Asure Software, Inc. (NASDAQ:ASUR) Q1 2024 Earnings Call Transcript

Asure Software, Inc. (NASDAQ:ASUR) Q1 2024 Earnings Call Transcript May 3, 2024

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Operator: Good afternoon, and welcome to Asure’s First Quarter 2024 Earnings Conference Call. Joining us today for today’s call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Vice President of Investor Relations, Patrick McKillop. Following the prepared remarks, there will be a question-and-answer session for the analysts and investors. I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead.

Patrick McKillop: Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure’s first quarter 2024 earnings results call. Following the close of the markets, we released our financial results. The earnings release is available on the SEC’s website and our Investor Relations website at investor.asuresoftware.com, where you can also find the Investor Presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of those items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today’s call will also contain forward-looking statements that refer to future events and as such, involve some risks.

We use words such as expects, believes and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I will hand the call over to Pat in a moment, but I just want to take a moment to remind folks of our upcoming Investor Relations activities. On May 15, we will attend the 19th Annual Needham Tech, Media, Consumer Conference in New York. On May 16, we will attend the Jefferies HCM Summit in New York. On May 29, we will attend the 21st Annual Craig-Hallum Conference in Minneapolis. And on May 30, we will attend the 52nd Annual TD Cowen Tech, Media, Telecom Conference in New York. On June 4, we will attend the Stifel Cross Sector Insight Conference in Boston.

And finally, we will participate in the Northland Capital Markets Virtual Growth Conference on June 25. Investor outreach is very important to Asure, and I would like to thank all those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Pat Goepel: Thank you, Patrick, and welcome, everyone, to Asure Software’s first quarter 2024 earnings results call. I am joined on this call by our CFO, John Pence, and we’ll provide a business update for our first quarter 2024 results as well as our outlook for 2024. Following our remarks, we will be available to answer your questions. Our first quarter revenues were strong, coming in at $31.7 million. Our revenues were driven by our contributions from our core business, strategic initiatives and acquisitions, including our Asure Marketplace offering, Payroll Tax Management and interest earned from funds held for clients, which we refer to as float. We believe in 2024, our momentum will grow throughout the year, and we’re off to a great start.

Advancing our business through artificial intelligence, new technology enhancements, leading partnerships and strategic sales initiatives such as bundling of our 401(k) products with payroll to drive new client additions continues to be part of our strategy. Small businesses in the U.S. have traditionally not been or not had the resources to offer 401(k) retirement solutions. The SECURE Act 2.0 from the U.S. government is legislation that aims to increase employee participation and retirement plans by offering tax credits to support the setup of employer-based retirement plan. Currently, there are around 20 or more states in the United States that have mandated these plans. Also, many more have introduced legislation mandating 401(k) plans for our small businesses.

Asure has the solutions they need to set up the plan. Our announcements with Workday and the certification and joining the SAP PartnerEdge Open Ecosystem are really strong validation of advancing our technology and these partnerships will help us with more enterprise level clients. In today’s press release, we highlighted that after receiving the Workday certification, we went live with our first client, which is a major league baseball team. This client is an example of the complexity of multi-state payroll as the staff and team members incur payroll tax liabilities in multiple states each week. We’re excited to win this business and look forward to achieving more opportunities with Workday. We also remain excited about our partnership with SAP, which allows us to enhance our payroll tax engine by integrating with the SAP system and streamlining payroll tax processes for our existing SAP client.

We have also recently formed the partnership with the tax credit firm, HRlogics, which will provide our small business clients with access to capital. The partnership will help small business owners with identifying employer tax credits that many are unaware of, such as work opportunity tax credits, research and development and overall, tax credit programs. Our sales bookings helped drive growth and repetitive revenue for the quarter. Our pipeline is strong as we grow our product portfolio and enhance our technology. We are supporting our sales efforts with digital marketing, and we believe we’ll drive higher level of sales leads and productivity in 2024. Based on our current business trends, we’re reiterating our 2024 revenue guide of $125 million to $129 million with adjusted EBITDA margins of 20% and 21%.

As a reminder, this 2024 guidance excludes any potential contributions from ERTC filing, but does include our plans to continue to make acquisitions and grow organically. Our guidance for 2024 implies a 25% growth rate if we exclude ERTC from 2023 revenues for comparison. Now, I would like to hand it off to John to discuss our financial results in more detail as well as our Q2 guidance. John?

John Pence: Thanks, Pat. As Patrick mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. Reconciliations themselves are also included in our most recent investor presentation posted in the Investor Relations section of our website at investor.asuresoftware.com. Now on to the first quarter results. First quarter revenues were $31.7 million, decreasing by 4% relative to prior year. However, excluding ERTC total revenues were up 10% from prior year. Recurring revenues in the first quarter grew 8% versus prior year to 30.3 million.

And excluding ERTC, recurring revenues were up 9% from the prior year. First quarter recurring revenues grew on the strength of our HR Compliance solutions, our tax solutions, Asure Marketplace and increased interest revenues with the average client balances of approximately $240 million throughout the quarter. Net loss for the first quarter was $300,000 versus net income of $300,000 during the prior year. Gross margins for the first quarter decreased to 71% from 74% in prior year. Non-GAAP gross margins for the first quarter decreased to 75% from 78% in the prior year. The decrease in gross margins for the first quarter is primarily attributable to decrease in non-recurring ERTC revenue. We continue to believe, there’s substantial margin upside over the longer term as the business scales.

EBITDA for the first quarter was $4.4 million, down from $6.8 million in the prior year. Adjusted EBITDA for the first quarter decreased to $6.8 million from $8.2 million in the prior year. And our adjusted EBITDA margin was 22% in the quarter compared with 25% in the prior year. We ended the first quarter with cash and cash equivalents of $23.2 million and we have debt of $5.3 million. Now in terms of guidance for the second quarter of 2024, we are guiding second quarter revenues to be in the range of $28 million to $29 million. Adjusted EBITDA for the second quarter is anticipated to be between $4 million and $5 million. We are reiterating our 2024 revenue guidance to be in the range of $125 million to $129 million with adjusted EBITDA margins of between 20% to 21%.

As Pat mentioned in his comments earlier these guidance figures exclude any contribution from BRTC revenues, but assume a combination of organic and inorganic growth. Our pipeline of potential acquisitions remains strong and we feel confident about reaching our objectives. We also remain excited about the outlook for core products such as our payroll tax offering, which brings additional client fund balances and the resulting flow revenues, as well as potential for numerous new initiatives we have recently launched such as the 401(k). In conclusion, we are excited about the remainder of 2024 and look forward to 2024 as being a great year for sure and driving profitable growth and leveraging the initiatives we’ve implemented across the business to drive sustainable growth and create shareholder value.

With that, I will turn the call back to Pat for closing remarks.

Pat Goepel: Thanks, John. We’re pleased to have delivered strong solid results in the first quarter of 2024. We remain committed to creating products and technologies that make a difference for our clients. The continuous improvement of our solutions over the last few years is being reflected by the growth of our business and we’re happy to see positive impressions from our client base. The improvement of our solutions is ongoing and a few recent examples include launching a best-in-class employee self-service and role-based identity access software embedding a new AI agent into our enterprise payroll tax management platform, which will assist in complex multi-state tax compliance inquiries, is another example of our efforts.

Our business has multiple growth drivers in our core payroll business, Asure Marketplace, Payroll Tax Management and our 401(k) offering in addition to tuck-in acquisitions, small business owners in the US are tasked with an enormous challenge trying to navigate all the regulations that have been put in place over the years. And we’re offering multiple solutions to these business owners to ease the demands of their time and resources. We anticipate demand for our HR compliance solutions will continue to be healthy as businesses increasingly seek to supplement their internal capabilities with external experts who can help them navigate the increasing complexity of doing business day-to-day. We’ve added benefit in insurance capabilities in the insured marketplace and we expect to grow going forward.

Our Payroll Tax Management solution has also great potential as evidenced by the recent news of our first Workday client, a major league baseball team go online and we remain excited about what lies ahead for this business. Our sales initiative and bundling 401(k) with payroll has gotten positive reception and the SECURE 2.0 Act will allow to implement many more 401(k) plan, which states are mandating now and we expect more to pass mandates in the future. Our guidance for 2024 reflects our expectation for continued growth and we expect to be delivered with a combination of organic and inorganic growth when we view the business excluding ERTC, core revenues continue to grow at a very strong rate and our guidance for 2024 implies 25% plus potential growth.

We hope that our discussion today helps illustrates our plan as we move on from ERTC. We now feel the business is right-sized for future success as we enter the remainder of 2024. In summary, we’re pleased to have delivered another solid performance in Q1 against the backdrop, have some unfavorable year-over-year comparisons, which we will be up against for the next few quarters. The unfavorable year-over-year comparisons will start to lift away in Q4, especially and assuming we achieve our goals, the growth rates will be much healthier as we exit Q4 and enter into 2025. We’ll continue to provide innovative human capital management solutions that help small businesses thrive, human capital management providers to grow their base and large enterprise streamline tax compliance.

Thank you for listening to our prepared remarks. So with that, I’ll turn the call back to the operator for the Q&A session. Operator?

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Q&A Session

Operator: Thank you. At time we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from Joshua Reilly with Needham & Company. Please proceed with your question.

Q – Joshua Reilly: All right. Thanks for taking my questions and nice job on the quarter here. Can we get an update on how many acquisitions you’ve made now year-to-date, how valuations are trending? And where are you relative to the inorganic revenue assumptions that you laid out in the guide initially for the year?

Pat Goepel: Yes. Josh, thank you. And just by the way — and we’re fortunate enough to have Eyal Goldstein, our President and Chief Revenue Officer with us as well to help answer questions. But as far as acquisitions, we’ve made really good progress in the first quarter and anticipate to make a very similar process in the second quarter. We have probably done about a handful of acquisitions here. I don’t know, if we want to get too much into the noise of what’s closed and what’s not, what I would suffice to say is, I think we are absolutely on track, if not maybe slightly ahead of on track, around acquiring. Now some of whom have to implement and some implement very, very quickly and some it takes a month or so. But we’re right on track in doing now.

What I would say and on the purchase price, we’re probably just slightly under two times. We’re thrilled with that kind of purchase price amount, so far. And it’s been a combination of either equity where we’ve done some small equity deals, as well as cash and loans. So suffice to say, we’re really bullish about our plan not only for the year, but the first half of the year and the integration of those have gone very, very well.

Q – Joshua Reilly: Got it. That’s helpful. And then, could we get some more details? What was interest income in the quarter and maybe compared to last year in the same quarter. And is the yield on the float bounces up, year-over-year or is that consistent with what it was last year? Just some more detail there would be helpful. Thank you.

John Pence: Yes, Josh. This is John. So last year rough numbers about 3.5% is what we earned on the client funds balances, this year roughly 4.5% the balances have ticked up a little bit, but that gives you a rough order of magnitude as to kind of how that’s progressed.

Q – Joshua Reilly: Got it. That’s helpful. And then maybe just last follow-up on that. Do you expect it to be 4.5% for the rest of the year or is there more upside, potential for the yield to increase Thank you guys.

Pat Goepel: Yes. So, what we factored into our numbers Josh was a 0.5 point decrease midyear. Obviously, we don’t know if that’s going to happen or not, but when we kind of came up with our forecast for the year, we were assuming 0.5 point. So there might be little upside in into our model depending on what happens on the balance.

Q – Joshua Reilly: Thank you, guys.

Pat Goepel: Thanks, Josh.

Operator: Our next question comes from Bryan Bergin with TD Cowen. Please proceed with your question.

Q – Bryan Bergin: Hey guys, good afternoon and thank you. So, obviously, a big emphasis on your tax solutions in the prepared comments and good to hear about that first Workday, client going live. Can you give us a sense of how you’re thinking about the growth potential of the tax business and the potential scale as a mix of the overall company over the medium term?

Pat Goepel: I think from our perspective. First of all, these are enterprise deals both SAP as well as Workday And we have opportunities in the reseller mix as well. But as enterprise deals, if I thought about it, John and I were talking the other day and when we acquired PTM, our kind of payroll businesses was roughly 40% or so of our float. So our standalone business, if you will is 60%. Float and tax, it’s all part of our value proposition. Now since then, we’ve spent some calories and time and tears and smiles really growing tax where we’re thrilled as we have some of these enterprise partners in addition to PEO partner and Prism and certainly, we’re going to grow that business. What I would say implicit in our guide around repetitive revenue, last year, we were about with ERTC, about 84% or so repetitive revenue.

This year we’ll finish in the high 90%s. Tax is a big part of that. It’s profitable, it’s sticky. And the book-to-bill in some of these enterprise clients are a little bit longer than our small business. But suffice to say over a multiyear plan, we think we can grow tax quite a bit. It will be a mixture of fees and flow, and that’s all part of the value proposition. But as I was reflecting even on our guidance, we started out repetitive revenue this quarter, growing 10%. If you think about our guidance, we’re going to finish the year much stronger than that just based on the numbers. Tax filing is going to lead and be part of that value proposition. So we think there’s huge opportunity and this will be multiyear, but it will also be growth this year as well.

John Pence: And I’ll just put a little bit finer point on what Pat just to make sure it was clear. When we think about those client fund balances probably about 60% are specific to this tax business. So, it’s a key part of the strategy. So, it’s part of how we price, it as part of the recurring revenue because of that, right? So that’s a really important thing that I think is a little bit nuanced relative to some other payroll companies that don’t have that as part of their product and go-to-market strategy.

Bryan Bergin: All right. That makes sense. Good detail. My follow-up here, so I guess versus three months ago, how would you characterize the overall ACM demand environment as well as kind of the competitive and pricing environment dynamics in the market?