Td report on ABTAbsolute Software Corp. (ABT-T) C$6.94 CEO John Livingston Resigns and Steps Down as Chairman Event John Livingston announced his resignation as CEO and Chairman of the Board of Absolute Software. CFO Errol Olsen will serve as interim CEO and director Dan Ryan will serve as Chairman of the Board. Impact: MIXED This is a surprise to us and as such we believe that the knee-jerk reaction could be negative. As the company’s day-to-day operations were already being run by COO Rob Chase and CFO Errol Olsen, continuity should not be an issue. The announcement was made at Absolute’s AGM. Given that there are two weeks left in the quarter (an eternity in the software business), we are not drawing any conclusions about near-term results. On the flip side, we believe that Absolute has a lot going for it — the emerging Samsung relationship, international opportunities, the potential for telco relationships, a growing channel business, the MDM play — that could be attractive to a CEO with connections to move the business forward. Our target price remains at $9 or 15x forward FCF (ending Sep/14), justified in our view by 13% organic growth and the potential for much higher cash flow as expense ratios decline into FY15. Although some may be leery of a tough comparable in Q2 (Dec), we maintain our BUY recommendation. Details We Expect at Least 3–6 Months Until a Permanent CEO is Named. This is based on our view of how long a proper search would take. There are strong internal candidates (Rob Chase and Errol Olsen), but our understanding is that the company has been approached recently, and we believe that there will also be strong external candidates. A search firm has been contracted. Opportunities Could be Accelerated by the Right Leader. Our bullish view of the stock is in part because of the various growth opportunities in front of the company. The embedded deal with Samsung is in the early stages. Different verticals such as healthcare are becoming a meaningful source of bookings. The strategy to grow the VAR channel revenue is only just the beginning. The international business is reaching critical mass. Absolute has almost $70mm of cash for acquisitions. It is one of the legions of mobile Technology device management vendors looking to stand out. An incoming CEO with a relevant rolodex of industry contacts could open doors for the company. The Elephant in the Room is What Role Crescendo Could be Playing. In Q2/13 (the Dec/12 quarter), activist investor Crescendo Partners secured two of seven board seats and upped its holdings to 7%–8% of the shares. Crescendo has a history with Canadian technology companies — it arguably played a pivotal role in the ultimate sales of 20-20, Bridgewater, Emergis, Matrikon, and Dalsa. We believe that the market could speculate (it would be just speculation) that Crescendo had some role in the CEO change. John Livingston is reported by Capital IQ to be the third largest shareholder in Absolute, with a 5.7% holding. Valuation Absolute currently trades at 14x P/CFPS on a forward basis (ending Sept/14) versus a historical range of 10x– 15x. Based on our FY15 estimates (which assumes modest operating leverage), Absolute trades at 10x CFPS and at a 16% FCF yield. We see this as attractive given the high expense ratios and our double-digit organic growth forecast. Justification of Target Price Our target price of $9.00 is unchanged and based on 15x EV/FCF applied to our forward model. We believe that this multiple is justified by the number of growth opportunities and the potential for the business to yield much higher cash flow as expense ratios begin to decline in FY15. Key Risks to Target Price 1) The growth of notebook computers; 2) foreign currency fluctuations; 3) theft recovery rates; 4) execution of opportunities with key OEMs; 5) the competitive landscape; and 6) Absolute’s relationship with Microsoft and other complementary vendors. TD Investment Conclusion Despite the knee-jerk reaction that a CEO leaving is a negative sign, we believe that there are many reasons why this change could benefit shareholders. BUY.