Paradigm Capital analyst Kevin Krishnaratne says recent efforts from Absolute Software (Absolute Software Stock Quote, Chart, News: TSX:ABT) are intended to bear fruit in the long term, not necessarily right away.
On August 19, Absolute reported its fourth quarter and fiscal 2016 results. In the fourth quarter, the company lost $1.2-million on revenue of $22-million, a seven per cent increase over the same period a year prior.
“Fiscal 2016 was a breakthrough year for Absolute. Revenue and customer growth were propelled by aggressive product innovation, new go-to-market initiatives, and growing market demand from organizations seeking to protect critical data from external and insider threats,” said CEO Geoff Haydon. “We finished the fourth quarter strongly, reflected by a 7-per-cent increase in revenue and a 19-per-cent increase in billings, as larger enterprises took advantage of our innovative and entirely unique end point security and data-risk-management solutions. In fiscal 2017, we will continue to drive towards our long-term objective of 20-per-cent revenue growth and 20-per-cent adjusted EBITDA margins. This will involve accelerating investment in research and development, elevating the productivity of our global field investments, and expanding enterprise and third party ISV adoption of our Absolute Persistence-enabled end point security solutions.”
Krishnaratne says it may be time to look at Absolute’s metrics in a different light.
“While we have mainly used profitability-related measures to derive our valuation for ABT, such as free cash flow (FCF) and EBITDA, we think it is worth giving revenue metrics some consideration given the company’s focus on delivering double-digit growth through new customer wins and TAM expansion, versus the legacy model which skewed more toward harvesting existing business,” says the analyst. “FY16 reflected a complete overhaul of the Sales & Marketing team to better address new opportunities (90% of sales team used to be focused on retention, but is now more evenly split between retention and acquisition), while FY17 marks a more meaningful move to increase innovation following successful product launches through H2/16. Metrics to date suggest the strategy is working, though it remains to be seen how sales momentum will evolve as FY17 unfolds. The accelerating pace of wins in recent quarters gives us comfort that trends should continue to move in the right direction.”
In a research update to clients today, Krishnaratne maintained his “Buy” rating and one-year price target of $9.00 on Absolute Software, implying a return of 31 per cent at the time of publication.
Krishnaratne thinks Absolute will generate EBITDA of $7.4-million on revenue of $93.4-million in fiscal 2017, numbers h expects will climb to EBITDA of $13.6-million on a topline of $101.7-million the following year.
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