Asure Software, Inc. (NASDAQ:ASUR) Q2 2023 Earnings Call Transcript

Asure Software, Inc. (NASDAQ:ASUR) Q2 2023 Earnings Call Transcript August 7, 2023

Operator: Good afternoon. And welcome to Asure Second Quarter 2023 Earnings Conference Call. Call. Joining us for today’s call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Head of Investor Relations, Randal Rudniski. Following their prepared remarks, management will hold a question-and-answer session for analysts and investors. I would now like to turn the call over to Randal Rudniski for introductory remarks. Please go ahead.

Randal Rudniski: Thanks, operator and good afternoon, everyone. And thank you for joining us for Asure’s second quarter 2023 earnings call. Following the close of markets, we released our financial results for the quarter. The earnings release is available on the SEC’s Web site and our Investor Relations Web site at investor.asuresoftware.com, where you can also find our 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 these 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. Finally, I’d like to remind everyone that this call is being recorded and it will be made available for replay via a link that can be found on the Investor Relations section of our Web site. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Pat Goepel: Thanks, Randal. And welcome, everyone to the Asure Software’s second quarter 2023 earnings call. I’m joined on the call by our CFO, John Pence. John and I will provide a business update for the quarter and our outlook for the remainder of 2023. Following our remarks, we’ll be available to answer your questions. As you can see from the reported results, our strong momentum continued in the second quarter with strength coming from solid execution across the business. Our revenue growth for the second quarter was 50%, all of which was organic with reoccurring revenues growing by 21% relative to the prior year and non-reoccurring revenues up $6.2 million on continued strong performance of our ERTC solutions. This top line growth also drove a significant increase in adjusted EBITDA, which reached $6.1 million in the second quarter with adjusted EBITDA margin of 20%.

Through the first half of 2023, we have generated 20% more adjusted EBITDA than we produced in all of 2022, showing a powerful operating leverage we have built in the business as we continue to grow revenues. Powering this performance is our focus on delivering a unique value proposition for our target market that addresses the needs of our clients. This approach starts with identifying imactful solutions that we believe will make a real difference to our clients and is supported by engaging in efficient technologies. It also involves mobilizing our sales teams to make sure that our message and value proposition is well understood and providing prompt and reliable customer service. Our sales efforts for the second quarter produced an 80% increase in new sales bookings, which also builds upon the 87% growth rate we achieved in the second quarter of last year.

We continue to invest in the sales force expansion and been very pleased with the quality of new hires we are making. We are supporting our sales efforts with digital marketing, which is driving higher level of sales leads and productivity in 2023. In the second quarter, our marketing source bookings increased by 227% relative to the prior year. Our selling and marketing activities have been underpinned by a focus on delivering excellent solutions that address specific client challenges and needs. In payroll, our focus has been on elevating the client experience by making enhancements to our platform and standardizing processes to produce efficiencies. This client focus, combined with our increasingly effective marketing efforts, produced an 86% increase in new payroll client revenues in the second quarter relative to the prior year.

We have also had notable successes in the quarter with our HR compliance and marketplace solutions. HR compliance revenues more than doubled relative to prior year without an increase in underlying costs as we have automated our solutions in a manner that is duly efficient for our employees and our clients. This efficiency has also met with opportunities for us to provide scalable solutions in the midst of an increasingly complex regulatory environment that poses new challenges for growing businesses. Asure marketplace, which was launched in the second half of last year, has contributed meaningful to our performance, and we continue to believe this segment will represent 30% to 40% of our revenues overtime. We are developing new solutions that we will introduce later in 2023 and 2024, which will address a wide range of business needs through targeted integrations and will meaningfully support the next level of growth for our company.

I’ll have more to say on that in a moment. Processing of employee retention tax credit, drove upside in our non-reoccurring revenues for the quarter. This activity is an example of effectively identifying and developing impactful solutions that make a real positive contribution to our client successes. Furthermore, ERTC solutions have also been a helpful contributor to our bundling success, particularly with HR compliance. Interest revenues were also an important contributor to revenue growth in the quarter with the rise in the yield curve along with our success and consolidating back office systems and bank accounts we have the opportunity to support higher investable balances and revenues. In addition, we are continuing to invest in technology and product development to create new solutions for our clients and to proactively anticipate market opportunities in future.

Our partnership with Amazon Web Services, Application Modernization Lab, which we announced during the second quarter is an important part of this commitment. This strategic initiative is designed to help spur innovation and to accelerate our platform development to ensure we can deliver the most secured advanced cloud platform in the industry. Our collaboration with AWS will speed development activity, while advancing our cloud optimization efforts and employing artificial intelligence to drive future efficiency. Our technology investments will support the introduction of new solutions later in 2023 and 2024 that we expect to have meaningful impact on our top line performance. These new initiatives will enable us to further leverage our core capabilities to address our clients’ pressing business needs in a dynamic business environment.

One other significant opportunity I’d like to highlight is the vast revenue generating opportunity that has come from last year’s passing of the Secure Act 2.0. The original Secure Act made it easier for small businesses to set up Safe Harbor, 401(k) plans and provide some tax credits to do so. Version 2.0 of the Secure Act aims to increase employee participation in retirement plans with updated rules and dramatically expanding the tax credits available to employers for plan setup, administration and matching contributions. While the federal government is incentivizing small business retirement plans with the Secure Act 2.0, a growing number of states are now mandating small businesses offer retirement savings to their employees as well. Many small businesses traditionally have not had the resources to offer such retirement programs but now they have the mandate and the funding to move forward.

Given our large base of small businesses, there is a unique and substantial opportunity to provide our clients with solutions that address these new business requirements. Just as legislation created an opportunity for us with ERTC processing, Secure Act 2.0 and the state mandates enable us to create compelling solutions to address this emerging area. We recently announced the partnership with Vestwell to use very advanced record keeping technology to help power Asure’s new 401(k) offerings. We are excited to work with them and deliver a great solution for our clients. And because we’ve already developed scalable tax credit capabilities with ERTC, we are uniquely positioned to help those same clients take advantage of the tax incentives available from Secure Act 2.0. Our efforts are focused on providing our clients with solutions that address the most pressing business challenges.

In that light, we released our small business HR Benchmark report in the second quarter. This report identifies best practices in human resources based on a survey of more than 2,000 businesses across the United States. It also lays out a roadmap for success for businesses to address HR challenges and positioning themselves for enhanced growth and success. Our benchmark report identifies eight areas in human resources across the employee lifecycle that are critical for success, exposing areas where compliance with regulations is challenging or misunderstood. It also identifies ways of maximizing employee retention and satisfy satisfaction to help fuel organizational success. For small businesses, there is nothing more important than linking employees clearly to the drivers of organization success.

Copyright: gmast3r / 123RF Stock Photo

Best in class businesses have best in class HR practices and Asure has the solutions to help. A copy of our Small Business Benchmark report is available on our Web site at asuresoftware.com. In addition to the momentum we built with our HR compliance marketplace and ERT solutions, we are working on strategic enhancements to our tax platform. To capitalize on our unique position in the market. We’re consolidating to a single tax engine, introducing a new tax portal and improving technology to facilitate integrations. We will have more to say about our development activity in the tax area in future calls, but we’re very pleased about the unique and valuable asset and its ability to drive value for our clients and growth for us. In closing, I hope my comments give you a sense of the opportunities that are ahead for Asure in 2023 and 2024.

Based on our performance and our current expectations, we’re introducing revised higher 2023 financial guidance. We are now guiding for a full year revenues of $118 million to $120 million and adjusted EBITDA margin range of 19% to 20%. Our previous guidance was for revenues of $111 million to $113 million and an adjusted EBITDA margin of 17% to 18%. We’re also introducing third quarter 2023 guidance of revenues of $26 million to $27 million, which is approximately 20% higher than the third quarter of 2022. For adjusted EBITDA, we’re guiding $3.5 million to $4.5 million in the third quarter, which at the midpoint would mean adjusted EBITDA expected to more than double relative to the prior year. We expect 2023 will be a strong year for revenues and adjusted EBITDA margins.

The midpoint of our revenue guidance range implies approximately 24% organic revenue growth and 19% to 20% adjusted EBITDA margins exceeding the rule of 40 for the year. We’re also very excited about the portfolio of solutions we are developing to drive value for our clients and growth for Asure in the long term. Now, I would like to hand off to John to discuss our financial results in more detail. John?

John Pence: Thanks, Pat. As Randal mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You’ll 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 Web site at investor.asuresoftware.com. Now onto the second quarter results. Revenues reached $30.4 million in the second quarter, rising by 50% relative to prior year, all of which was organic. Recurring revenues rose 21% relative to prior year to $23 million. Second quarter recurring revenues grew on the strength of our HR compliance solutions, Asure marketplace and increased interest revenues with an average client [balances] exceeding $200 million in the quarter.

ERTC revenues were recorded in the professional services hardware and other category in both the current and comparable periods. Non-recurring revenues saw an increase of $6.2 million on the strength of ERTC processing activity. Relative to the first quarter, revenues declined in the period. However, that is attributable to the normal seasonality of our business as recurring annual year end W2 and ACA revenue is recognized in the first quarter. Net loss for the second quarter was $3.8 million, a $2.1 million improvement over prior year loss of $5.9 million. Gross margins rose by 12 percentage points to 72% in the second quarter relative to the prior period, while non-GAAP gross margins rose 11 percentage points to 77%. It is notable that our revenues rose by 50% year-over-year in the quarter, while our non-GAAP cost of sale rose by only 2%, which allowed for almost a 100% fall through of each dollar revenue growth into the non-GAAP gross margins.

This operating leverage reflects the high margin mix of our growth and our continued impact of our standardization and consolidation efforts. EBITDA for the quarter was $3.3 million, a $3.4 million improvement from prior year’s quarter. Adjusted EBITDA rose by $5.5 million relative to prior year to $6.1 million and our adjusted EBITDA margin reached 20% in the quarter compared with 3% in the prior period. In the quarter, we converted a little over half of each incremental dollar of revenue growth into adjusted EBITDA. Margin expansion was driven by growing high margin revenue streams, continued progress with our efficiency initiatives and scale benefits from our growth. These gains more than offset the investments we are making in the expansion of our sales and marketing activities.

We continue to believe there’s margin upside over the longer term as the business scales. We ended the quarter with cash and cash equivalents of $21.6 million. We also had $36.8 million of debt, which is comprised of $32 million drawn under our senior credit facility with the remainder made up of seller notes from acquisitions. Now in terms for our guidance for the third quarter and the full year of 2023, as Pat mentioned, we are raising our full year ‘23 revenue guidance to the range of $118 million to $120 million, including third quarter revenues of $26 million to $27 million. Our full year guidance implies annual revenue growth of 24%, while the midpoint of our third quarter guidance would yield revenue growth of 21%. We expect our organic recurring revenue performance in the third quarter will be broadly inline with the results in the first half of 2023.

HR compliance, Asure marketplace and [float] revenues are expected to continue to drive high margin performance. Our non-recurring revenue performance year-to-date has been driven substantially by the success with our ERTC processing activity. While there is no sign of a significant slowdown in this area, our guidance reflects a modest expectation for this revenue stream given its transactional nature. We’ve also introduced 2023 adjusted EBITDA guidance for margins of 19% to 20% and third quarter adjusted EBITDA to be in the range of $3.5 million to $4.5 million. Adjusted EBITDA performance is expected to be driven by continuing strong revenue performance, efficiency gains from our consolidation and efficiency programs, which will be partially offset by continued investment in sales and marketing activity.

In terms of acquisitions, while nothing is currently imminent, we will continue to be prudent in evaluating targets and will execute if the right opportunity arises to create value for our stakeholders. In conclusion, we are pleased with our performance in the second quarter and the momentum we have built on the strength of our product development, technology and sales. Our year-to-date performance gives us confidence in our forward-looking guidance. We think that we are continuing to build the foundation for driving sustainable, profitable growth and value creation for the future. With that, I will turn the call back to Pat for closing remarks.

Pat Goepel: Thanks, John. We achieved a new milestone in the second quarter, achieving 50% revenue growth, all of which was organic. We achieved this growth by investing in products and technologies that will make a difference for our clients. It is very gratifying to see the positive reception to our solutions from our clients. The feedback supports our view that by enabling them to focus on their core businesses, we can create meaningful value for them. We are very encouraged by the early results of the Asure marketplace, which we think is a game changer for Asure. Its results to date have made a meaningful contribution to our overall performance and there are lots more to come. Earlier I previewed our activity with retirement solutions under the Secure Act 2.0. And while we believe our initiatives here will be significant, they are just one example of the many ways we can leverage our systems and knowledge to create impactful solutions for our clients.

We are also leveraging our strengths in areas such as HR compliance. Our solutions address real business challenges facing main street America. We anticipate demand for HR 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 today’s HR. Investments in market leading technology that support our client solutions is also a high priority at Asure. The partnership with AWS is an example of our focus on delivering compelling solutions. These efforts enable us to tackle the critical business issues our clients are facing and supports our efforts to maximize sales and cross sell our solutions. Supporting all of these initiatives are our efforts to improve our cost structure and efficiencies via our consolidation efforts.

We continue to be on-track to deliver annual savings of $5 million annually once its implementation is complete. Our upwardly revised revenue and adjusted EBITDA guidance reflects the positive momentum we achieved with our expanding portfolio of solutions and continued strong new sales performance. In conclusion, we’re very excited about the performance of the business and the direction we’re headed. We are focused on creating value for our clients and on delivering consistent, positive results for our stakeholders. We look forward to speaking with you again next quarter. So with that, I’ll send the call back to our operator for the Q&A. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Bryan Bergin with TD Cowen.

Bryan Bergin: I wanted to start off with the demand question here. So just any comments, any measurable change in client demand that you’ve witnessed over the last three months? Obviously booking strength seems to imply a healthy continuation, but we know you’ve got a lot of moving pieces here as you’re scaling a lot of the new offerings. So I’m just really curious if you’ve seen any change to what clients are demanding in the current environment and nearly any change by client size that’s worth calling out?

Patrick Goepel: We do not see any demand changes. I mean, I think if you think about early in the quarter the July 4th week is always a vacation week, et cetera. But bookings have been solid, demand’s been — interest, level’s been really high, leads have been flowing, we feel really good about our solution set.

Bryan Bergin: My follow up then to margin expansion. So can you talk about how you’re feeling about a sustainable gross margin here? Just understanding you’ve had some higher margin revenue contributors, like the non-recurring, I believe, here that support the second quarter strength. Can you kind of give us puts and takes in that second half margin outlook? And do we need to be mindful of potential grow over pressures as you get into next year as things like ERTC sunsets?

John Pence: Let me go off the first one, Bryan, and then I’ll let kind of Pat get his perspective on that. I mean, I think in general what you can tell is that the cost of goods sold line is generally becoming relatively fixed. I mean there’s a little bit of variable component to it, like in the first quarter there’s more shipping. But I would say in general it’s fixed to going down just based on, again, the standardization and some arbitrage in terms of offshoring some of those positions. So I think that’s the way to think about it. And from my perspective is there’s relatively kind of high fixed cost to doing business, but once we add that incremental revenues, that’s where you see the margin. So that’s the way I would think about it in the back half of the year. So however, we are guiding revenues, think about cost of goods sold being relatively consistent, the way I think about — and then you can talk about the kind of year over year kind of going forward issues.

Pat Goepel: Bryan, I think we’ve done an excellent job with the cost structure. John’s really done a nice job of budgeting that. And then our team has automated solutions in such a way where we can achieve those results where COGS is roughly flat. As we look and turn into page and ‘24, we’ll probably share ‘24 guidance next quarter. But just on a whole the ERTC program we put it in the 1 time item and we’ve done that all year. There’s no question that ERTC as a program ends first quarter of 2025. So there will be some headwinds in the 2024. But if you think about kind of what we’ve done as a business, we’ve got several early day products that we’re working through that we’re pretty proud of. The Secure Act 2.0 with 401(k) will a great extension and we’re launching that as we speak.

So we think that’ll be a good tailwind. HR compliance will be a good tailwind for us. The marketplace will be a tailwind. Our tax filing business in general will be a tailwind. And what I’m proud about the sales organization is they’ve achieved some outstanding productivity. And what we’ve kind of locked into here is if you think about small businesses in this environment, access to capital is probably their number one concern and then expertise on the changing compliance, whether it’s HR, payroll or tax filing is number two. So to have a partner to be able to solve their problems is really, really important. And that’s really what we set out to do and we’ve automated the back end in such a way for that to be efficient. So there’s no question, there might be some 1 time tailwind — headwinds going into ‘24, but we have our share of tailwinds going into it, and more to come next quarter when we announce ‘24 guidance.