Asure Software, Inc. (NASDAQ:ASUR) Q4 2022 Earnings Call Transcript

Asure Software, Inc. (NASDAQ:ASUR) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good afternoon, and welcome to Asure’s First Quarter 2022 Earnings Conference Call. Joining us for today’s call are Asure’s Chairman and CEO, Pat Goepel — pardon me, Asure’s Chief Financial Officer, John Pence, and the Head of Investor Relations, Randal Rudniski. 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 Randal Rudniski for introductory remarks. Please go ahead.

Randal Rudniski: Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure’s fourth quarter and full year 2022 earnings call. Following the close of 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 these items along with a reconciliation of non-GAAP measures to the 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 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?

Patrick Goepel: Thank you, Randal, and welcome, everyone to Asure Software’s fourth quarter and full year 2022 earnings call. I will begin today’s presentation with an update on our business highlights and strategy, and then we’ll turn the call over to our CFO, John Pence for a more detailed review of our financial results and outlook for 2023. We will then conclude the session with time to answer your questions. We are very pleased with the performance of the business in the fourth quarter and in 2022. We made meaningful enhancements to our HR compliance and tax solutions while introducing a sure marketplace and more effectively leveraging client funds to drive interest revenues. Collectively, these businesses contributed significantly to our revenue gains in the quarter and in the year.

We also had a strong contribution to revenues from processing of employee retention tax credits in ’22 on behalf of our clients. This government stimulus program, which is part of the CARES Act is expected to be active to 2025 and we have leveraged our differentiated tax filing processing capabilities to tap into this segment on a very efficient basis. Strength in those areas drove 39% annual growth in revenues in the fourth quarter, virtually all of which is organic. It also resulted in an improved net loss of $1.1 million versus a net loss of $4.3 million prior year and improved EBITDA of $5 million relative to $1.5 million in the prior year. Adjusted EBITDA grew 159% in the quarter to $6 million for a margin of 20.5%. Notably, we converted 45% of each incremental dollar of revenues into adjusted EBITDA in the quarter relative to prior year’s quarter.

This high flow-through is the direct result of enhanced automation within our systems, improved efficiencies via consolidation and increased penetration from high margin revenue segments. I am pleased with this performance and it gives us confidence going into 2023. Business momentum accelerated through 2022, resulting in strong fourth quarter finish with new sales bookings achieving a 234% growth rate relative to the prior year and net revenue retention improving to 93%. This gives us a great starting point for 2023. I would also like to take a moment to note that we’ve enhanced the disclosures in our press release this quarter, by providing additional GAAP to non-GAAP reconciliations. John will talk more about that in his remarks. We have refreshed our IR presentation on our website to reflect our current views on the business and the direction of our future.

Turning now to sales development in 2022. We focused our sales activities and bundled offerings as well as new products to drive value and additional revenue streams. As previously discussed, a large portion of these activities was geared towards the introduction of Asure marketplace, enhancements to our tax platform, that also facilitates ERTC processing and our new HR compliance suite of solutions. With this increased number of solutions available to our clients, we leverage our ability to bundle products which ultimately played a key role in our revenue success. We will continue this focus in 2023 with further enhancements to our payroll solutions and Asure marketplace. Another key initiative that we’ve been working on is strategic enhancements to our tax platform to capitalize on our unique position in the marketplace.

Efforts in this area include consolidating to a single tax engine, introducing a new tax portal and improving technology to facilitate integrations, including ERTC processing. Overall, our tax solutions also had strong performance in 2022, and we believe that we’ll see this performance continue into 2023. Our HR compliance solutions were focused in 2022, and we leveraged our ability to bundle solutions to drive excellent performance in this segment. Our revenues nearly doubled relative to prior year in the fourth quarter, and bundling has been a big part of that success. So far, I focused on sales and revenue achievement, but I don’t want to lose sight of our enterprise efficiency initiatives that have also been top of the mind of our organization.

We are executing against our strategic growth initiatives and are achieving the milestones that are expected to deliver $5 million in annual savings once the plan is fully complete by year-end. We are enhancing our standardization and centralizing our operations to bring all of our assets into a unified operating platform. There are obvious cost benefits to this structure, and we expect to improve our service delivery and revenue retention from these initiatives, which we believe will create long-term value for our clients and our stakeholders. Project streams for our centralization efforts include: first, developing a single HCM platform to deliver state-of-the-art solutions and accelerate product development; second, enhancing automation through robotics to gain efficiency; third, standardizing processes and data to give us greater flexibility and reduce cost; and finally, upgrading our communications infrastructure.

These efforts have produced efficiency gains that have enabled us to flow through a higher proportion of revenues to EBITDA and to grow the business with a clear sight into higher margins. I’ll give you a very tangible example of what that means to our business. In 2022, we grew revenue by 26%, and we ended the year with fewer employees than we started the year. The performance was made possible by our focus on high margin revenue streams and our standardization and centralization efforts. As we look into 2023 and beyond, we believe we’ve built a foundation that will drive continued success. Here, I want to highlight the Asure marketplace, which has the potential to transform our business in a very significant and positive way. Asure marketplace enables businesses to communicate seamlessly to support a wide range of business-to-business and business-to-consumer applications, business applications can include income verification, tax preparation, retirement solutions and earn wage access.

We’re also developing consumer applications that expect those to be part of the Asure marketplace in the future. Asure marketplace leverages the vast amount of data in our domain and allows us to explore, test and create new revenue streams. One of those new revenue streams is the integration with Equifax to help power their work number solution. We work with Equifax to provide data to help consumers with their mortgage applications, car loans, government benefits and other end users. In addition to simplifying processes for our clients, it brings value to business by eliminating manual processes, ultimately saving time for management and reducing verification risk. This is a true win-win for employers and employees. We have several additional integrations in development that will be released in the quarters and years to come.

I would also like to highlight our announcement last week about our partnership with ZayZoon to allow customers to offer their employees earned wage access, earned wage access provides employers with the flexibility to pay their employees in real time as small businesses continue to compete for talent, applications such as earned wage access, enable them to differentiate themselves with the workforce and attract and retain talent. For employees, it offers access to their hard earned wages while promoting financial wellness and reducing financial stress. We are very excited to offer earned wage access to our small businesses throughout the United States. This application has great potential, and we believe it will be an important component to our service and product offering.

We launched Marketplace in 2022 on the belief that data and automation would play important roles in generating high margin revenue streams for our business. In the fourth quarter, marketplace lived up to that expectation through its contribution to our revenue and EBITDA performance. Moving forward, we believe Asure marketplace could represent upwards of 30% to 40% of our overall revenues over time. In addition to driving the Asure marketplace, HR compliance and tax solutions, our 2023 efforts will include a moderate expansion of our sales force and refined selling and marketing strategies. These initiatives are designed to drive reoccurring revenues with a continued focus on high margin revenue streams. We are expanding and accelerating our technology development efforts to further enhance automation and build a single human capital management platform that supports our solution.

We will also continue to focus on our consolidation and standardization program that is in the final phase of implementation. You could see the impact of these initiatives on our revised higher 2023 guidance. We’re now guiding for revenues of $105 million to $107 million and adjusted EBITDA margin of 15% to 17%. Our previous guidance was revenues of $98 million to $102 million, with an adjusted EBITDA margin of 14% to 16%. Our 2023 guidance reflects our organic performance and does not include acquisitions. We’re also introducing first quarter 2023 guidance for revenues of $29 million to $30 million, which is approximately 20% higher than the first quarter of 2022, all of which is expected to be organic growth. We’re guiding for adjusted EBITDA between $6 million and $6.5 million in the first quarter, which means margins are expected to hit 20% again in the first quarter.

The first quarter of each year is our seasonally strongest period from both a revenue and margin perspective, owing a bit to the timing of W-2s and year-end fees. Our performance in 2022 has laid the framework for what we expect to be a record year in 2023, while macroeconomic complexities continue to be on our radar. Labor market trends have been supportive of our business so far in 2023 and the revenue gains we expect to achieve from our enhanced solutions anticipated to partially insulate us to some degree from the broader economy. Now I would like to hand off to John to discuss 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 will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. This quarter, we have updated our non-GAAP reconciliations to provide additional information that we hope will be useful to investors and analysts. We are providing reconciliations for each operating expense line item. We have also adjusted our definition of one-time items. The reconciliation in the press release have been updated for the current and prior quarters that you have comparable basis to get our results. The reconciliations themselves are also included in our most recent investor presentation posted in the Investor Relations section of our website at investor.asuresoftware.com.

So with that, now on to the fourth quarter and full year results. Revenues reached $29.3 million in the fourth quarter, rising by 39% relative to prior year, almost all of which was organic. Recurring revenues rose 25% relative to prior year, while non-recurring revenues rose by 93%. Our revenue improvement this quarter was driven by continued strength and our recurring HR compliance business, which has seen success in their differentiated solution as well as being bundled with our ERTC offerings. Increased interest revenues with average client balances exceeding $200 million. The fourth quarter also represented the first full quarter of Asure’s marketplace, which was initially introduced in the third quarter. Finally, we also experienced a nice uplift generating revenues from processing of earned retention tax credits.

For the full year, revenues reached $95.8 million, a 26% increase relative to prior year with growth being relatively balanced between organic and inorganic. Net loss for the quarter was $1.1 million, a $3.2 million improvement over prior year’s quarter loss of $4.3 million. Full year net loss came in at $14.5 million versus prior year at $3.2 million of net income. I would like to remind everyone that in 2021, Asure recognized $18.8 million in extraordinary gains related to the CARES Act. Absent these gains, 2021’s net loss would have been $15.7 million. Gross margins rose by 9 percentage points to 72% in the fourth quarter, while non-GAAP gross margins rose 8 percentage points to 76%. This reflects our strong revenue gains, the high margin mix of the growth and the impact of our standardization and consolidation efforts.

EBITDA for the quarter was $5 million, a $3.5 million improvement from prior year’s quarter of $1.5 million. Full year EBITDA came in at $8.8 million versus $22.3 million a year earlier. Excluding the extraordinary gains just discussed, 2021 EBITDA would have been $3.4 million. Adjusted EBITDA rose by $3.7 million relative to prior year to $6 million, and our adjusted EBITDA margin reached 20.1% in the quarter compared with 11% in the prior year. 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 as well as the technology development to drive revenue success.

We are encouraged by this proof point in our operating model as it demonstrates the long-term potential scalability of the business. We ended the year with cash and cash equivalents of $17 million, we also had $34.9 million of debt, which is comprised of $30 million drawn under our senior credit facility, with the remainder made up of sell our notes from acquisitions. As Pat and I said earlier, the fourth quarter results, we have made some changes to the presentation of our non-GAAP and adjusted disclosures. First, we are providing a reconciliation of GAAP to non-GAAP expenses for each operating expense grouping. In our conversations with analysts and investors, they have expressed the desire to see more detail in our non-GAAP operating expenses.

And we are providing a view that is similar to how we have previously provided GAAP to non-GAAP gross profit. Secondly, we have revised our definition of onetime expenses. For comparability to current and future period presentations and guidance, we removed from prior period presentations, specific expenses that at the time, we believe would be one-time in nature but are likely to recur given our recent internal forecasting. We have included a GAAP to non-GAAP reconciliation for net income to facilitate the comparison to our 2022 guidance. However, going forward, we do not intend to give guidance or report on this metric. Turning now to guidance for the first quarter and full year of 2023. Our guidance is offered with a backdrop of continued economic uncertainty and a dynamic labor market.

It’s also important to keep in mind that the first quarters are seasonally strong as recurring year end W-2 and ACA revenue is recognized in this period. We are raising our full year 2023 revenue guidance to a range of $105 million to $107 million and adjusted EBITDA margin to a range of 15% to 17%. We are also introducing guidance for the first quarter revenues of $29 million to $30 million and adjusted EBITDA of $6 million to $6.5 million. Our 2023 guidance does not include any acquisitions. However, we will continue to evaluate those as we always do. Consistent with our historical performance, we expect the first quarter’s 2023 results will benefit from revenue generated by annual preparation of federal reporting regarding employee, employer reporting of W-2 Income and ACA compliance.

Our revenue expansion across multiple categories was excellent in the fourth quarter, and we are encouraged by this momentum continuing into 2023. We have been very successful with building our HR compliance and tax processing solutions. Between our multi-tiered HR offerings and our automated ERTC filing capabilities, we believe we are setting the industry standard for compliance. Asure’s marketplace is also expected to be an important driver in 2023. We are growing our list of partners and expect strong momentum from this solution. This opportunity is a result of dedicated effort to enhance our technology and to leverage the data we have in our business. Further projects are anticipated to go live in the coming quarters. And regarding float, we enjoyed our best quarter yet with float as our consolidation efforts have enabled us to take full advantage of rising rates.

We believe float revenues will be a strong contributor to our revenue performance in 2023. We are also continuing to move forward with our standardization and centralization initiatives and anticipate achieving additional operating savings. While nothing is imminent, as we’ve stated before, we will continue to be opportunistic in evaluating acquisitions and we’ll execute if the right opportunity arises to create value for our shareholders. With that, I will turn the call back to Pat for closing remarks.

Patrick Goepel: Thanks, John. I’d like to conclude by saying that 2022 was a busy and successful year at Asure. And I’m very excited about the foundation we have built to drive growth and value creation for the future. In 2022, we invested in sales and marketing to drive higher demand for our solutions. We invested in product and technology, resulting in enhancements to our HR compliance and tax solutions with greater automation to support new applications such as the Asure marketplace. These investments produced accelerating demand throughout 2022 with Q4 new sales bookings growing 234% year-over-year. And with fourth quarter organic revenue growth accelerating as we said it would. We also continue to improve our cost structure and efficiencies by pursuing consolidation and standardization initiatives designed to save $5 million annually when fully complete.

We are really excited about the progress we made in 2022 and anticipate following it up with a strong performance again in 2023. In 2023, we anticipate delivering double-digit organic revenue growth and strong adjusted EBITDA margin gains. Our revenue guidance anticipates solid momentum with our HR compliance and tax solutions, reflecting the upgrades we have made revenue contribution is expected to come from new revenue solutions such as the Asure marketplace. Interest revenues are also anticipated to increase meaningfully due to the rise in rates and investable balances. We’ll continue to pursue our consolidation and standardization initiatives while simultaneously investing in technology development and sales expansion to support long-term success.

We are excited about the foundation that we have laid, which we expect to drive double-digit revenue growth and increasing margins. We look forward to updating you on our progress next quarter or during one of the several conferences we’ll be participating in over the next couple of months. So with that, I’ll send the call back to the operator for the Q&A session. Operator?

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Q&A Session

Operator: Thank you. And our first question comes from Barry Bergin from Cowen. Your line is now open.

Patrick Goepel: Hey. Bryan, careful. How are you?

Bryan Bergin: Good guys. How are you doing? Good afternoon.

Patrick Goepel: Good. Thank you.

Bryan Bergin: Wanted to start here on demand drivers. So is it possible you can quantify some of the larger contributors to that strong bookings performance, the 200% plus in 4Q? And how have you seen that strong level of demand? Has it continued into the early part here through January and into February?

Patrick Goepel: Yes. Bryan. Thanks for the question. First of all, the marketplace, if you think about how we started in April, we announced the Equifax deal, we’ve announced in Q1 and Q2 or excuse me, Q1 and Q4, whether the H&R Block or Intuit recently, ZayZoon. So clearly, the marketplace has a ton of focus. HR compliance offering has really picked up steam, especially in the second half of the year, and there’s no reason to think that it won’t continue. Our tax filing solutions have done really well. We did bring some tax partners on in the fourth quarter and there was some accelerated demand on backlog of processing ERTC or in addition to some of the tax deals that we also announced. So what I would say is, Q4 and Q1 feel real good. There’s a continuation of those — primarily those four product lines that have really accelerated in the second half of 2022 and we anticipate them to continue in 2023.

Bryan Bergin: Okay. That’s good to hear. And then just on float revenue. So I know you consolidate — it sounds like you’re through the consolidation there in the accounts. Can you give us a sense on what the float was in 4Q and how you’re forecasting that into 2023, just so we can kind of tease that out when we think about operating margin expansion ex float?

John Pence: Yeah. I’ll give you a little bit of sense, just to give you some rough numbers again. Average balances were pretty consistent throughout the quarter of a little over $200 million. I’d say we entered the quarter at probably at 2% on that $200 million. And with the rising rates, we probably ended the quarter around 3%. And let me kind of explain you how that’s composed. Roughly $60 million is laddered. And so there’s always some money coming off and that’s getting reinvested at higher rates, but it’s potentially a little bit lower than the current Fed funds rates. Where we’re really seeing the upside is in that short-term money because we’re getting pretty close with most of our banking partners the Fed funds rate. So that gives you some sense in terms of modeling, but it’s definitely going to be a positive in terms of the compares for the balance of ’23, at least that’s what we expect.

Bryan Bergin: Okay. And if I could squeeze just one more in here. So I understand the outlook here is all organic. Just how are you guys thinking about M&A? Anything here imminent on the recall front?

Patrick Goepel: Yeah, Bryan. From my perspective, one of the things that the teams worked hard on is popping out the model because we believe we got it, and we believe the model has a lot of momentum. What we wanted to do is pop out that model, and we’ll continue to do that in the first half of the year. I would say the second half of the year, we’ll evaluate and really look at being more aggressive in acquisitions. We think we have the luxury with the reseller network to — that there are some folks that are raising their hands. As you may know, the debt market is a bit of a mess right now. What we want to do is be real thoughtful on keeping the momentum that we have, both organic and with margin expansion. And then, we’ll start to revisit layering acquisitions in because we do think that’s an important part of the model. But I would look more midyear, second half of 2023.