Take a pass on Absolute Software, says National Bank Financial

A quarter that continued to show eroding earnings hasn’t changed National Bank Financial analyst Richard Tse’s bearish take on Absolute Software (Absolute Software Stock Quote, Chart, News: TSX:ABT).

Yesterday, Absolute Software reported its Q2, 2017 results. The company lost (US) $1.84-million on revenue of $22.5-million, a topline that was seven per cent better than the same period last year.

“During Q2, we continued on our trajectory of accelerating ACV and revenue growth, driven by both new customer acquisitions and existing customer expansions, with increasingly strong growth coming from the targeted enterprise and health care verticals,” said CEO Geoff Haydon. “The new DDS features and capabilities that we have introduced over the past nine months, combined with an increasingly strong go-to-market capability, are translating into measureable topline results. Our R&D investment plan remains on track, with our new Vietnam facility now open and hiring in both Vancouver and Vietnam beginning to accelerate. We are very excited to be in a position to execute on our product roadmap and vision, which leverages our unique persistence technology and distinguishes Absolute as the leader in the self-healing end point security market.”

Tse says despite the company’s insistence that all is well, he sees cracks that were furthered revealed to him on the conference call to discuss the quarter.

“Yes, we were on the conference call tonight and yes, we reviewed the MD&A and fiscal Q2 results,” says the analyst. “Like you, we heard a continued bullish outlook from Management. And why not, there were some indicators of progress when it comes to revenue and average contract value (ACV) growth. We agree – that was positive. The challenge for us is while those are positive top-line indicators – the line items below (like Opex) continued to offer a less convincing case, and it’s our view that we’ll see negative operating leverage as the Company increases headcount this year.”

In a research update to clients today, Tse maintained his “Underperform” rating and one-year price target of (C) $6.00 on Absolute Software, implying a return of -9 per cent, including dividend.

Tse believes Absolute Software will post EBITDA of $6.1-million on revenue of $92.6-million in fiscal 2017.