Asure Software, Inc.
Q1 2021 Earnings Call Transcript

Published: 10 May 2021

[Operator:]

Good afternoon, and welcome to Asure's First Quarter 2021 Earnings Conference Call. Joining us for today's call are Asure's Chairman and CEO, Pat Goepel; John Pence; and Vice President of HR, Cheryl Trbula. After the speaker's remarks, there will be a question-and-answer session. I would now like to turn the call over to Cheryl for introductory remarks. Please go ahead.

[Cheryl Trbula:]

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's First Quarter 2021 Earnings Call. After the market closed, 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. This teleconference is also being broadcast over the Internet and will be archived and available on our IR website.

[Pat Goepel:]

Thank you, Cheryl, and I'd like to welcome everyone to our first quarter earnings call. We sure appreciate your interest, whether you're an employee, a client, investor, analyst, or another interested third party. I'll start today's call with an update on some key metrics before reviewing business highlights for the first quarter. Then John Pence, our CFO, will review our financial results and provide an outlook for the second quarter 2021. Then he'll turn back over to me, and I'll provide an update on our strategy as we look to the second quarter. Then we'll open it up for questions. In reflecting, since December 2019, when we sold the Workspace business, we increased our salespeople from 33 to 64, right in the middle of a COVID pandemic. And I think what's really important since that kind of progress has been made this quarter was a really important inflection point for Asure Software because it was the first quarter that we posted positive year-over-year revenue growth. We view this as an important inflection point in the business and an important milestone as it sets us up nicely for 2021. The past 14 months or so have been different than any other we've experienced before. The mass shutdowns in response to COVID-19 forced us to find innovative ways to connect with our small, medium-sized business clients, and prospects as well as our own employees to overcome these challenges with more than a year passing since the pandemic began. I'm very proud of how the Asure team embraced the challenges and took a leadership role through this pandemic. For example, as part of our efforts to shepherd more than 80,000 SMB clients through the COVID pandemic, we recently introduced an employee retention tax credit or what we call ERTC solution to help clients efficiently maximize the tax credit. ERTC is part of the CARES Act, which encourages businesses to keep employees on their payroll. Also, we're enriching our partner program by providing industry-specific educational resources to help our CPAs, our brokers and our bank referral sources grow and prosper. When they grow and prosper, we grow and prosper.

[John Pence:]

Thanks, Pat. As Cheryl mentioned at the beginning of this call, several of the financial figures discussed today are non-GAAP. You will find a reconciliation from GAAP to non-GAAP results as part of the earnings release made available earlier today and included in our most recent investor presentation posted in the Investor Relations section of our website at asuresoftware.com. As mentioned on our last earnings call, we continue to review the metrics used to explain our business performance. With the year behind us as a pure-play HCM software provider, following the separation of the Workspace business in 2019, it is a good time to simplify and add clarity to our reporting with the goal of making our progress on the execution of our strategy easier to follow. We believe this ultimately will require fewer GAAP to non-GAAP reconciling items to deliver that message.

[Pat Goepel:]

Thanks, John. And I want to highlight, John, and the management team, I think they did an excellent job with the investor presentation, and I think really gives a window of clarity into the business. As we enter our second year here with COVID, we remain diligent in helping businesses continue to navigate the pandemic and remain hopeful that the worst is behind us. Throughout every stage of the pandemic, we have demonstrated our commitment to helping clients and our multifaceted response, our COVID-19 resource center, webinars, for example, continue to help thousands of small businesses. We continue to listen to and work with small and midsized businesses to provide information, resources and the support they need. We've assisted our clients in quickly applying for and obtaining PPP loans. We have also helped them claim paid in employee retention tax credits Our experienced employees have really lived Asure's values of embracing change, leading with integrity, owning the outcome, delivering awesome and being a good human. I give credit to the innovation, integrity, and hard work of our employees will continue to show up for our clients even while navigating the challenges of the pandemic in their own personal lives. And what this has done is that it really has helped our small, medium business clients get back to growth and help them navigate the complex stimulus legislation, develop return to office plans, and create vaccination policies. We're confident that our resilient business model, strong financial position and dedicated employees and leadership team will help us sure finish 2021 even stronger than when we started it. We're particularly pleased with the trend line of revenue growth improvement. It troughed at an 18% year-over-year decline in second quarter of 2020, improved to a 10% decline in third quarter 2020, to a 7% decline in the fourth quarter of 2020, to a 4.5% growth in the first quarter of 2021. And as John mentioned, our core operating metrics are now at a point where we're comfortable reintroducing quarterly guidance. For the second quarter 2021, we expect revenue to be in the range of $16.5 million to $17 million. This range points to year-over-year growth of 17% to 20%, about half of this growth being organic and the other half inorganic, we believe that this points to an important milestone as we march towards our strategic goal of 10% organic growth, 10% growth generated through accretive acquisitions and 20% EBITDA, which gets Asure more in line with the growth and profitability margins with some of the other publicly traded SaaS human capital management companies, which carry much higher valuations. Internally, we're getting back to normal. We're returning to -- back to our vision of providing human capital management software that services that help companies grow while nurturing a culture of growth around us, and our mission is to help customers grow by getting the most from their human capital. We also want to help our employees grow personally and professionally, grow relationships in the communities that inspire goodness. And if we do all of these things in a way that grows shareholder value, we'll all be happy. With that, we'll open it up for questions. Operator?

[Operator:]

Our first question is from the line of Ryan MacDonald with Needham. Please go ahead.

[Unidentified Analyst:]

This is Josh on for Ryan. Congrats on the strong quarter. Just wanted to start off, our checks and some of your competitor results indicate that the market improved in the month of March. Is that what you're seeing as well? And then how is rep productivity trending throughout the quarter?

[Pat Goepel:]

Yes. No, Josh, and I'll let John chime in as well. I think January, February, if you think back, we had a second wave of COVID the election stimulus probably was a little bit delayed. So we saw some softness in January, February. March was relatively strong and started to bounce back a bit. I think that's how we thought. From a sales rep productivity perspective, first of all, we've been really happy with the reps that we've been able to get. But our average tenure of the sales reps is 10 months. So it is still a journey. I will tell you, I think our reps are developing really good referral sources. We're learning how to sell digitally and have done that, a really nice job in a tough environment. And we're cautiously optimistic that as America reopens, we'll keep gaining productivity. But to be up in bookings over 20% in the first quarter year-over-year, I was very happy with our sales rep performance.

[John Pence:]

Yes, I agree with Pat's assessment. It was a little choppy January, February, but it did come back in March. We're talking in May, right? So we've already forgotten the spike that happened kind of in that time frame. So anyway, it did come back a little bit in March.

[Unidentified Analyst:]

And then following up on that, how should we think about the slower return to work that we were all very aware of here, given what's happened in the last week, particularly in the troubled industries impacting your same-store sales later in the year here? And then can we get some more color on how you're factoring that into Q2 guidance here? Or what assumptions you're using?

[Pat Goepel:]

Yes. Just in general, we're not pounding the table on a huge improvement. We're kind of modeling steady state, if you will. I do think in the back half of the year, towards September, we may have an opportunity that employment levels will start to go up a bit. But we'll take that on third quarter -- second quarter's call. But as far as modeling second quarter, we've really kind of looked at it as -- we're open for business. We're going to continue to drive results and keep fueling the trajectory that we have, but we're not expecting anything more natural than that.

[Operator:]

Your next question is from the line of Richard Baldry with ROTH Capital. Please go ahead.

[Richard Baldry:]

Firstly, can you talk about what you're seeing at the leading edge of your pipeline for your marketing funnel? Whether there's material changes to that and how that's been trending? And then maybe just kind of an easy one, but R&D was sort of flattish year-over-year below where it's been trending in the last several quarters. Is this sort of a new level to base off of? Or is there anything unusual in that number?

[John Pence:]

Yes. I don't think you're saying -- I'll answer that first question first and then I'll or that last question first, and then I'll turn it over to Pat. There was, I think, a little bit more capitalized this quarter and it kind of just varies depending on what projects they're working on. So I think that's probably the transition more than anything. I don't think that you should read anything more into it than that. I think the levels are fairly consistent year-over-year.

[Pat Goepel:]

I would agree with John. And I think as far as the leading edge of the funnel, what I would say, Rich, is I do think we're working on some really interesting stuff and some maybe bigger transformational kind of accounts, but they're early in the pipeline. And it's really a factor of some of our either resellers or some of our value-added partners are now turning to, hey, I have hundreds of clients, boy, I could do something more meaningful. Let's talk to Asure. So I think we're in the early innings of some pretty nice sales opportunities, but I don't anticipate anything immediate to that. But that's what I would say towards the back half of 2021 or 2022, we certainly have some interesting opportunities. So we'll see how those play out.

[Richard Baldry:]

And the last for me is, can you maybe dig into the M&A backdrop a little bit. I'm sort of curious whether COVID has altered some of the willingness of people to entertain the concept of sale or how it changes your ability even to evaluate those companies given their 2020 results would look a lot different than they might have otherwise.

[Pat Goepel:]

Yes. Just where we are in a business, we're really focusing on our employees, our clients getting back to normal. We've built the business to scale, and we're going to take advantage of some opportunities to do that. I would say, right now, we have some opportunities. I think in the back half of the year, you will see some of those opportunities. I think in this first half of the year, we kind of want to finish what we started. We're pointing towards double-digit growth. We have a plan to do that, and we anticipate to get there in 2021. And I think you'll layer tuck-in acquisitions as we go. As far as expectations, I do think people, whether it's capital gains or perhaps some of the new legislation, they're evaluating their options. And then as far as COVID, I think we've been able to understand the COVID impact on small, medium-size businesses as well as anybody being a provider. And then we have a window into some of our resellers and other businesses of how it affected them. So from a pricing strategy, sometimes it's just really understanding that and understanding and matching expectations. I do think you'll see some deals as we get into end of 2021 and 2022.

[Richard Baldry:]

Congrats on the return to growth and the guide for a strong growth in the second quarter.

[Operator:]

Your next question is from the line of Eric Martinuzzi with Lake Street. Please go ahead.

[Eric Martinuzzi:]

Yes. I wanted to focus on the pays per control stats and when we start to see a recovery there. I know a year ago this time, you were doing kind of -- I don't know if it was a daily war room or what the expression for the concentrating on the installed base was. But what are your expectations there given we had this 13% step down in Q1? How does that look in Q2?

[Pat Goepel:]

Yes. I'm going to go. I'll let John jump in too. First of all, we do a daily call at 9 a.m. every day. Goldstein runs that call with the management team and I'm really proud of everybody showing up and really giving us the data we need to match our customer base and make sure that we're in sync with them. What I would say, in the second quarter, early on, there's two stories here. First of all, from a client perspective, but I think back to last year, companies really didn't know what to do, were they're going to go back into business? Were they going to go out of business? They needed funding. Are they going to get it from the government? Are they going to get it from their favorite uncle? Is their institution going to draw in their credit line? They really didn't know. What I would say is there's been a return to normalcy. We lost probably 1% to 1.5% of our business is because of COVID. But I think the more important stat now is the employees and when do the employees return to work. And we're not . We don't know the future. What I would tell you is second quarter was down, we had improvement in the third quarter, fourth quarter it stalled. And if you think about the election and first quarter, there was the second wave or third wave of COVID that really reduced employment in that December, January, February timeframe. I think the vaccine has certainly helped. But now what you're seeing is with the stimulus and employees get paid extra to navigate some of the unemployment, now that there are jobs open. There's been sometimes not a workforce or a steady workforce. And then in some cases there's supply chain challenges. And then finally, I think just if we look at it, some of the early indicators, if you're thinking about hiring people, your first step is going to pay more over time to make sure you have demand. And then you hire. So I don't think we've seen the return to normal yet. I do think digital will. Maybe some jobs will be lost forever, but we'll create other jobs, and there'll be more employment opportunities. We've modeled some slight improvement as we look into September, but not until then. And John, I don't know if you want to add any color.

[John Pence:]

No, I wasn't here for the full impact in the second quarter of the last year, obviously. But I'll try to educate myself on the business and what I saw was a huge, obviously, decline in the employees served in the second quarter of last year. It's come back, as Pat mentioned, but it's nowhere close to where it was pre-COVID in terms of the overall employment levels. I mean, the client accounts are roughly the same. But when we look at the overall employees served under those employers still dramatically different than pre-COVID. So when that comes back to normal, I guess, is anybody's guess and clearly, the economists are missing it as well. So there's tons of, obviously, demand out there. But it's unclear as to when the employees are actually going to show back up again.

[Pat Goepel:]

And I think for us, I think what's important is we've modeled continued business improvement despite that uncertainty. I know just when I had two appointments recently, one at the barber 1.5 years ago that same time I go on a late Sunday afternoon after the Packer game, there's 12 barbers in that chair 1.5 years ago, there were 3 this year. Those nine employees for our business, that's top and bottom line. We don't -- we have the same customer service people based on the companies that we serve. So that will be accretive when they return. We can't wait for them to return, but we can model the business and run the business even if they don't return quickly. Second, the dentist's office, the dentist is doing the oral surgery. The dental hygienists have not quite yet gotten back to employment. They're increasing their hours, but not anywhere near what that is. So that's an example, the two type of businesses that when employment does come back, that will be a good opportunity for us, top line, bottom line. We're going to be cautious in modeling that. But when it does, it will be a nice tailwind for us.

[John Pence:]

Yes. And again, just to close out Pat's point, I mean, we're trying to focus on things we can control, right? We can't control the overall economy and when people all go back to work, but we're trying to do the right things to take care of the business in the interim.

[Eric Martinuzzi:]

That takes me to my next question, which is on the gross profit. The gross margin is up nicely here. Any one-timers to the good that we should be aware of? How should we think about gross profit margin for Q2?

[John Pence:]

Yes. I think it will be fairly consistent. There is not any one-timer. I think it will get pressured potentially in the second half as we start with the benefits back on. But we'll -- I guess, we'll get to that point when we start talking about the third and fourth quarter. But I don't think anything extraordinary changing between this quarter and next?

[Pat Goepel:]

Yes, Eric, I just think seasonally, a little bit the W2 and ACA revenue is -- it's the same every year in the first quarter. As John mentioned, we've restored pay cuts in the first quarter to normal levels from an employee perspective. In the second half of the year, we want to restore bonus and 401(k) map. So we're excited about that, but that will probably put a little bit of a damper on gross margin improvement. That being said, we are getting more efficient. And our operations, I've been very proud about the group that's doing the work. I think we're getting a higher level of standardization, harmonization of how we do business. We're getting efficiencies in our software and our technology projects. And that coupled with the economy, if we get a boost, will help gross margins as well.

[John Pence:]

And that's a fair point, Pat. I think I was looking at it more from a cost of sales perspective, not changing dramatically, but you're right. Absolute dollars and percentage will probably go a little bit down with the transition in revenue. That's fair.

[Operator:]

Your next question is from the line of Derrick Wood with Cowen and Company. Please go ahead.

[James Wood:]

Pat, I just wanted to ask about the focus on mid-market versus kind of SMB and smaller organizations, particularly as you onboard new reps, and it seems like you could go after target smaller companies with kind of higher volume level of new customers or target mid-market customers where there's bigger ASPs, but perhaps maybe lumpier deal flow. So what's the strategic focus, particularly with a lot of the new reps onboarding?

[Pat Goepel:]

So Derrick, it's a little bit of both, right? And I think when you think about a partner strategy, and we've been very strong with the banks, the CPAs and the benefit brokers. They will very often bring to you, whether it's clients, 10 clients at a time, 50 clients or a 100, we want to make sure, we're very clear, we're not going to be in the enterprise or the large end of the marketplace for payroll. But when you have the opportunity to gain somebody's book of business, you want to be able to serve their book of business because they don't want to, if possible, go to two or three providers. And we think we have a unique capability. In fact, our mid-market product, we're really excited about it. We've had some really good partnered activity in that product. And the capability, it is strong. So we have opportunity to grow in both areas. But from a small business perspective, we've chosen the start there. Just if you think about kind of getting partners and getting clients, we want to get the vast majority of those small businesses over quickly, and we saw some opportunities in the middle of the pandemic. Now what we're also doing is taking the second stage and growing the mid-market. So we strategically grab reps in the small business. This next stage over the second half of the year in 2022, we'll add more in the middle market, but we feel really good about the capability of both our product lines. And then when we prosecute the strategy around partners, we want to make sure that if we get 100 clients, we can get all 100 of them served on behalf of our partner.

[James Wood:]

And maybe kind of a follow-on would just be the -- maybe give us what your sense is of the competitive market and competitive landscape and compare and contrast, maybe how that was 6, 9, 12 months ago?

[Pat Goepel:]

Yes. I think when you think about human capital management, I mean, clearly, the -- I think the upper end of the marketplace. I've been in this industry 30 years. It is a bit crowded, and there're some world-class companies in that upper marketplace. And I think there's a number of clients or competitors that are fighting each other in that space. I really like the small, medium-sized business. I think, first of all, we have good market adoption, good market opportunity to get share. I think in some of the Tier 2, Tier 3 cities, it's still underserved. And I think we have the opportunity to grab market share where we continue to do that. And I think we're following a model that is very profitable in that segment of the marketplace. And then as far as the need, especially with COVID, I think people are coming out of COVID, and their wanting increased. Last year was survival. This year they'd say, how do I grow and grow digitally, and I think there's going to be more opportunities for years to come.

[Operator:]

And your next question is from the line of Jeff Van Rhee with Craig-Hallum. Please go ahead.

[Unidentified Analyst:]

This is on for Jeff. Just one for me. Pat, I think you mentioned you're seeing some good multi-product, some good cross-sell bundling in the quarter. Could you just go into a bit more color on what modules are seeing strong attach rates?

[Pat Goepel:]

Time and attendance and HR, both are increasing. And then what I would say, our tax product and money movement, we do feel is embedded and has some opportunities in the future as well. So we feel really good about those product sets that we're seeing.

[Operator:]

And your next question is from the line of Vincent Colicchio with Barrington Research. Please go ahead.

[Vincent Colicchio:]

Yes. Pat, did you add any resellers organically in the quarter? And what are your thoughts about going forward and adding resellers organically?

[Pat Goepel:]

We -- well, first of all, we're always willing and able to add resellers. We almost look at it, first of all, we have a lot of -- we're underserved in a lot of the Tier 2 and Tier 3 cities in the United States. So we've identified probably 100 cities we'd like to go to with the right reseller partner. We probably added about three or four in this first quarter. We want to make sure, and we do believe that especially as we get to the second half of the year, some of the resellers with COVID, if you're starting a business, it's tough to fund the business and start a business in the middle of COVID. So I do think you'll see that we'll get some resellers in the second half of the year or first part of 2022. And I think there'll be a return to normalcy there. And then I do think some folks that have been in reselling for us for a while, will look at potentially capital gains and some of the other taxation where they might want to strategically partner in exiting the business in late 2021 to make sure that they're tax-efficient as well. So it's kind of a constant pursuit where we're opening cities. We want to build a presence in those cities. And then as we do, strategically, we can welcome them to the Asure family and get the growth that we're building in this business. So that's definitely part of our strategy.

[Vincent Colicchio:]

As you move forward, hiring incremental salespeople this year, and you said the mix may change more towards midsized focus. What's your guidance instinct? Will you be able to hire people at the same level of tenure as you did last year?

[Pat Goepel:]

I think so. Last year, we had an opportunity with the acquisition of CompuPay by ADP, where we were fortunate that culturally we had some good sales reps that we could add. But we're fortunate in that we have a management team and President and Chief Revenue Officer, Goldstein, our Chief of Staff, Todd Waletzki, myself, others that have been in the industry 30 years, 20 years, 15 years, 10 years. And with that, what happens is you work with really some special people. And so it's always -- it's hard to get really good salespeople. But by the same token, when you have tentacles that run pretty deep, you have opportunities to get talent. And what we feel really good about as we grow our business and really focus our business, that talents coming available and luck is preparation meeting opportunity. And we think we have an environment where we can get some good people working for us, and we can do something special. So that's how we'd see it.

[Operator:]

And I'm showing no further questions at this time. I would like to turn the call back to Pat for closing.

[A - Pat Goepel:]

Yes. Thank you so much, and I appreciate everybody being on the call today. I think just a couple of takeaways. It's a tough environment. We play -- we knew that this was going to be a tough environment. By the same token, we could see the other side. And when you think about the progress we made with today in revenue growth, first of all, pre-COVID compare versus post-COVID that really bodes well for the future. I think you're going to see more revenue growth and more growth in the Asure business going forward. I think the trajectory we're on, when you think about some of the results we showed in the second quarter of 2020 to now, we have some really good momentum in the business despite having some tough times and some uncertainty with COVID. I'm really confident that as we go through the year and go through next year, investors, clients, shareholders, and employees are going to be very fortunate that they stayed with Asure because I think we're going to make some great things happen. So I appreciate your time today and look forward to talking to you live next time.

[Operator:]

This concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.