung's third party vendors embedding technology into the product) this gives Absolute the opportunity via their joint sales strategy to ride their coattails and deepen their footprint into the enterprise market. I believe this partnership for its persistence technology could be the first step and be broadened in the future to include more of Absolute's enterprise management tools.
    • While clearly strategic in nature, the economic benefits of the partnership will not be immediate and take a little while to materialize. KNOX will be announced next month with Computrace embedded into Galaxy smartphones beginning in the Summer and tablets in the Fall. Thus, there will be no      financial impact in FY 13 (June) and a growing benefit thru FY 14, especially in the education market, with the full benefit realized in FY 15. A key variable will be the timing of the Samsung tablet roll-out. If the Samsung tablets are ready to ship in the 2013 summer back-to-school buying season that would be beneficial for Absolute as they would provide healthy competition for the Apple iPad (the success of which hurt Absolute in the Summer of last year). Trying to gauge the financial benefit of the      partnership to Absolute is difficult given the many variables involved (i.e. Samsung roll-out schedules, the vendors success in building out its sales force and reaching the enterprise customer as well as consumer/enterprise attach rates). Assuming continued growth for the Samsung platform as well as product ASP's and attach rates somewhat close to historical levels, the partnership could translate into potential annual bookings of approximately $30M-$50M in 18-24 months. This would be a significant addition to the current annual bookings rate of about $85-$90M.
    • The shares reacted very favorably to the news of this partnership and have had a nice bounce from their November lows reflecting a major contract win, the Crescendo Partners addition to the board and the initiation of a dividend. With a FCF/EV yield of ~9%-10% and a 3.1% dividend yield, the share are still attractive, especially relative to other SaaS companies. I believe that the shares have further upside over the next 18-24 months if management can execute on taking advantage of its technology and the BYOD tidal wave (which has been spotty and and a little disappointing in the past) while the dividend yield provides some downside protection. In addition, if management does not execute and take advantage of the opportunity, I believe the Crescendo Partners representation on the board would open the door and increase the possibility of an acquisition to maximize shareholder value. However, I would note that the recent softness in PC units, highlighted by the downward revisions in PC forecasts by IDC and Dataquest (the pre Win 8 slowdown was more pronounced with little pick up following) creates some near-term headwind for bookings/estimates over the next quarter or two while the transition away for PC's continues to unfold. Thus, there is some risk to a near-term pull back in the shares.

    Hope this is helpful.

    PS: sorry for the delayed response, with the closing of my former firm, I have been a little sidetracked on networking and finding a new position.

    Regards

    Bentley 


    SubjectUpdate
    Entry09/27/2013 12:54 PM
    Memberstraw1023
    bentley, andreas
     
    We have reduced our position recently. The qualitative aspects of the story have happened as predicted. The general space (security) remains hot. But the growth is simply not coming and not forecast by mgmt.
     
    Any thoughts on how things develop from here?
     
    thanks
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