Asure Software, Inc.
Q2 2019 Earnings Call Transcript

Published: 10 Aug 2019

[Operator:]

Good afternoon and welcome to Asure Software’s Second Quarter 2019 Earnings Conference Call. Joining us for today’s call are Asure’s CEO, Pat Goepel; CFO, Kelyn Brannon; and Vice President of HR, Cheryl Trbula. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this call is being recorded.With that, I’d like to turn the call over to Cheryl for introductory remarks. Cheryl?

[Cheryl Trbula:]

Thank you, operator. And good afternoon, everyone. Before we start, I’d like to mention that some of the statements made by management during today’s call might include projections, estimates and other forward-looking information. This will include any discussion of the company’s business outlook or guidance. These particular forward-looking statements and all of the statements that may be made on this call that are not historical are subject to a number of risks and uncertainties that could affect their outcome. You’re urged to consider the risk factors relating to the company’s business contained in our reports on file with the Securities and Exchange Commission. These risk factors are important, and they could cause actual results to differ materially from expected results.Finally, I would like to remind everyone that this call will be recorded and it will be made available for replay via a link available in the Investor Relations section of our website at www.asuresoftware.com.With that, I would now like to turn the call over to Pat Goepel, CEO. Pat?

[Pat Goepel:]

Thank you, Cheryl. And I’d like to welcome everyone to our second quarter 2019 earnings call. We sure appreciate your interest, whether you’re an employee, client, investor, analyst or valued interested party.Let me run through some of the financial highlights. During the second quarter, we exceeded consensus expectations for both revenue and non-GAAP EBITDA, with non-GAAP earnings per share meeting expectations. Looking at the quarter

[Kelyn Brannon:]

Thank you, Pat. And good afternoon, everyone. As Pat noted, our second quarter results were steady and solid, and we continue to focus on improving our operating leverage. Now let me run through the details. As a reminder, as usual, all non-revenue financial figures I will discuss today are non-GAAP, unless I state them as a GAAP measure. As always, you’ll find a reconciliation from GAAP to non-GAAP results in today’s press release.Total revenue for the second quarter increased 14% to $24.8 million from $21.8 million in Q2 of last year. Recurring revenue grew 15% year-over-year. In Q2, professional services, hardware and other revenue grew 10% over Q2 of the prior year. As expected, Q2 exhibited its usual seasonal pattern with a slight downtick from the prior quarter due to W-2 and ACA onetime benefits which impact our first quarter. The remaining quarters of 2019 will not include this benefit, but we’ll see the seasonal impact again in Q2 of 2020.Recurring revenue in Q2 as a percentage of total revenue was 82% compared to 82% in Q2 of 2018. HCM revenue represented 69% of the total. And workspace was 31%, in line with Q2 of the prior year. HCM revenue grew 15% over Q2 of last year, and workspace revenue grew 13% year-over-year. As a reminder, HR consulting revenue and AsureForce is included in our HCM category.Next I’ll discuss our profitability metrics. Q2 non-GAAP gross profit increased 4% to $15.6 million, equating to a non-GAAP gross margin of 62.9%. This compares to $15 million or gross margin of 69.1% in Q2 of 2018. Q2’s non-GAAP gross margin declined slightly from the prior quarter. As I discussed earlier, Q1 benefited from the usual seasonality we experience as a result of onetime W-2 and ACA processing. These one-off items carry a benefit of over $3 million to our overall gross profit in Q1 or a benefit to our non-GAAP overall gross margin of over 400 basis points in Q1 of 2019.Increasing our – given our increasing mix of HCM, along with increasing hardware sales, we continue to expect non-GAAP gross margins to be in the range of 63% to 65% in the near future.Q2 non-GAAP EBITDA was $4.9 million, roughly in line with Q2 of last year. Non-GAAP EBITDA as a percent of revenue was 19.9% versus 22.4% in Q2 of 2018. As we look into the second half of 2019, we expect to continue to see improvements on our non-GAAP EBITDA as onetime expenses related to harmonizing our acquisitions and upgrading our infrastructure primarily with AWS and NetSuite. In Q2, non-GAAP net income totaled $1.2 million or $0.08 per share. Looking ahead in the third quarter, our non-GAAP effective tax rate guidance is still at 0%, and we feel this more accurately measures our expectations for actual performance.Shifting gears to our balance sheet. Cash and cash equivalents was $14.7 million at the quarter end. This is a decrease of $1.9 million from the prior quarter primarily due to investments of inventory of some $2.5 million. At June 30, 2019, we had $120 million in gross debt, down from $124 million at the end of Q1 of 2019.Total deferred revenue on the balance sheet as of June 30, 2019, including both short and long term combined, was $12.6 million. At June 30, 2019, short-term backlog, which we define as the sum of deferred revenue and unbilled deferred revenue within a 12-month horizon, was up 4% year-over-year. Total backlog, which includes both short and long term, was up 8% year-over-year. We are pleased with the level of visibility enabled by our focus on recurring cloud revenue. DSO in Q2 was 57 days, down from 77 days in the year ago quarter, benefiting from our focus on improving cash collection. Inventory was up $1 million sequentially as we build our capacity to fulfill the strong workspace demand. Overall head count increased sequentially by three employees in Q2, bringing our total to 557.During the second quarter, cash used in operations was $1.4 million, an improvement of $2.7 million or 66% over Q2 of last year. I’ll also note that, during the quarter, we invested $2.5 million on inventory to meet increased demand for our workspace technology. Had we not invested to this level, we would have generated positive cash flow from operations during the second quarter, which tends to be our most seasonally light quarter. We continue to be very focused on generating positive cash from operations for the full year.Before I turn the call back over to Pat, I want to update you on our back-end infrastructure upgrade activities and our client fund initiative. Our client support is now hosted on AWS cloud platform. Our NetSuite implementation remains on track. We are now live on procure-to-pay and fixed assets. In addition, all of our HCM small businesses are completely online with NetSuite. We plan to have the billing and invoicing for the Great Plains businesses up in Q3 and projects implemented and running in Q4. I am pleased with my team’s efforts to drive our modern enterprise architecture and internal control environment.As we discussed on our last earnings call, we’ve taken steps to consolidate client funds to achieve a higher blended investment rate. Last quarter, we had anticipated to achieve a blended rate of approximately 2% to 2.5% annually. Given the recent 25 basis points decline in federal fund rate, we expect our blended rate to decline accordingly to 1.75% to 2.25% annually. While lower rates pressure revenue and EBITDA a bit, it is net neutral to EPS and cash flow due to the lower debt interest rates.When we initiated this effort, we started out with 60 accounts spread across 11 banks, and we’re working hard to rationalize banking and investments. Currently, we’ve consolidated 70% of the client and operating funds, up from 60% last quarter. We expect a majority of the funds to be consolidated by the end of the year. This is a very high-margin revenue stream, so we were pleased to see additional synergies from the acquisitions impact our top and bottom line.Now I’ll turn the call back over to Pat. Pat?

[Pat Goepel:]

Thanks, Kelyn. And I’d like to salute her team. They really make a lot of progress. Our business was right on track during the first half. We feel that we’re on a solid foundation to execute on a consistent basis.Turning to guidance. We’re fine-tuning our annual guidance given underlying macroeconomic trends and a new initiative that we’ve implemented in our consulting business. We recently went through an examination of our consulting business. We found that we’re better able to improve utilization and profitability via scalable consultants that aren’t dedicated to just one specific client. This will impact our 2019 revenue by approximately $1 million on low-margin business. To a lesser extent, our revenue has been impacted by macroeconomic conditions, including the China-related tariffs; FX exposure, particularly the British pound; and interest rate declines during 2019 as it relates to funds we invest. For example, just 90 days earlier, the British pound exchange rate was $1.30. Today, it’s roughly $1.21. And then the fed rate cut that Kelyn just mentioned took an effect recently as well. As such, we feel that extra level of conservatism is warranted. We’re refining our 2019 revenue guidance to $103 million to $105 million, with non-GAAP EBITDA of $22 million to $24 million, equating to non-GAAP EBITDA margin of about 21% to 23%.Please note, as we’ve outlined to you, the guidance does not include any contribution from future acquisition, and we’re pleased – or we’ll revise our guidance after such acquisitions will close.We’ve committed to generate positive operating cash flow for the full year 2019, which we believe is a very important step in realizing harmonization from last year’s human capital management acquisitions. In fact, without the investments in inventory we made in Q2, we would have generated positive cash flow from operations in which is typically very poor-cash-flow quarter. Given that our onetime expenses and investments in ERP and AWS will be tapering through the second half, we feel very confident that we’ll generate a better cash flow cadence moving forward, so posting positive operating cash flow for 2019 is a key objective.While we have an active pipeline of acquisition targets, we’ll be opportunistic in the near future on this front. As I mentioned on the last earnings call, I don’t expect the pace of acquisitions to be anywhere close to that of 2018 [ph]. It’s really been about the focus of integration of the acquisitions and a demonstration of the economic model that is the focus for 2019. We’re entering the second half of the year with solid performance. We’re keenly focused on scaling the business. We set clear objectives this year to set the foundation with a scalable platform from which we can leverage our back-end infrastructure for growth opportunities, both organic and inorganic, in the future. We want to realize cost synergies and get the cost out of the business. We want to produce margin improvement and generate cash. We want to invest in product improvements and execute on our cross-selling opportunities.In closing, I firmly believe we have the right products and a depth of offerings for the markets we serve. We have the right people in place, and we’re focused to improve our financial leverage.And with that, we’ll open up for questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Derrick Wood with Cowen and Company. Your line is now open.

[Derrick Wood:]

Hey, everyone and congrats on the quarter. I wanted to touch on the what seems to be an effort to build out the reseller channel and perhaps some kind of additional activity going on in this quarter. I guess, if you look out over the next couple of years, will this be kind of additive to the build-out you’re focused on from a direct sales force? Or do you think you could lean more onto the reseller channel? And then maybe can you just give us a sense as to how long it takes resellers to ramp up and help generate revenue?

[Pat Goepel:]

Yes. Derrick, thank you, and great questions. How we view resellers. First of all, we view organic growth in general to be we’re never going to have 2,000 feet on the street. And we believe that the resellers are very profitable. They can open up markets in a much more cost-effective way. As you know, customer acquisition costs are typically about two years to break even, but in this model clients are very profitable years three through nine or eight, depending however long they stay with us. And on average, our retention rate is very high. So with that backdrop, we want to continue to sell resellers and have them and their business flourish. We also, though, want to be able to – once they want to exit, in an exit strategy be able to own the clients directly; and that allows them to have an exit strategy and a partner for life.And when we do that, now we have individual sales reps take directly, and our sales reps are very productive in this segment of the marketplace. And then they can now really take what historically has been a payroll focus and really offer hire-to-retire solutions and drive value to the clients from a product perspective as well as the synergies of having kind of a scalable business beyond just a reseller. And what’s exciting about that transition for us is we’ve proven out the model and it’s worked out very well. We have very little channel conflict. And both seem to flourish very, very well. So with that, I think you will see more of that, and then as the resellers mature, they have an exit strategy with that. That is from a business owner resonating very nicely.As far as onboarding of clients. Typical reseller may have 600 clients. They usually onboard in a period of as little as three months; or it could be a year, at their pace. And what we’re finding in the marketplace is – the marketplace for payroll services and resellers in general is they’re tending to want to go with high-quality shops that have good software, good service DNA and then the back-end infrastructure to support scale. And we’ve been fortunate to have that with the right kind of people that are able to onboard kind of these resellers, and the team has done an outstanding job. So it’ll continue as part of our strategy.

[Derrick Wood:]

Great color. And I guess, one for you, Kelyn. Could you reconcile the difference? I mean you guys put up 14% revenue growth, and short-term backlog was up 4%. So I guess, what components of backlog are driving that number down? And then are there any other dynamics to consider for the delta between the two?

[Pat Goepel:]

Yes – no. And Derrick, I’ll take that. And Kelyn, feel free to jump in as well. You know what, if I reflect back

[Derrick Wood:]

Great, I’ll get back in the queue. Thanks.

[Pat Goepel:]

Thanks, Derrick.

[Operator:]

Our next question comes from Scott Berg with Needham & Company. Your line is now open.

[Scott Berg:]

Hi, guys. Congrats on a good quarter and thanks for taking my questions. I guess, Pat, starting for you

[Pat Goepel:]

Yes. No, thank you, Scott. It’s a very thoughtful question. On a couple fronts

[Scott Berg:]

Great. And then my follow-up for Kelyn is, Kelyn, on the revenue guidance, how conservative are the estimates with regards to the British pound and your exposure there? And then what’s – I believe many are anticipating at least another 25 basis cut in the funds – fed funds rate at least sometime here before year-end.

[Kelyn Brannon:]

Yes, yes. I think that on the fed funds rate usually is – I mean that’s we’ve gone back. And we know that we’re going to be down those 25 bps, so that’s kind of a no-brainer. Quite frankly, on our business in the U.K., which has been incredibly strong, especially with our acquisition of OccupEye last year, I don’t know if I could forecast what bretix is going to look like – Brexit, and if they’re going to crash out, but we’re making those plans. I believe we have been conservative. I do have a lot of inventory over there and so I want to make sure that we’re protected from a crash out of the EU.So, I may be shifting some inventory around to other locations, but I think I’ve been relatively conservative. And probably 50% of that guide that we put in the revenue is really around the consulting business and as we change that platform from individuals sitting at clients or working on two or three clients at an office to how we can leverage technology to deliver those HR consulting sources that they need. And it just takes time

[Scott Berg:]

Great. That’s all I have. Thanks for taking my questions.

[Kelyn Brannon:]

Thank you.

[Pat Goepel:]

Thanks, Scott.

[Operator:]

Our next question comes from Jeff Van Rhee with Craig-Hallum. Your line is now open.

[Rudy Kessinger:]

Hey, great. Thanks guys. This is Rudy on for Jeff. A couple questions. I’m not sure if I missed it earlier. I know, in the past, you guys have said you’re planning to hire, I believe, 20 additional sales reps this year. Can you just give an update on where you guys are at, if 20 is still the target for the year?

[Pat Goepel:]

Yes. Rudy, thanks for the question. 20 is the target for the year. I think we have really focused on quality and quantity. We’re not hiring just to hire by a specific date. I think, when I look at the first part of the year, we really – we’re very picky and did really well. I think it took us a while to really get the right kind of talent and the right kind of interest. What’s been exciting over the last three months or so is we got the right word out and starting to hire now. As far as the hiring perspective, typically in a small market you can get up and running within three to six months. The enterprise market is a little bit longer. The full productivity ramp is probably another quarter than that. And so right now, we’re on pace to finish the year 20 up. I think, without getting into a specific number right now, we’re right where we need to be to make that 20 and hit the ground running in 2020 from a productivity perspective.

[Rudy Kessinger:]

Okay. Great. Got it. And then a lot of color earlier on, on the resellers. I’d like to revisit that in terms of take that typical reseller with 600 clients. In terms of migrating those customers over, is that something where you guys have the capacity built up right now to handle those? Or any incremental investments going to be needed there in head count.

[Pat Goepel:]

Rudy, I’m happy to have you apply and help us out – no. I’m teasing you a little bit. What – you know what, what we feel really good about is, because we have some skilled people that really understand our platform, we are adding to capacity there, and that’s been a good thing. And what we’re looking at is from other areas of the business and actually from some other resellers that – people that want to help us out or earn a few extra bucks. So we have a really good coordination of people that will help themselves, add clients, use some consultants to help us out or help them out; and then also our staff, both implementation, training. And then from an automation perspective, really getting automated scripts from other platforms, et cetera, to help with the conversion. So it’s been a multipronged effort. We’re trying to do that in a very efficient manner but then also one that’s high quality because those type of resellers typically have a really long life with us. And so once you do get them in, you spend a few bucks with the customer acquisition model and getting them live. The rewards can pay off really as a partner for life.

[Rudy Kessinger:]

Great. And then just lastly, I know you haven’t given out a guide for next year yet or anything, but just any early thoughts on what potentially organic growth rate could be if we look at the out-year?

[Pat Goepel:]

Yes, what I would say, Rudy, I think it’s just a little bit early for that, but just forest from the trees this quarter. And we’re starting to break out space revenue versus human capital management revenue. It’s roughly about 31% in space, but if you think of it, we were over double-digit organic growth this quarter in the space business. And I think we have the kind of pipeline that we should be that going forward. So that would imply a 10%-plus organic growth. In the human capital management side, we are doing some pruning on the consulting model, where we’re not going to consult for consultant sake or low-margin business. We’re going to do that for a relatively high-margin, scalable business that helps the overall business, so that’ll be a little bit of a drag on the organic growth. And then two, the sales reps that we’re hiring, we invested because not only did we – we were very pleased with the sales rep productivity. We just didn’t have enough of them. They typically really start to ramp into organic growth, and the second half of 2020 is where kind of I see it’ll start to grow sequentially. We’ll give you a more formal guide as we speak in the next call, but I would – at least that would give you the foundation to kind of look at the numbers.

[Rudy Kessinger:]

Got it, great. Thanks, guys.

[Operator:]

Our next question comes from Vincent Colicchio with Barrington Research. Your line is now open.

[Vincent Colicchio:]

Yes. Pat, the – based on client feedback that you received, how may your product road map change?

[Pat Goepel:]

Vince, that’s a great question because we always have a product road map that’s informed by our clients, our employees, our operational leaders, our marketing department and to some extent even our competitive innovations. And what we do is we put that plan together and then we test drive it with our clients. In short term, it really doesn’t change too much. It could change in a glaring feature or feedback that it doesn’t work the way it’s intended, but generally the feedback is that it gets out. Now from a quality perspective of training and messaging, that’s where some of that feedback gets into the road map in the immediate month, let’s say. What really, though, the client feedback does, and the clients talking together, is it affects both change management internally on how we implement better; and how they can implement our products and services; how they can maximize the use of our services on a mobile or a PC, an iPad or one of our hardware solutions. The analytics and results that they can drive from those results are really important.And then from a product road map perspective, we’ll have a co-innovation opportunity where a client can partner on something with us that – as long as it’s not just for that client but could be used for other areas. And then what I would say

[Vincent Colicchio:]

You mentioned a – there’s a large insurance client on the space side that’s looking to deploy globally. I realize that the process is relatively slow. Are there others in the pipeline that you think are getting close to a similar decision?

[Pat Goepel:]

Yes, we have what I would say right now are probably about four really interesting proof-of-concepts and "workforce of the future in some form or fashion" initiatives where they’re running some pilot programs and they have the ability to get future spend in the area of $300,000 to multimillion dollars. Now before everybody gets into when, what and what week and what month, what I would say the order of magnitude in some of these larger companies if they have five, 10, 20, 50 locations is they have to think about what is the global workforce, what is the continent strategy, what’s the department strategy. So what we try to do in those cases is partner with them to get the right business outcomes. And as – if they get the right business outcomes, then it’s rinse and repeat on those locations.So when I look at the marketplace today. If you were going to buy an ERP solution or you’re going to buy some global solution that’s readily bought and matured, you have kind of that underlying buying kind of capabilities. And you know how to buy. You know how to deploy. You know how to use it. As workspace is growing and it’s still a young space, we’re – almost have been able to teach people not only how to buy, how to deploy and how to get the results they want. And they’re teaching themselves kind of how to buy it as well. So it’s an exciting time in the space. I think it has a lot of potential, but we’re still in the early innings of it, which makes it hard to predict the revenue. By the same token, it’s not a question of if. It’s a question of when.

[Vincent Colicchio:]

Okay. Nice quarter. Thanks for answering my questions.

[Pat Goepel:]

Thank you, Vince.

[Operator:]

[Operator Instructions] Our next question comes from Bruce Goldfarb with Lake Street Capital. Your line is now open.

[Bruce Goldfarb:]

Thank you. Hey, Pat, Kelyn and team, congrats on the great quarter, and thanks for taking my call. A question in regard to the competitive landscape. Have you guys had good customer retention post your acquisitions over the last couple of years?

[Pat Goepel:]

Yes. Bruce, thank you for the feedback. We were just discussing this in getting ready for the call. The – when we look at annual retention numbers, we’re running ahead of where we predicted we were going to be. As you know, some of the business in – is cyclical in the sense that people like to convert, let’s say, January 1 or on the quarters. And sometimes, it’s dependent on when contracts are signed, or government money or different kind of budgets, but I would say we’re running ahead on retention through the year. We anticipate that – with the initiatives that we have in place both from a product and a hiring perspective, that, that will continue to stable or even increase. So we’re very cautiously optimistic that retention rates will be nice. Now what we want to see further traction on is the ability to cross-sell and upsell on that higher-than-average retention number, which we’ll declare victory towards the end of the year, but we’re – we’ve had a nice start.

[Bruce Goldfarb:]

Great. And just one more in terms of products, and I think it’s your features and – that you’re going to be adding. I’m just curious if you can give us any color on what your Chief Technology Officer, Joe Karbowski, is working on in terms of, one, integration of products and new features; and any kind of functionality that you think you’re going to be focusing on.

[Pat Goepel:]

Yes. No, I appreciate that. And Joe Karbowski is a busy guy. And I call him Inspector Gadget, but coming from the client conference in C3, we got plenty of feedback on the road map, et cetera. We’ve rolled out through the first half of the year and in the third quarter a hardware refresh throughout the business. And that’s where you saw the inventory line has gone up to $5 million because what it did is enabled us to really get some – a refresh of all our hardware which drives a lot of our analytics, especially in the sensor business. Our capability is multiplied, and then our cost has gone down per unit. And we’ve also partnered with scalable partners that can make the materials faster.So over in the future, we won’t have – we’ll have almost just-in-time inventory. So that was a key initiative for us, and our clients led that. And Joe has really driven that with his partner, Travis, on that initiative. As far as on the software side, in Resource Scheduler we have a scheduling system. Plugs into Outlook with a bidirectional interface. The analytics come from it, where – the actionable insights. And then the integration between the panel, the mobile, the analytics really has been the key driver, SmartView and scheduling with that and then back in Outlook. So those are the initiatives that we’re focused on this year and through the second half of the year.In human capital management, it’s really the time interface, so time and attendance, facial recognition. From a workflow perspective, I can’t tell your fingerprint from mine, but our supervisor could tell our faces. So the facial recognition into the payroll engine has been a big integration effort, as well as our focused on HR. Then – and in the second part of really 2020, we’re looking at automating some quick payroll entry screens. We believe that the clients have the ability to take on more work with better control, and they’re doing that already. That’ll eliminate or take some costs out of our model, so that’s exciting for us, but those are some of the key terms. And then I think some general themes is really get to the mobile across all products and services and get to the analytics, where the ROI and the key kind of intelligence of the solutions pop out to the client. And you’ll see that in the first half of 2020.

[Bruce Goldfarb:]

Great, thank you. That’s all I had and congrats again on the great results.

[Pat Goepel:]

Yes. Appreciate it. Thank you.

[Operator:]

I’m showing no further questions at this time. I’d like to turn the call back over to Pat for any closing remarks.

[Pat Goepel:]

No, I really appreciate everybody’s time. I thank you for your interest in Asure Software. We feel like we’re positioned really nicely in the second half of the year. And we have a good team in place. We’re working on the right initiatives. It’s a lot of blocking and tackling, but this will allow us to go forward in a faster manner, in a scalable solution. We think we have an awesome opportunity in front of us, and it’s our challenge here is to really get in a position so we can accelerate. And we thank you for your investment and your interest in Asure, and we’ll do a good job for you. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.