Q1 2020 Earnings Call

[music].

Good afternoon me and welcome to assure first quarter 2013 earnings conference call joining us today, starting school Ashworth C O <unk> GAAP, though.

I will tell you about name and vice President of Oh, I'm, sorry mail to blow yeah that I'd like to turn call over to carry out for introductory remarks, sorry.

Thank you operator, and good afternoon, everyone before we start I'd like to mentioned some of the statements made by management. During today's call I include projections estimates and other forward looking information that's what we put any discussion of the company's business outlook or guidance. These particular.

Statements and all of the statements that may be made on this call, but are not historical are subject to a number of risk and uncertainties that could affect their outcomes. The 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 result, I would like to remind everyone that this call will be recorded and it will be made available on the Investor Relations section I Www dot extra software dot com.

Finally, I would note that we oppose it sounds like on our Investor Relations website regarding our Cobra thought please refer to the events and presentations section on our IR website with that I would now like turn the call lever to packed Apple CEO Pat.

Thank you Sheryl and thank you all for being on the call today, we'd like to welcome everyone for the first quarter 2020 earnings call I. Appreciate your interest whether you're in employee or a client investor analyst or get trusted third party first of all our thoughts and prayers go out to.

Those who have bad or no someone who has been impacted by cobot 19, we tepid ties with the small businesses faced with unavoidable reductions in their workforces and the people who have lost their jobs I'd also like to recognize the sure employees for rising to the challenge and delivery.

The exceptional service to our 60000 small business clients. Despite the challenging circumstances they've had to face.

To them I want to say thank you.

I do want to refer and Cheryl mentioned that that we have a coal bed deck on our IR website I'm going to spend the first part of the call talking about coal bed in our business at a macro level. The Cobrand 19 pandemic can stay at home government mandates caused the demand for products and services.

Offered by many small businesses stick to decline these unprecedented circumstances forced the small medium sized businesses. The pause operations reduced head count or go out of business. This has resulted in significant economic and operational headwinds, including higher unemployment.

And I are out of business rates as well as lower same store sales lower client fund balances and lower interest rates.

We are making tactical adjustments to effectively navigate these challenging times, we remain optimistic about our long term strategy and will be positioned well once the macro environment and our clients operations normalize we took multiple decisive actions in response to these.

Precedented circumstances, and I categorize our responses into three categories people clients and financial if you're following along on the deck, particularly slides four and seven I would focus on first of all our people.

We successfully executed our business, Brazil, let's see plan, while transitioning 98% of our workforce to a work from home model. We also made the difficult decision to rightsize, our overall workforce really related to the work state workspace management sale and we implemented.

Temporary salary.

Cuts to some of our higher paid employees and benefit reductions and then we furloughed some of our valued personnel.

Phil we are growing and hiring talented personnel to maintain excellent support levels for our small medium business clients to categorize the impacted those cuts, it's about $3 million a quarter, one and a half million more permanent.

One and a half temporary to deal with the uncertainty of the environment second our small business clients. We launched the cold in 19 response center for customer and non customer small businesses alike and significantly increased customer engagement. We also redirected device.

Women resources to integrate new legislation into our products, including the cares specific report designed to help small businesses applied for and receive PPP loan forgiveness to give you a magnitude of our efforts I want to provide you with some stats we had.

Really internal and external called down activities, reaching our 10000 direct clients and approximately 200 resellers to our indirect small business clients more than 5000 Webinars attendees.

Over 5000 hours of compliance programming, our thought leadership groups, Where's, taking and helping crap legislation with the IRS and other groups in Congress around executing on the government changes PPP report production and corresponding with.

The various government legislative.

Branches about changing tax loss.

Third our financials first quarter results were strong driven by our high recurring revenue business model as well as progress in growing our Salesforce and cross selling we increased our human capital management quota carrying reps to 45 from 33 at the started the year first.

Quarter revenue was 18.9 million non-GAAP EPS was 21 cents, both exceeded street expectation expectations. Despite.

Unexpected interest rate cuts and an unemployment spike in March related to the pandemic bookings were up 11% year over year through February demonstrating clear success in our initiatives, but we were down 3% for the quarter due to coal bed impacts in the said.

Second half a March we expect a fully complete the workspace business transition. This month ahead of plan, which enabled us to realize the cost synergies, we talked about sooner than expected, we hired human capital management developers and salespeople in client service people to meet the.

Changing requirements for small businesses. Furthermore, mws a net suite implementations are now complete and finally.

We exited some non strategic contracts that we previously discussed about that enable us to be laser focus on our core strategy.

Well rounded human capital management company with that before we go any further I like calendar talk about the financial results Kelly.

Thank you Pat and good afternoon, everyone for comparison purposes, we have provided restated 2019 revenue numbers that exclude non strategic customer contracts and noncore HCM businesses, we exited at December 29.

As usual all on revenue financial figures I will discuss today, our non-GAAP unless I state them as a GAAP measure and you will find a reconciliation from GAAP to non-GAAP results.

David revenue numbers in today's press release.

During the quarter bookings declined 2.7%, our first quarter saw ramp of 36% and direct sales representatives that will be impactful in the second half of the year prior to the impacted Koberstein team, we saw strong year over year growth with bookings up 11.5% through February.

However, bookings fold in March with the advent of the pandemic.

Revenue for the first quarter decreased 1.6% to 18.9 million from an adjusted 19.3 million in Q1 of last year recurring revenue declined 2.9% year over year and was 97% of total revenue in Q1 compared to an unadjusted, 99% in Q1.

One of 2019.

Next I'll discuss our profitability metrics.

Q1, non-GAAP gross profit was 12.1 million equating to a non-GAAP gross margin of 64.1%. This compares to 15 billion or gross margin of 73.7% in Q1 of 2019 gross margin decreased year over year by 9.6%.

Due to accounting policy changes and Reclasses from Opex to cost as we focus on our ATM business as well as higher SaaS hosting fees as we move completely to ADW app.

Applying these changes to Q1 2019 gross margin would have been 68.5%, having said that taking hold and 19. Aside we are laser focused on gross margin and we are taking actions to drive improved.

Interest on client funds exceeded $330000 in the first quarter up from less than $100000 in the first quarter of 2019.

Since our last earnings call. There has been additional phase fed fund rate reduction on a suspension of tax withholding payments and therefore, we expect 2020 level of interest on client fun to be between 850 to $925000 for the year.

Q1, non-GAAP EBITDA was 4.3 million down from 6.1 million in the first quarter 2019. This decrease was due to the exit of non strategic customer contract and a lower gross margin in the first quarter in for 2020, our non-GAAP effective tax rate guidance is still a zero percent.

As we feel this more accurately measures our expectations for actual performance.

Shifting gears to our balance sheet.

Cash and cash equivalence was 20.8 million at quarter end.

At March 31st 2020, we had 25.6 million in gross debt, which are the amounts payable for our term loan and for seller. Note. This is down 1.6 million from 27.2 million at the end of Q4 of 29 team as we paid down seller note.

Total deferred revenue on the balance sheet as of March 30, Onest 2020, including both short and long term combined was 3.8 million.

So in Q1 was 24 days up from 17 days in the year ago quarter.

Overhead overall headcount decreased sequentially by two employees in Q1 with an ending headcount of 411.

During the first quarter cash generated from operations was negative 3.4 million as we made payments on accounts payable and yearend bonuses.

Before I turn the call back over to Pat I want to discuss how we're responding to covert 19 pandemic and the challenging macroeconomic conditions, we face today.

2020 was to be a transition year as we grew into our infrastructure. After the sale of our workspace business due to the uncertainty around the death and link of the pandemic, we've taken a series of preemptive actions to reduce operating costs.

Having said that we will continue to hire employees that are close to our customers and continue to invest in product development now I'll turn the call back over to Pat Pat. Thanks, Carol and then going forward or you know I just want to put in perspective. This year with the sale. This space business, we're a small business helping small.

All businesses and there's nothing more essential than providing them a payroll Chuck.

As with prior uncertain economic environments that I've experienced over my 30 year career in payroll and human capital management, a bit much more abrupt and in the past the buying behavior of our small business clients and prospects as change as they became time and resource constrained and b.

Came focused on maneuvering their own operations and survival, while our products our mission critical making vendor changed decisions and implementation once the decision's been made can both be delayed as a result, we are withdrawing previously issued full year 2020 guidance.

In light of these macroeconomic uncertainties, particularly unemployment and business Reopenings rising from the current Kobin 19 crisis.

Our large market opportunity recurring business and attractive value proposition will help us to mitigate the pandemic impact of head count and business reductions across our customer base as more information becomes available we plan to return to providing guidance.

With that I'll open it up to questions.

Operator, we'll take questions now.

Ladies and gentlemen.

My question.

Thank you nice start and then the number one I like that.

Fine. If my question has been answered our unique Tang Yan Calpine Dickey. These.

Yes.

Our first question comes from Ryan Macdonald asked me Tom Your line is open.

Good afternoon, Thank Helen Thanks for taking my questions.

I guess its first.

I'd love to hear what you're seeing in terms of mix within your customer base.

Customers that are actually churning off the platform, because it's going out of business versus simply lower headcount with existing customers.

Yeah, Ryan you know, we have daily call Downs both.

Direct to our clients and then around our payroll schedule and.

You know our direct segment of the market place in our daily call Downs, we had about a thousand delayer. So its too early to tell if they're going out of business or what have you now I would say in the last maybe eight days or nine days there's been.

At about 16% that are returning and so some of that is due to either the PPP money et cetera, now will there be another spike and.

Once that money runs out or is there another program et cetera.

And some of it is you know it's hard to predict the opening and stay at home.

You know for how long and how many so we're not in the that's one or reasons, we pull guidance, but I would give you a sense that you know.

Thousand clients today and direct about 16 of returns so far we've heard some good rumblings that others will return and then you know as the local and state National governments kind, a you know start to reopen or or lift some of the shelter in place we'll have a lot more visibility.

You know anecdotally or maybe 20% you know would be challenges that they might be out of business, but really you know that that metric will evolve overtime.

Excellent I appreciate the color and then in terms of the new bookings activity, thanks for sort of.

Parsing out February versus March can you talk about what you're seeing in April and if you're seeing any.

Pipeline start to build again through through the month of April April as maybe some of these businesses are looking for an opportunity to be better more responsive within their own businesses on payroll. Thanks.

Yes, no I think you know the first step of this process were businesses coming back to us and I think that's been the first step as far as new bookings you know we've caught a internally and we meet daily on this.

Our planning you know for about a 50% attainment of bookings and I think the first phase is getting back to work in the second phase will be buying more and then a third phase will be changing providers and it it really appears to be in that order what I would say as were teach.

During our salespeople hottest sell differently, we've gone to Webinars and we've had over 5000, well I actually tens of thousands of people attend webinars in total well over 5000, just on the PPP alone and looking for information. So we're really were were.

Sure.

Fast forwarding two at online experience.

A website experience we have a very quick kind of value proposition and and getting started and then we have some offers a targeted to what their needs are right now and it's a more direct offering because frankly.

People don't have as as much time and they're making.

A number of different decisions so.

We're encouraged that we're doing the right things, but I would say for planting AD demand right now we're at about 50%.

Excellent. Thank you very much.

Okay.

Our next question comes from Vincent Colicchio right.

Your line is open.

Yeah, Pat did you give us color maybe on.

A portion of clients are looking for better financial terms, there may be real pricing is looking like.

Yes, no I think Vincent count feel free to chime in.

From our perspective, they're looking for they're looking for a partner right now and they're looking you know we think this a tremendous opportunity to build loyalty. We're trying to make attractive offers I don't see a ladder renegotiation right now and we're open to helping people you know whatever possible but.

For us, it's really about extending our personnel and really all hands on deck to help them and Thats, where we feel overtime will have a lot of loyalty with them.

You know people. This is a mission critical they've got to take care of their employees.

You know we've offered some additional services at no charge.

But we're approaching eight with.

Plenty of.

Feed on the street.

To help people really.

Pivoting, our development resources to make sure that day.

Can respond to the change in compliance laws and the PPP laws et cetera, and so we're really trying to smother them and help them through a tough time and we'll figure it out and really we want to be partners for life. So thats, how weve approach that Kellen I don't know if you have anything that no I wouldn't I agree with that comments, what we're really seeing is that.

As you think about cross sell opportunities. This really isn't the time to to be doing that but our it's been wonderful to see our HR consulting reach out and put their arms around our small business customers, helping them with PPP with the changing rules and what well we look forward to we've actually done that also with non client of ours to provide some.

Port and what I would expect to see happened in the back half of the here as we kind of come out of the that we've built some really strong relationships and we will start to see additional opportunities because of it.

And your sales ramp has been pretty rapid since the beginning of the year are you going to.

I know you say, you're going to trend higher but are you going to slow on the sale side, we're going to reset that goal for the year right now.

You know events our plan all along is overtime, we believe that we're in a big market opportunity and we believe we are underserved from a sales perspective naturally will be cautious, but we're going to we believe that theres, an opportunity and we'll be very opportunistic one or the.

Vantage is you know and it's a tough environment, but you know the ability to attract the really strong people. We feel that we've have some opportunities and you know in order to support our small business community and clients. When you have an opportunity to get people.

That can do that and do that well you know we're going to continue to take advantage of that.

So we'll see how this plays out and how long covert last and and and the impact, but we are planning to continue to.

Grow and.

And higher and be opportunistic through these uncertain times I would add to that that this has been a unique opportunity for our new sales representatives that's been coming in.

Actually pivot and we have contacted every one of our 10000 direct customers that also called into our SBO. So it's allowed an opportunity for training versus just kind of dropping into the deepen. So we feel really good about this and I think the fact that we had to sales organization and could find.

When.

Joe is pizza shop did not process in Santa Ana that someone reached out to Joe to find out what's going on there and how we can help so.

I actually think that it's it's not good thing but.

It's been very effective for our sales organization.

Thanks for all the color.

Thanks.

Our next question comes from Paris grid ask Paul along the line is open.

Great. Thanks, Hey, guys.

Pat can you can you talk about how much exposure you have to.

Retail hospitality travel.

Maybe just how much your business is exposed to some of the more distressed industries today, and what what areas maybe doing better.

Yeah just.

So we have no really one area of the business from a dnbi over a 9%. So the base is pretty spread out in geography wise.

99% of our clients the United States and you know they range from East coast to the West Coast and.

Margin, there's opportunity there there's opportunities as we think about A.W.S. When we spent up a a new SBO. There's an initial charge there, but it yet may take them, you know four or five months to really get up and running but we're encouraging a W.S. hosting charges. So in those big buckets of areas within gross margin.

We actually have task teams working to to improve those costs yeah, they're just to add on the W.S. Because then it gets a great example, our first mission was really to have a quality back office for all our clients now we're working with our clients on you know do they need.

Dedicated backup recovery through A.W.S., you know how do we optimize their W.S. for the client experience, but also use it in a cost effective way, there's a whole team in place to really style make those dials effective for an client or reseller as well as provide.

By the right cyber security in the right speed and and robustness of the data and you know there's opportunity there to to provide that quality service at a very efficient price. So we're going after those opportunities and then some of that compare year over years now that we're focused on human capital managed.

That we add some geography issues around the P. and now that the costs are centered around that now we're really work and and I think you'll see improvement over time.

Great. Thanks, guys.

<unk> I don't remember <unk>.

<unk> <unk> <unk> <unk>.

Well since there's no more questions today, and I know I'd say a busy Thursday.

With companies reporting you know, we Wanna again, thank our employees for their exceptional efforts through a tough time with <unk> their dedication to our clients and the market in a sure it's been amazing and I want to thank them personally.

As far as the investors you know we realize that these are uncertain times. We wanted to give you a color on how we're responding to <unk> and you know what how we're looking forward to the business and what actions were taking while we understand that from a guides perspective.

We had to pull the guys with the market on certain me you know I wanted to make sure you understood. How we're thinking about the business going forward in in trying to mitigate and and really thrive long term.

And then finally, two o'clock clients and you know we thank them each and every day for their loyalty with US and you know, we we think that there's opportunities here <unk> you know as as coal bed.

Mitigate to bed that are a partnership will continue to thrive and look forward to having the conversations where we can all grow together. So thanks for your time look forward to speaking again soon.

<unk> <unk> <unk> yeah.

Horrible horrible <unk>.

Oh.

Oh.

Ooh.

[music].

[laughter].

[laughter].

[laughter].

[laughter].

[music].

[music].

[music].