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A very pregnant press release
On Tuesday, Jan. 11, 2022, Jamf (JAMF) issued what I consider to be a highly positive news release. There were more than a few nuggets of good news that could be gleaned from the release. Overall, the release strongly suggests to me that the company will most likely report an upside to the current consensus, and further that the guidance it will provide for the 2022 year will be well above the current consensus.
Jamf is not the most prominent investment opportunity for many subscribers/readers. Its revenues in 2021 were probably around $375 million. It is a profitable company; I expect for the full year of 2021 non-GAAP EPS to have been around $.25/share. The company’s free cash flow, driven by strong billings and bookings is far higher; I have projected the free cash flow margin for the next 12 months to be around 28% up from about 24% on a trailing 12 month basis.
Jamf’s business is one that is highly correlated with the deployment of Mac’s into enterprise networks. The latest earnings release of Apple (OTC:APPL) showed revenue growth for the Mac category of 25%. Much of this growth was apparently a function of the new, lower cost M1 MAC version, and thus the growth upside may continue for some time. While, of course, there isn’t a one for one relationship between Mac revenue growth, and that of Jamf, this kind of growth acceleration for the Mac, specifically, is likely to be part of the demand tailwind that Jamf is seeing at this time.
Apple is perhaps the best covered stock in the universe, and deservedly so. It appeals to many classes of investors, and I certainly have nothing substantive to add to the dialog. But I would make the observation that not all components of the Apple machine are growing at similar rates, even during a blowout quarter such as the company just reported. I don’t want to overstate the thesis, but the fact is that the growth of the Mac segment was the strongest in percentage terms of the company’s different business classifications. And Jamf will see a significant benefit from greater Mac deployments in the enterprise space. It is certainly a strong component of a positive investment thesis, that seems particularly timely at this point.
Jamf shares, currently trading at around $33, are down from a high of $49.27 set in early November. That is a drop of about 33%, probably less than the average for high growth IT names. Of course the shares never really enjoyed the strong performance of many other IT shares. The company went public in July 2020. The shares hit a high of $51/share during its initial trading session, and closed that day at a bit more than $39. It has never reached $50/share again, although it came close to that level just before it released earnings for its September quarter.
The shares dropped precipitously from their high point in the wake of the disclosure by Apple that it had introduced a product called Business Essentials. Jamf is the leader in Apple device management, and Apple’s Business Essentials include a basic form of device management functionality as well as iCloud storage and Apple Care support. It is, however, designed to be used by relatively small businesses and Jamf is absolutely focused on larger enterprises.
Just before the latest earnings release, and even after the conference call, Jamf shares fell as some investors believed that Business Essentials was, at the least, likely to become a major headwind to Jamf’s growth, and possibly something worse than that. The company CEO and various analysts provided a spirited riposte. My evaluation at the time was that this was another case of investors selling first, and reconsidering later. I had a position in the shares going into earnings, and I have retained it.
In this great re-rating/sector rotation/panic there are number of substantial investment opportunities. Is Jamf absolutely better than all of them? The company will not have the absolute highest percentage growth of IT names, although the mid-thirty percent range isn’t to be despised. And it doesn’t have the absolutely highest free cash flow margins of any company I follow. But it is the combination of growth + free cash flow that creates an attractive valuation. The company’s rule of 40 metric is over 60, and depending on the specific assumptions one uses, it has a discounted present value that is at least 50% above its current share price. I think the shares are an attractive dusty corner, well worth considering, even in the context of so many other opportunities in the IT space.
To the extent that there has been an investment controversy with regards to Jamf, it has been focused on the introduction of Apple Business Essentials. The offering was almost certainly a necessity for the company in order to help smaller enterprises set up a Macintosh deployment and its genesis was a long time coming. Jamf’s business focus, has been, and remains centered on larger enterprises. The company, as it announced a couple of weeks ago, has deployments in 9 of the 10 largest companies worldwide, 8 of the top 10 technology companies and the top ten banks and global universities. The inference to be drawn from the press release is that it signed its 9th deal with one of these 10 largest companies just this past quarter.
I of course have no way of validating that Apple will never take Business Essentials to another level. Proving a negative is just something beyond my abilities. On the other hand, Jamf management has spoken specifically of its close relationship with Apple and its ability to work with Apple to support that company’s newest functionality. I am sure that company CEO Dean Hager has every reason to believe that his company is not threatened by any current or potential Apple product initiative.
Interestingly, subsequent to the shares making a low of around $30 in early December, they rallied to as high as $40 even while most enterprise IT names were seeing their valuations eviscerated. While I haven’t read any takeover speculation, both the size of this company and its financial metrics suggest that it might be a target of a private/equity interest.
It isn’t really feasible for me, or for anyone, to figure out who was buying or selling shares of Jamf, and what their thought process may have been. But at this point, I believe, the issue of the impact of Business Essentials on Jamf’s business is no longer a central factor in driving the shares-and to my mind, at least, it shouldn’t be.
What’s the catalyst for Jamf shares
I basically do not try to call quarters. I have no specific knowledge of Jamf’s business for the December quarter other than press releases. But I read the recent press release, some of which I have copied below, as close to an upside preannouncement, without specific details. Here are the specifics of what Jamf announced a couple of weeks ago:
“2021 was a pivotal year for Jamf, as the company added new functionality to its Apple Enterprise Management platform to help organizations connect, manage and secure their devices. Jamf added more than 6 million devices and 13,000 customers in 2021 and is now running on approximately 26.5 million devices and serves more than 60,000 customers. These organizations include:
- 9 of the 10 largest companies, as ranked by Fortune 500
- 22 of the 25 most valuable brands, according to Forbes
- 10 of the 10 largest U.S. banks, according to Bankrate.com
- 10 of the top 10 global universities, according to U.S. News & World Report
- 8 of the top 10 technology companies, as ranked by Fortune
In 2021, Jamf completed its three largest contracts in its history, and ended the year with its highest gross customer revenue retention rate since its founding in 2002.
“Exiting 2021, we saw continued strengthening in commercial markets across all geographies,” said Dean Hager, CEO of Jamf. “Looking ahead, this commercial momentum, along with continued investments in our go-to-market activities and new products, will help drive strong revenue growth in 2022. We are excited to continue to help our customers empower their end users with technology that is enterprise-secure and consumer-simple, while protecting personal privacy.”
Jamf further strengthened its security platform with acquisition of Wandera and cmdReporter, and rolled out key product enhancements to help organizations succeed in today’s hybrid work world
Jamf completed its acquisition of cmdReporter, a suite of security and compliance tools purpose-built for macOS, in February of 2021. Jamf also completed its acquisition of Wandera, a leader in zero trust cloud security and access, in July. These acquisitions uniquely position Jamf to help IT and security teams confidently protect devices, data and applications while extending the intended Apple experience through the most robust and scalable Apple Enterprise Management platform in the market. At its 12th annual Jamf Nation User Conference in October, Jamf launched Jamf Private Access, a true zero trust network access solution that replaces legacy conditional access and VPN technology, ensuring that after a user authenticates into their device business connections are secure, along with Jamf Threat Defense, a mobile security solution that protects endpoints from being compromised through mobile threat detection and zero-day phishing prevention with a web-based dashboard for real-time notifications and remediation. Jamf also rolled out key functionalities across its platform, including new bring your own device (BYOD) functionality, application lifecycle management capabilities, integrations with Google, data loss prevention features and more.
Jamf has seen significant success with its new line of security-focused products for commercial organizations, with approximately 8,000 commercial customers running Jamf Connect, Jamf Private Access, Jamf Protect, Jamf Threat Defense, or Jamf Data Policy on millions of Apple devices.”
Despite the press release and its positive implications, Jamf shares have fallen by about 15% since the release was published. Investors have been far more interested in rotating from the IT space, regardless of the specifics of company releases, and while the release reads as it does, investors in this environment are more likely to pay attention to specific earnings such as those of ServiceNow (NOW) and Atlassian (TEAM). Jamf is likely to release its quarterly earnings in early March.
There is more than a little in the above statement to unpack. The cadence of new customer acquisition, and the growth in the number of devices was consistent at the high levels of prior quarters. The customer count has risen by about 28% this past year, and the device count has risen a little faster in percentage terms.
The company also indicated that it had closed its 3 largest contracts in its history, and ended the year with its highest gross retention rate in its history. Finally, the CEO said that the company saw continued strengthening in its commercial markets across all geos. The CEO talked about commercial momentum, new product influences and greater sales capacity. The company also reported a robust uptake of its line of Apple first security offerings with 8000 of its customer already running one or more of its various security solutions. Finally, the company appointed John Strosahi as its president.
What does this likely mean. Closing the 3 largest deals in the company’s history ought to be pretty self-explanatory. If a company closes large deals and has a record rate of gross retention, it seems fairly self-evident that its revenue performance was exceptionally strong.
The comment about exiting 2021 with continued strengthening in the commercial space, as well as the commentary about strong growth to be seen in 2022 are also of significance in terms of what revenue attainment should actually be anticipated. The commercial component of Jamf’s revenues exceeds 75%-perhaps more now that security has become a significant revenue contributor.
Finally, the company’s COO, who actually has been running the sales organization, was promoted to president. While not dispositive, to be sure, it would be more than a bit unusual to see a promotion of this kind without some kind of revenue overattainment in the just preceding quarter.
Currently, the consensus forecast call for Jamf to see revenue growth of 31% for its quarter that will be reported in early March. That’s consistent with the guidance the company provided back in November and not consistent with this most current press release. I believe that this most current press release indicates that the quarter to be reported has been a larger upside than has been typical for this company. Last quarter, for example, the company had forecast that revenues would reach $94 million. It wound up reporting revenues of just below $96 million, growth of about 36%, although its growth in ARR, at 47% was much greater.
The company had forecast that revenues this quarter would be about $101 million, or growth of about 31%. That’s a forecast for just $5 million in sequential growth. Last year sequential growth was more than $6 million. I think it is fair to suggest that the growth this quarter is likely to show a greater overattainment than was the case last quarter. There should be no impact on sequential growth from the change in the revenue recognition of Jamf Connect whose impact I detail below, and it seems reasonable to imagine that the go to market initiatives and investment that was made in Q3 for Wandera should have some impact in Q4.
Operating cashflow is seasonally at a peak in Q4, and with the likelihood that bookings and billings have been unusually strong, I might anticipate that Q4 free cash flow will be at the highest levels of the year as well. It is always difficult to know what investors might be looking for, but my guess is that revenues, earnings and free cash flow will all exceed the consensus.
Currently published consensus expectations are that revenue growth for Jamf in 2022 will be at 25%. That seems a significantly less robust expectation than I think is suggested by the CEO’s comment about “strong growth” based on business momentum and new products that will animate the Jamf story in 2022. Overall, given the commentary, and strong and accelerating growth in deferred revenues, my own forecast for 2022 revenues is about $480 million, or growth of around 30%. It could certainly be greater than that, but I think $480 million is a good revenue estimate base line. That brings the EV/S to just 9X, quite reasonable for a company with a free cash flow margin in the mid-20% range.
Getting to know Jamf
Not all readers will be familiar with this company. While it is big fish in its space, until recently that space has been quite small. While perhaps trite, and a commercial, the company is really the gold standard in Apple Enterprise Management. Apple is not really know as an enterprise hardware solution, but that has been changing. I am not attempting any review of Apple here, but it has been substantially increasing its penetration of the commercial device space. According to one survey, 89% of users would be willing to make a salary sacrifice in order to be able to choose Apple. 62% of surveyed users would prefer an Apple device at work.
While device management is probably not the most sexy area in the IT stack, Jamf does offer its users several functions that are not totally available elsewhere in the market. It’s device management solution offers cloud-based identity, it is network aware, it is self service and its architecture is Apple-native. Best of all, using Jamf as a device management tool, pretty much allows for a 90 second, self-service device set-up and that kind of capability resonates with many users.
Besides managing Apple devices, the company offers Mac authentication and identity management and it has recently introduced a private access solution that incorporates what is called a Zero-trust and conditional access to networks.
The company has had an Apple network security solution for some years; that said, this past summer it bought Wandera, a software vendor specializing in cyber-security for Apple devices. The integration of Wandera and Jamf’s internally developed solution appears to be resonating with users; the press release cited above shows that the company now has more than 8000 users running its various security solutions.
Finally, the company has a couple of specific verticals including education and health care for which it has developed unique solutions. The use of Apple in the classroom is expanding, and Jamf offers a purpose built set of apps to monitor the devices and to ensure that students are protected from malicious web content. While in person education is obviously desirable, some form of remote learning seems destined to remain even after the last of the Covid restrictions are lifted.
Like most software companies these days, the company has a marketplace where there are hundreds of applications and integrations available that are enabled by Jamf’s suite of Application Programming Interfaces (API’s).
While hardly a household word, Jamf is well known within the enterprise Apple user space.
Competition
I have linked here to G2’s listing of alternatives to Jamf’s flagship product, Jamf Pro. While G2 lists many alternatives, the companies listed aren’t really competitors as their solutions are not architected and well-integrated with Apple. I have linked here to a product review of Jamf Now, which is essentially a one stop solution for mobile device management and obviously one of the most significant of Jamf’s solutions.
In reality, as mentioned earlier, investors and commentators are most concerned about potential competition from Apple Business Essentials. Business Essentials is simply not designed for the enterprise. That is what the product introduction announcement says: “Apple Business Essentials saves precious time for small businesses as they grow
The product that Apple announced is a bundle that includes device lifecycle management some basic security functionality, and secure data storage and back-up. Jamf does not compete in the data back-up and protection space and it is unlikely that it ever will try to compete in those spaces.
Could Apple enhance Business Essentials so that it actually became a competitor? Of course it could. Apple is one of the largest companies in the world with resources that boggle the imagination. There are technology challenges that the company can’t easily overcome such as building and deploying autonomous vehicles. But being able to develop a suite of technologies that equals the offering of Jamf is certainly well within the reach of the company’s abilities.
But would it make sense for Apple to launch head to head competition with Jamf and attempt to destroy its economic basis? I think the answer to that is almost certainly no! Apple has, and will have anti-trust issues for years to come given its dominance of the iPhone market, and certainly has a myriad of other regulatory concerns as well, in particular how it deals with those who provide apps on the IOS platform. Undermining the economic basis of a collaborator would not redound to Apple’s reputation as a reliable partner or to its relationships with regulatory authorities.
Even on an economic basis, the case to compete aggressively with Jamf is hardly overwhelming. Jamf is likely to generate about $130 million in free cash flow over the next year. Apple would need to undercut Jamf’s pricing substantially in order to achieve dominance in the space. For Apple, which generated more than $104 billion of operating cash flow last year, $130 million is essentially a rounding error. The company has many other strategic priorities which will ultimately generate far more operating cash than becoming a dominant factor in the Apple device management market.
Apple does have a specific priority to ensure the emergence of Mac’s as a strong factor in the enterprise IT space. And while Apple has many growth initiatives, the opportunity it has for the Mac to emerge as the PC of choice in an enterprise is quite substantial, even in the context of the overall revenues of the company. It is far more likely to achieve that objective with Jamf as an independent software vendor and close collaborator, than if it tries to compete aggressively with Jamf and undercuts that company’s economic basis. At the least, large enterprises really rebel against any kind of vendor lock-in, and to have a choice of Jamf as an independent vendor offering highly specialized and efficient device management, and deployment options, as well as an Apple first security offering, will almost certainly resonate within the enterprise IT community.
The nature of the enterprise IT space is that just about every company of any size has competitors and alternatives. The case of Jamf is a bit unique in that it really doesn’t have any other equally capable independent vendors as competitors and there is no indication that will change any time in the near term. On the other hand, the overhang that exists from the potential of real competition with Apple will probably constrain valuations, even if the likelihood of substantial competition is limited.
Jamf’s business model
Jamf already enjoys a profitable business model, which I believe will see further gains as the company scales. The company made a change to its revenue recognition policy for one of its key products, Jamf Connect. Jamf Connect is one of the core applications that the company offers. It essentially allows users to unbox their Mac’s, power it on, and access their authorized applications without the challenges of binding to an on-premise Active Directory.
Because of the way the company now delivers Jamf Connect, it no longer recognizes the revenue upfront. This change obviously will have no impact on free cashflow, or ARR. It did, however, have an impact on revenues in the 2nd half of 2021 of approximately $9 million. Revenue from on-premise license declined by about 17% sequentially, while the growth in SaaS subscription revenues accelerated to 47%. Subscription revenues grew around 9% sequentially on an organic basis. Netting out the impact of the revenue recognition change, and the acquisition of Wandera, the Apple first security software company that Jamf acquired at the start of Q3, the organic growth in revenues has remained at the 35%+ level, with the organic growth in ARR a little higher at 37%.
Overall, the change in the rev. recognition model, coupled with the expenses entailed in on-boarding Wandera, and the write-down of deferred revenues, caused expense ratios to be higher in Q3 than will be the case going forward, and that is true for cash flow as well as reported non-GAAP operating numbers.
Jamf’s reported non-GAAP gross margin in Q3 was about 80%. After making the adjustment for the change in the revenue recognition model, the CFO indicated that the non-GAAP gross margin in the quarter was consistent with that metric in the prior year, or just short of 83%.
Overall, non-GAAP sales and marketing expense rose 15% sequentially, non-GAAP research and development expense rose by 23% sequentially, and non-GAAP general and administrative expense rose by about 20% sequentially. Most of the rise in sequential opex relates to the costs related to Wandera, and particularly to additional costs related to investing in addition go-to-market investment for Wandera.
The company forecast results that were just above break-even in terms of operating margins for the quarter, and that is what is reflected in the consensus for Q4. Part of the modest forecast relates to a substantial additional investment in Wandera go-to-market activities. For the most part, this company has exceeded its earnings forecasts; given the press release quoted earlier, I expect that it will show much higher operating margins than forecast, and that the consensus forecast for EPS, and for free cash flow will increase noticeably after the earnings call.
Jamf’s free cash flow last quarter was exceptionally strong. A significant component of this was the rapid rise in deferred revenues. The increase in deferred revenues actually doubled last quarter on a sequential basis, and that increase was more than 90% of the total operating cash flow in the quarter. Given the commentary copied above, with its emphasis on strong sales momentum, and the inference of a closed large deal with one of the 10 largest companies, I imagine that free cash flow will continue to show positive trends as well.
Wrapping Up!
Jamf’s recent press release, at least to my mind, indicated strongly positive trends and the likelihood of both an upside revenue and earnings surprise coupled with strong guidance, above consensus levels for 2022. Despite the positive inferences to be drawn from the press release, Jamf shares have declined with just about all other IT shares, and have lost 15% since the press release was published.
Jamf has a relatively modest 9X EV/S. It also has a relatively strong free cash flow margin of about 25%. Overall, as said earlier, Jamf has a rule of 40 metric of around 60. Jamf is probably not the best known of software vendors given its size. It exists in the shadow of Apple, and its business is strongly correlated to trends of Apple’s Macintosh.
The strong growth Apple reported for Macintosh in the results published last Thursday evening suggest one of the tailwinds animating Jamf’s growth. In addition, the upsell/cross sell opportunities for Wandera are in the early stages of realization.
Initially many investors took flight from Jamf shares after the announcement of Apple Business Essentials. The company and several covering analysts have spent much time and electrons demonstrating why Apple Business Essentials is not a competitive threat to this company. I have tried to summarize the reasons I believe that Apple will not choose to destroy the economic basis for Jamf either now or in the foreseeable future.
This is a target rich environment in terms of the attractive IT investment opportunities. I think Jamf is lower risk than some, more profitable than most with strong prospects for long-term growth of greater than 30%, in part due to the recently announced reacceleration of Macintosh growth. It ticks most of the boxes I look for in an investment. I believe it will deliver positive alpha over the next 12 months.
