Absolute Software: Cracks Appearing in Armor (NASDAQ:ABST)

Absolute Software Co., Ltd. (NASDAQ: ABST) compete in the burgeoning cybersecurity sector that has been growing for many years.The latest earnings report had a good number, but there were some Cracks are starting to appear in the armor, and as the cracks spread, they could become a problem throughout 2023.

Some of the concerns include changes to contract terms, changes to perpetual license terms, and increased non-renewal of end-of-support products.

At the moment, these headwinds are modest in nature. They could easily accelerate into 2023, pushing ABST’s growth trajectory down.

The company has provided guidance for 2023, but we are concerned by the macroeconomic uncertainty. The company is shrinking its ARR, but there are a number of headwinds that could quickly change its growth trajectory, such as top management delaying or reprioritizing spending.

In this article, we’ll take a look at recent numbers, the headwinds facing the company, and why I think it’s too early to provide guidance in the current economic environment.

part of a number

First quarter 2023 adjusted revenue was $54.2 million, up 10.6% year over year.

Total ARR for the reporting period was $215.7 million, up 15% from the first fiscal year 2022.

Corporate and agency recurring revenues were $169.1 million, representing 78% of total recurring revenues, an increase of 18% compared to Q1 FY22. -Year.

Adjusted EBITDA was $11.5 million compared to $12.8 million in the year-ago quarter. The adjusted EBITDA margin was 21%, down 5.1 percentage points from the 26.1% margin in the first quarter of 2022.

Adjusted gross margin for the quarter was 88%. As the company continues to move to the public cloud, costs will increase and the company expects adjusted gross margin to decline by 100 to 200 basis points over time.

Operating cash flow for the first quarter of 2023 was $15.2 million.

Cash and short-term investments increased to $67.6 million from $64 million in the prior quarter on debt repayments and dividend payments. After consecutive coupons increased him 125%, the company had to pay about $900,000 more in interest expense during the reporting period.

While there were several economic headwinds that impacted the company’s performance during the reporting period, particularly in education, the company said growth in the enterprise space and increased activity in its secure access product line offset this, and the company is adjusting 2023 Full Year Earnings and Adjusted EBITDA guidance is in place.

We may be able to offset the headwinds, but in the current economic climate, even though education accounts for only 22% of the total, we have enough visibility to provide the king of leadership with confidence over the next few quarters. I’m not sure there is. Not only that, but Enterprise & Government has a lot of things that could be adjusted down, like contract lengths and a slowdown in converting perpetual licenses, but these are already happening.

headwind

Perhaps the most direct impact on ABST’s performance was in education. Supply chain issues have delayed many deals or changed school districts from his PCs to Chromebooks.

As for the pending deals, management said they expect to sign several deals in the second quarter. In terms of Chromebooks, the percentage of Chromebooks has increased significantly as they become available in school districts.

The problem with ABST is that Chromebooks have low ARR per endpoint, which is a headwind for the company. Management expects the education endpoint population to continue to grow, but expects it to contribute to ARR growth at a slower pace.

As previously mentioned, education revenue increased 7% year-over-year and is a smaller percentage of total revenue. I think it will continue. The impact on company performance will depend on whether education headwinds from supply chain issues are catalysts or corporate and governmental growth. If the former, it could be a drag on Absolute Software Corporation in the first half of 2023.

Despite the headwinds, the company sees education growing at a high single-digit to low double-digit pace. If supply chain issues continue to impact education, I think these numbers will be lower than expected at best, and possibly even lower.

Some of the areas where macroeconomic factors had an impact in the fourth quarter related to contract length and conversion to perpetual license terms. At this time, contract duration had no negative impact on ARR, but had a slight negative impact on earnings. and perpetual license conversions, which together have an impact on revenue and may impact ARR to some extent.

Right now we don’t have the visibility to know how it will go, but the economy and ongoing supply chain constraints will keep investors on the alert as to the impact on the absolute software’s future performance. The unanswered question is the expected growth of the enterprise space and increased activity in the secure access product line, especially if the projected growth in enterprise and secure access is lower than expected. will be enough to offset the headwinds in education.

Some of that may have already come from the enterprise business. While our enterprise business is steadily improving, we are starting to see a drag from non-renewals from legacy customers of discontinued products.

What’s happening in this situation is that many executives are more tightly controlling their top spending. The usual result is some reduction in spending. For ABST, increasing non-renewals can move into a significant headwind.

Conclusion

Absolute Software Corporation has seen some growth over the last year, with ARR increasing from $187.4 million in the first quarter of 2021 to $215.7 million in the first year of 2023, but weak macroeconomic seems to be starting to affect the market. company.

Even if the company did provide guidance, I am concerned that it did so given the lack of visibility over the global economy over the next year or so. It said it would not provide guidance for 2023 as it was unclear how things would play out. I think that’s the correct way to look at it.

As mentioned earlier, there are already some things in the market that have had a small impact on the company, such as supply chain issues, contract terms, switching to perpetual license terms, and non-renewal of end of support. product.

These shouldn’t be dismissed just because they don’t currently have a significant impact on ABST’s performance, aside from the supply chain. All of this happening simultaneously suggests that the market may be in the early stages of weakening. If so, these things show signs of increasing impact on the company, which will likely underperform in 2023.

Absolute Software Corporation is trading near early June 2020 levels. We believe this reflects market uncertainty over the sustainability of the long-term growth trajectory. Given the current state of the company and the unpredictability of the global economy in calendar year 2023, I think he will struggle to gain traction in the short term, i.e. from the next six months to the year ahead.

Longer term, the outlook looks good for Absolute Software Corporation as it competes in a sector with longstanding growth trends. But before Absolute Software Corporation has a chance to realize its potential, it must weather the current uncertain times and operate in a better economic environment.