Q3 2020 Asure Software Inc Earnings Call
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Joining us today for today's call or to see all that gap.
Oh, John <unk>, Vice President of HR Shadow Terreblanche NJ powers.
Third the speakers remarks, there will be a question and answer session I now would like to kind of go over to Cheryl for introductory remarks. Please go ahead.
Thank you operator, good afternoon, everyone and thank you for joining us stores third quarter 2020 earnings call.
The market close we released our financial results the earnings materials are available on <unk>.
Web site.
So really shouldn't website at Investor <unk> Star software Dot Com, where.
Where you will also find.
I mean not for profit <unk> presentation. This teleconference is also being broadcast over the internet and will be archived and available on our IR website.
Today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items I disruption and timing of these items along with a reconciliation of non-GAAP measures.
Most comparable GAAP measures can be found in our earnings release today's call will be well also contain forward looking statements that refer to future events and other factors involved that arrest. We encourage you to review our filings with the FCC for additional information on factors that could cause actual results to differ materially from our current expectations.
Finally, I would like to remind everyone that that's call will be recorded and will be made available for replay via a link available in the Investor Relations section of our website with that I would now like to turn the call over to pack Apple CEO.
Thank you Sheryl and thank you for all the and for all of you being on the call today I would like to welcome everybody to work third quarter earnings 2020 call I. Appreciate your interest whether you're at a point, where the client investor analysts or other interrupted third party I will start today's call with an update on it.
Key metrics and our response to covert bank seen before reviewing business highlights for the third quarter and recent changes to our senior leadership team next I'll review, our financial results and then I'll take questions.
Third quarter small business, new bookings grew by over 100% year over year revenue was also better than expected and we generated positive free cash flow our key metrics benefited from a backdrop of a gradually improving economic conditions, including higher unemployment levels.
<unk> increased business activity.
We also onboarding many high quality caliber sales reps are number of sales reps increase.
64 from 33 at the beginning of the year. We're delighted how quickly these new reps to become productive while hiring these terrific revenue sooner than expected led to higher sales expenses in the quarter non-GAAP EBITDA would still at or above expectations. We view any early hiring.
Extraordinary sales reps is a very attractive tradeoff that we expected benefit organic growth in 2022nd half 2021 and beyond.
In May and August we provided an update to our business as we were responding to the impacts of COVID-19, we also talked about the headwinds in our key metrics at that time, well. The pandemic continues to impact our top line, resulting in unfavorable year over year comparisons we have experienced.
Steady increase in paid its employees as well as an increase in sales leads and sales productivity in the quarter. We usually do not provide detailed monthly metrics, but this year to help our investors to understand the impact the coal bed and how they've been trending as the economy recovers.
First of all the pandemic with them and it's impacted our key metrics in three ways. If we take number one looking at our 10000 customers approximately a thousand 50 paused in March and since that time over 600 returned at the end of June and about 900 at the.
The bargain us and Weve routine.
Levels through October so essentially bile I'm wondering a half a borrowing base or 150 clients.
Continue to be part of over 50000 indirect customers that assures serves through resellers have experienced similar trends second.
Rps per control or what we call same store sales.
Which really tracks national unemployment rates.
Is down 14% year over year in Q2, but weve improved to about down 9% in Q3 to provide a sense of the headwinds is present in normal times pays per control is usually a tailwind increasing about 2% to 3% year over.
A year lastly, new sales bookings were pressured as many small businesses are focused on surviving in adjusting their business models. Accordingly, instead of changing payroll providers, even if it's a pain point, but this pressure has been offset by our investments in sales and products demonstrate.
During this point.
We began 2020 with 33 sales reps that we now have 64 most of those new hires are very experienced brings strong referral relationships and they've ramped and hit a quota quickly small business bookings, where most of these reps focus increased more than 100 per.
That year over year in the third quarter, pointing to higher product adoption over 95% of new customers bundle human capital management product with payroll also new sales units and starts are exceeding losses every month since July week.
Expect is to drive organic growth as national employment levels gradually return to pre covance levels. It is important to know that we also hired a human capital management developers and client service people to meet the changing requirements for small business some of the new products that we recently.
We rolled out includes single payments simple payroll entry and essentially charts adopting new Kobin compliance requirements has also been a major initiative in 2020 I've been in this industry a long time, there been more payroll changes in tax filing changes in a lab six.
Then the past decade, we continue to be a valuable business partner to our small business clients during the pandemic, providing them with information to navigate complicated changes in legislation.
Our solutions were invaluable to clients and adapting to the new environment of a remote workforce as they begin to reopen and get back to business. Our COVID-19 resource Center and Webinars in particular have benefited tens of thousands of small business attendees since the launch in this.
First and second quarter also during the third quarter, we hosted our annual reseller conference. This well attended virtual event featured more than 25 training sessions over two days representatives from many of our existing 200, plus resellers participated as well.
As prospects and new prospects of retailers, we're extremely proud of our employees level of commitment to our customers and their excellent execution. During these unprecedented times I can't thank them enough for rising to the challenge.
Accidentally 90% of our workforce continues to work remotely as we are committed to ensuring our employee safety our investments in back office technology over the past couple of years has made this transition possible, while small businesses have experienced unprecedented economic headwinds do.
Recovered nicely pandemic.
We will never stop providing our clients with the service technology and support they need to survive the crisis and thrive when it's over as such we continue to make progress on strategic initiatives, including product innovation go to market investments, while controlling expenses. These go to market.
Investments resulted in strong new business bookings in the second and third quarter still as expected the heightened unemployment rate and a 150 basis point cut in rates continue to adversely impact. This year's results in the third quarter, albeit to a lesser extent than the second quarter.
As an essential small business Usher remains committed to helping our 60000 small business clients grow in this challenging environment and we remain optimistic about our long term strategy and expect to be well positioned once the macro environment and our clients' operations normalized.
Shifting to.
A couple of leadership and board changes, we announced in the earnings release the job pass has been appointed CFO, replacing John excuse me Jay powers Jot as 28 years of leadership experience in accounting finance and operations at a variety of both publicly traded and privately held technology come.
Monies that have served both large and small businesses. Most recently he served as CFO of a leading HR benefits provider and help them direct to successful asset for the company's investors. We also announced the JD powers reside as CFO due to family health matters Jane will.
After a transition to chime in the next couple of weeks also independent Board member Charlie It's Rob is resigning due to health reasons effective December 30, Onest, we're delighted to welcome John to the Assurant leadership team John brings a strong track record of success leading high.
Performing finance organizations that technology companies at the same time, while we are disappointed about Jay and Charlie's departure from assure because of their outstanding backgrounds and valuable contributions.
Costs and prayers are both with Jane Charlie and their families. During this difficult time next year.
I'll cover the financial results, then Jay and John will say, a few words before turning over to Q M&A turning over to our third quarter highlights for comparison purposes. We provided recasted 2019 revenue numbers that exclude the workspace business as well as non strategic.
Customer client and non core HCM businesses, we exited December 2019 as usual all non revenue financial figures of this discussed today are non-GAAP unless I state them as a GAAP measure and you will find a reconciliation from GAAP to non-GAAP results and re.
Revenue numbers in todays press release during the quarter small business bookings increased more than 100%. We increase our sales representatives to 64 at the end of October up 94% from a 33 increase we began the year with they will be impactful in the fourth quarter of 2012.
Many and into 2021.
We are encouraged by the strong momentum with new business bookings and continue to manage costs prudently demonstrated by positive free cash flow this quarter, although revenue gross profit and adjusted EBITDA year over year declines are still being driven by the pandemic.
Related lower China volumes. These declines have improved substantially over the last two quarters. We remain we remain confident about our financial and competitive position and look forward to a gradual return to a more normal operating conditions revenue for the third quarter decreased 10%.
$16 million from adjusted 17.9 in Q3 of last year recurring revenue revenue represented 95% of total revenue in Q3 compared to an adjusted 96% in Q3 of 2019 next other skus our profitability metric.
Mix Q3, non-GAAP gross profit was 10.3 million equating to a non-GAAP gross margin of 64.3%. This compares to 11.6 million of gross margin of 65.2% in Q3 of 2019, we continue to be laser focused on.
Gross margin were taken actions to drive improvements interest on client funds exceeded a 190000 in the third quarter down from 460000 in the third quarter of 2019, we expect 2020 level of interest on client funds to be between 900000.
And at $1 billion Q3, non-GAAP EBITDA was $1 million down from 3 million in the quarter third quarter of 2018 in the third quarter of 2020, our non-GAAP effective tax rate guidance is still at zero percent as we feel this more accurately measures Rx.
Dictation for actual performance net operating loss carry forwards stands at 34 million, we generated $2.4 million of cash from operations less a million dollars of property plant and equipment and software capital and capitalization, resulting in a million for a free cash flow for the.
Quarter shifting gears to our balance sheet.
Cash and cash equivalents were $12.9 million at quarter end.
At September 32020, we had 23.7 million in gross data, which are the amounts payable for our term loan and our seller notes. This is down 10.2 million from 33.9 at the end of Q2 2020, the PPP loan reps.
Is that $8.9 million in gross debt, while we expect this to be forgiven, we expect the small business administration.
To grant that decision sometime in the second quarter of 2021, our total deferred revenue on the balance sheet at September Thirtyth, including both short term and long term combined was 3.7 million down from $4 million in the.
In the second quarter of 2020, our Dsos or days sales outstanding in Q3 was 29 days up from 23 days in the year ago quarter.
As for forward guidance, although we expect the tailwinds on recurring revenue to keep improving we think it's prudent to wait for John to be onboard before revisiting a return to providing guidance and given the economic uncertainty with the election steel mill as cold.
Did we just think that makes a lot of sense for us to provide a sense of forward revenue growth trajectory on slide 19 of the Investor deck, We show how after adjusting for non strategic customer contracts exited in 2019 second quarter 2020 trial.
At a negative 13% year over year decline in revenue, primarily due to covance and improve to a 5% decline in the third quarter in the fourth quarter and into 2021, we expect this trajectory of revenue growth improvement to continue because number one.
On new customer starts are outpacing customer losses to our new sales reps continue to ramp to full quota three us employment continues to improve and for easy over easy year over year comparisons begin in 2021.
Before turning our call over to an A.J. in job would like to say a few words, Jay perhaps you can go first.
Okay. Thank.
Thank you I'd like to thank you and the board for the opportunity to serve as Chief Financial Officer, but I think it's in the shares in my own best interest to resign. So I can focus on my family health matters. Thank you so much.
Thank you Jay and we appreciate.
The hard work and the diligence of which you serve.
Despite the unfortunate personal situation that causes opportunity to become available I am excited to join assures experienced leadership team sure is uniquely position as a leading SaaS HCM provider for 60000 small businesses and I'm eager to help the company.
Build on the foundation built by Pat and his team and continue on its plans for double digit organic and inorganic growth.
Thanks, Jane and thank you John with that we'll open it up to questions operator.
Ladies and gentlemen.
Question at this time, please press star and then the number one key on your Touchtone telephone.
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Thank you. Your first question comes from the line of Ryan May Yours with Lake Street Capital. Your line is open.
Hey, guys. Thanks for taking my questions first one from me. So when we look at the strong bookings number how much of that would you attribute to overall economic recovery and then how much would you attribute to the sales force expansion.
No. It's a good question, it's probably a little bit of both I do think we were able to really acquire it in gather about 20 sales reps early and they are experienced sales reps have been in the industry.
So they definitely came with.
Well well.
Really strong contacts in the industry and we are able to hit the ground running I do think in the second quarter. There was some pent up demand in the sense that.
Business is we're trying to figure out if they were in business and then in the third quarter. The the kind of settled down and said, okay. We don't like the pandemic, but we know how to operate and certainly we did get some sales now pivoting full or what I'm really excited about is the fourth quarter and first quarter 2021, where.
We have improving conditions, we have the sales reps with 20 of them with a quarter now underneath your belt and the pipeline is really strong. So we're selling a lot for January 2021, right now so feel really good about our position.
Okay, that's kind of a good segue to my next question can you give us some insight on what you're seeing so far from customers here in the fourth quarter and kind of how the bookings have been tracking.
Yes, I think from a business perspective, the pandemic is I.
I think the election.
I think you have a couple of things right you have the election, you have is there going to be a third wave, but from a customer perspective people are saying, Hey, I got to deal with this one way or the other I think we're getting a little bit more a return to normalcy and certainly you do have different industries.
Switching now if we get a stimulus obviously that will help but you can't count on that but I would say our pipeline growth has been strong we feel good about where we're positioned and I think people are starting to return to normalcy normalcy of buying habits.
And they are getting used to deal with the ambiguity of the pandemic that being said as they are going to be policy changes I can't speak to that but we got to do is control. What we can control, which is if we keep selling and starting more customers than we lose at a month, we're going to be in good shape going forward.
Okay. That's good to hear and then last one for me. So how are you thinking about sales hires for fourth quarter here going into 2021.
Yes, I think you will see in 2021 will position our sales head count around 75.
Of about 64, right now we'll hire some in the fourth quarter and the first quarter to get ready for the.
For the 2021 season, but.
What we see is this is a good opportunity to get share to stay close to our customers and growing and.
We feel good about our competitive products in the rollout of our new products and we think right now is the time to grow and so I think you'll see us run at a number about 75 in 2021 from a sales rep perspective.
Awesome, thanks to the help.
Thank you and thanks for the call.
Your next question comes from the line of Derrick Wood with Goldman Your line is open.
Great. Thanks for taking my questions guys to Pat nice to speak with you and everyone else.
The.
I know you entered the year with focusing on kind of the sale of space and reinvesting.
Sales capacity and another things back on the HCM side. So congrats on starting to see the dividends of that I wanted to ask as you onboard all these new reps.
Is the focus going to be more on cross selling the base or is it more towards generating new customers would be my first question.
I think the first question for US is we've got a lot of momentum.
Selling new customers in the sense of we have benefit providers, a cps and banks that they are actively looking to engage us in.
Books of business and growth opportunities and we're really looking to take advantage of that.
Okay.
Strength in the marketplace. Some of our competitors are certainly compete for example, with the benefit brokers, where they're looking to steal the broker a record.
We're taking the opportunity to work with the benefit providers and we think that there's some really good opportunity to continue to grow with those type of partnership. So we'll take advantage of that from a cross sell perspective, as we rollout our new products.
We do feel for example, the attach rates of our new sales increasingly are going up and then going back into the base, where we have a catalyst we will continue to grow but our first really real progress in getting those new customers and new books of business, because we feel that.
From a starting point is frankly.
Great sales opportunity and a great path to growth and then as companies go through kind of logical events will cross sell those opportunities and continue to drive.
The attach rates in all our customers.
Yes that makes sense and pad levers you made a point in your remarks.
95% of new customers tend to buy a bundle I mean, that's pretty that's pretty encouraging so what's the what's the most frequently adopted HCM module with payroll and.
Yes, how should we be thinking about at least out of the gate kind of what the average deal size up lift is when you do some of these bundling versus just standalone payroll.
Yes, the average bundle per units about 50% or so.
Up from a pricing perspective, and really what we're seeing is time and attendance HR in HR consulting and bundles and especially with the pandemic people are looking at all kinds of HR advice, whether they have to lay off whether they hire how they deal with the pandemic overtime.
Different legislation around payroll taxes et cetera. So they are increasingly looking for our advice around that and and Thats what were seeing frankly.
Bundles come about as in those three or four areas.
Okay.
Last question for me just on the older kind of back office Middle office investments that you've made.
Just in terms of what you're expecting the yield from that I mean, I kind of think of three different things that one would be easier ability to on board M&A.
One would be easier ability to cross sell and one would be.
Maybe better sales and marketing efficiencies from it obviously, there's cost savings on the cost side, but from the revenue synergy standpoint is there anything you'd call out now that youve kind of made those investments and where you see some yield coming from.
Yes, no I think Thats a great question, Derek when we're going through the planning cycle right now and we're completing that this quarter. How I look at it is first of all I think we could double the size of our company and the GA span will continue to drive down we're really attacking the G.H. bass general and administrative space.
And we think we have the people process and technology in order to double in size without.
Really adding a lot of cost and Thats, a big focus of ours from a product innovation perspective, what we believe that's going to continue to do is drive down Cogs.
Percentage and drive up gross margin over the next couple of years and I think you'll see improvement from a sales perspective, I'd like to spend probably 1% or so more a year as a percentage of revenue to keep our sales coverage growing and our organic growth growing even after acquisitions.
And then finally on or development perspective tick up spend.
Spending about a point a year or so where we continue to drive and innovate new products et cetera, and all of that we believe them won't be a highly leverageable model, where we can grow organically and with acquisitions and where we can double the.
The growth there and overall almost triple the bottom line and Thats really what were trying to drive and those that are kind of the expenditures and the benefits we hope to receive.
Makes a lot of sense okay. Thanks. Thank.
Thank you there.
Your next question comes from the line of Brian Macdonald with Needham Your line is open.
Hi, Thanks for taking my question I guess first one for you.
Talked about how about 90, I think 900 or so of this housing shutdown customers that return.
What should we expect for the I guess additional 100 to 150 clients that are that are still pause do you do we need to wait for stimulus.
To get those back online or do you do you think those are just customers that meet that are pretty mature yes.
Right.
Good thoughts.
In our daily calls, we cover that and ill Goldstein covers that every day and what I would say in general I think at this point there probably gone.
Or they might come back with some stimulus, but I've kind of said hey, those hundred 50, or so they are not coming back and if.
They do great and we'll keep in touch with them and have done that but thats, how long viewing now Conversely.
Some of the data around the U.S. chamber of Commerce would be that in the fourth quarter customer formations and new customers forming businesses is really snapping back at an all time high and we're really focusing on getting our share of those businesses, especially.
Lee on board in the fourth quarter as we look at 2021, so we're helping customers deal with coal bed, we're making sure. They have the data where they can return to us on a moment's notice, but we're really playing a lot on offense, because we think the business conditions are such that you're going to see a lot of businesses come in.
Into these pauses businesses and if you do get stimulus or you do get credit for new business formation again.
We see that there is a lot of robust activity in that area and Thats our focus.
Super Helpful. You mentioned also that you had the reseller.
Conference during the quarter, just love to get a sense of sort of what youre hearing from your resellers in terms of sort of the health of business or their viewpoint on the market and then how should we think about the expansion of the reseller network as a growth driver for fiscal 21.
Yes, no I think Brian you know our focus internally, it's been a couple of things one we first of all we had a banner year last year of selling more resellers and getting people to sign up you know this.
This year from a reseller network and if you think about these resellers.
Their overall, let's say, they're one to the $5 million to $8 million businesses.
They are looking at dealing with PPP and what we're working with in many other cases is helping them with their end clients get those in clients back to processing and their metrics are very similar to ours, where they lost about 10, 10.5% early in the year that due to apply.
And now they're there.
Getting customers back depending on what area of the country they are et cetera.
And then on unemployment level as the U.S. returns to more full employment. They are hoping to get those employees paid back so very similar trends as far as where we're focused on in 2021 with the reseller network, we'd like to continue to grow at a positive.
Rate with the amount of resellers, but then from an engagement around multiple products, we want to make some exponential impact around that area and then help them really with profitable add on products that they can add to their current customers. So our focus is really keep.
Growing the network.
Look for opportunities to grow from a solution perspective, and then help them position to get their end clients back and the employment levels up where they can drive their bottom line. So that's really our focus.
Great. Thanks, a lot.
Thank you.
Your next question comes from the line of Jeff Van Rhee with Craig Hallum. Your line is open.
Great. Thanks for taking my questions I've got several Pat on the on the bookings number I think last quarter, you said, new bookings were up 21% year over.
And I just wanted to be clear. This the number that you are giving this 100% I think you said new SMB are those apples to apples and if not is there do you have the comparable to last quarters, Yeah, Jeff were down we're down about 10% and overall bookings were up over 100 in SMB, we did have a difficult compare.
In our reseller area, where we had several large resellers and it was a competitive thing where one of our.
Value competitors get hit with the ransomware. So we did have a number of large resellers overall, our bookings were down 10% in the direct market. It was over 100% increase.
Okay. That's helpful.
And then on the on the resellers I. Thank you for your question you are talking about essentially you get back to these resellers and really trying to drive deeper penetration beyond the payroll in just some of the incremental.
Products tonnage and say what.
What do you is that as you obviously justine relationships those resellers what is it that you have to display so I would assume those wouldn't be greenfield or maybe they are what's there now with respect to China attendance HR.
Well first of all on swap cost does it really nice job and there is some other competitors out there in the marketplace that do a nice job. So in some cases, it's displacing there, but if you think about our product strategy and our web product deployment weve.
Ruled out simple payroll entry, which automatically gets you to the web once you're on the web essentially chart gives you a base level of HR that you normally don't have once you're on essentially jar and you want to go to advance HR. All you do is click on a drop down menu.
From a consulting perspective, we've done a lot of our consulting and put it onto the web. So as you want a bundle that payroll offering and then light HR offering with consulting.
Regulations, and how do you give.
Give performance reviews, the employee Handbook, all that's online into a nice bundle and so those are some product innovation that we didnt have last year and then we have this year and those are the things that we're going to continue to bundled going forward.
And we think we're going to get some pretty good traction and then at the user conference.
We roll those out.
Central HR already has over 100 clients and we think that there is.
Tuning to grow that to grow that in the network.
Thats very helpful. Last from me just to be clear. The I think you had sold the payroll tax management acquisition, just refresh and was there any revenue contribution in the quarter from that I don't recall, if you ever shared that.
Yes.
Doing well.
We didn't give exact numbers there what I would say if you think about the second quarter over the third quarter. We went from 14.1 to 16 million. If you think you know.
Little bit less than half of that was ppm and a little bit more than half was organic growth that would be kind of the neighborhood you would look at thanks.
Thanks, Thats very helpful.
Thank you appreciate it.
Your next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open.
Yes.
Hoping you can give us an update on terms of how far along you are in terms of the actions we've taken to improve gross margins.
You know I really think it's you look in 2021 beds I.
I think we'll see a pickup of a couple percentage points. What we've worked on a product perspective in the rollout this past quarter of single payroll simple payroll entry and.
Essentially jar.
Really sets the stage for more of a touchless experience. So I think we have some good traction dws and the consolidation of Vws is well in place and we're really working on.
Optimizing that so the first was the lift and shift the NPW US now the next stage is driving efficiency and we have some.
Good programs that will start to impact it.
2021, and then just looking at kind of the standardization and harmonization of some of the harvest that we have and how they run at peak efficiency I'm really pleased with some of the leadership that we have in each location and now that they are starting to benchmark. Each other I think you.
Going to see some opportunity so how we look at it is I would like to be over 70%.
Gross margin in this business, we're not there yet, but I think certainly.
Certainly a 3% a year uptick can certainly be achievable as we get there.
Thanks for all that color.
One other question from me SG, they ticked up in the quarter was that all tied to the new sales hires.
Yes, I mean, we really made fab.
Fast forward on on the sales perspective, because we were had the opportunity to get some sales reps that were highly experienced and we want to take advantage of it.
So the vast majority is in the sales area.
Thank you Pat.
Thank you Beth.
Good day, ladies and gentlemen, if youd like to ask a question. Please press Star then the number one on your telephone keypad.
There are no further questions at this time presenters you May proceed.
Yes first of all I'd like to thank everybody for joining the call I'm really excited about the business.
Lot of Shutterstock with my own money recently.
Really excited about the business, we haven't investor relation deck.
Turning to page 19, we do believe that second quarter was a trough we understand that.
Co bid, there's some uncertainty out there, but we're going to sell and start more customers and we're going to lose and thats going to pay off for us I think the investment in the salespeople. So right investment we're going to grow we feel very up.
Optimistic as we look into 2021 and we appreciate your involvement as a shareholder employer client or somebody listening to this call and we'd like to thank you for the time you invest today and we'll see you in the first quarter of 2020 Watt.
Thank you.
Ladies and gentlemen. This concludes today's conference call today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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