Q3 2023 Asure Software Inc Earnings Call
Greetings and welcome to the shore Software's third quarter earnings call.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during todays conference. Please press star zero from your telephone keypad.
As a reminder, this conference is being recorded.
At this time I'll now turn the conference over to Patrick Mckillop.
Vice President Patrick you May now begin your presentation.
Thank you operator, good afternoon, everyone and thank you for joining us.
Third quarter 2023 earnings call.
Following the close of the market, we released our financial results.
The earnings release is available on the Sec's website, and our Investor Relations website at Investor got assure software Dot com.
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.
Description and timing of these items along with a reconciliation of non-GAAP measures to their 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 in may to indicate forward looking statements and we encourage you to review our I see our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations.
I will hand, the call over to Pat a moment, but I just wanted to take a moment to remind folks of some upcoming investor relations activities.
We will be participating in the T V cow in HTM called French Tomorrow November 14th with virtual one on one meetings.
On November 15th we will be attending the Roth M. K M Technology Conference in New York.
And on November 16th we will be attending the 14th annual Craig Hallum Alpha Select conference in New York, plus participating in that 13th annual Needham virtual SaaS one on one Congress.
Management team will use like a split squad to cover both event on November 16th to make sure. We can accommodate all investors meeting requests.
This outreach is very important to be sure and I would like to thank all those that assist us in our efforts to connect with the investor.
Finally, I would like to remind everyone that this call is being recorded.
It will be made available for replay by it.
The link available on the Investor Relations section of our website.
With that I would now like to turn the call over to Pat Campbell, Chairman and CEO Pat.
Thank you Patrick and welcome everyone to assure software's third quarter 2023 earnings call I'm joined on this call by our CFO, John Pat and will provide a business update for the quarter and our outlook for the remainder of 2023 plus her guidance for 'twenty 'twenty four following our remarks.
We'll be available to answer your questions.
You can see from our reported results our strong momentum continued in the third quarter with strength coming from solid execution across the business our revenue growth in the third quarter was 34% versus the prior year period, which was almost entirely organic reoccurring revenue as crude diet.
8% versus the prior year period, and our non reoccurring revenues were up by 3.6 million versus the prior year period. Once again driven by E. R. A T C revenue strength, we will discuss more detail on ERP see once we get to our updated guidance, which we gave in.
Today's press release, our HR compliance revenues and I sure marketplace revenues, both showed very strong growth during the quarter versus the prior year period, and we're very excited about the future for these business lines overtime, we believe that the server marketplace can become 30% plus.
Of our total revenues and it is a high margin business as is the HR compliance business. Additionally, interest revenues contributed to the growth in the quarter and were able to benefit from the rise in the yield curve plus we benefited from consolidation of bank account, which drives higher.
In basketball balances, we continue to build on our momentum by advancing our technology through leading partnerships and launching a strategic sales initiatives such as the bundling of our 401k products with payroll to drive New client addition, this particular initiative was.
Just a short time ago and the reception. We have received thus far has been very enthusiastic many small businesses traditionally have not had the resources to work or 401, K retirement solutions, but approximately 22 states in the United States.
<unk> 401, K plan for small businesses and we expect more to pass similar mandates. The U S. Government Securities that 2.0 aims to increase employee participation and retirement plans by funding the setup of an employer based retirement plans, while providing the funding there.
Need to do so and it sure as the solutions employers need to set up the plant.
Our sales efforts in the third quarter produced a 26% increase in new sales bookings over and above that 91% increase we delivered last year. We have expanded our sales force during the year had been very pleased with the quality of the new hires we made were support.
Our sales efforts with digital marketing, which is driving a higher level of sales lead product topic productivity in 2023 based on our performance and our current expectations. We're guiding for fourth quarter revenues to be in the range of 25 to 27 million.
Which excludes any potential revenues from <unk> T. SEC filings, we are expecting our 2020 for revenues to be in the range of 125 to 129 million with EBITDA margins of between 20 and 21%.
Our 24 guidance also excludes any potential contributions from ear T. SEC filings, but does include our plans to resume acquisitions that Ernest as many of you are aware the IRS plays a pause on the processing of the yard D. C claims back in September.
<unk> clamped down on some bad actors that we're filing claims which it should not have been filed a serious a processor of claims only and we refer our clients to their tax advisers to see if they qualify for the E. R. T. C credit we continue to await further clarification from the IRS.
And experts expect the program will likely be resume however, given the uncertainty we want to be conservative in our assumptions on ear T. C revenue going forward now I would like to hand, it off to John to discuss our financial results in more detail Scott.
Thanks, Pat as Patrick mentioned at the beginning of this call several of the financial figures discussed today are given on a non-GAAP or adjusted basis if.
You will find a description of these GAAP to non-GAAP reconciliations.
The earnings release that was made available earlier today.
Reconciliations themselves are also included in our most recent investor presentation.
In the Investor Relations section of our website at <unk>.
Investor got it sure software Dot com.
Now on to the third quarter results.
Revenue reached $29 3 million in the third quarter rising by 34% relative to prior year period.
Recurring revenues rose, 19% relative to prior year period, the $24 million.
Third quarter recurring revenues grew on the strength of our HR compliance solutions assure marketplace and increased interest group revenues with the average client balance exceeding $200 million in the second quarter.
TCE revenues were recorded in professional services hardware and other category in the current and prior year period.
Nonrecurring revenues saw an increase of $3 7 million on the strength of the RTC pricing activity.
Net loss for the third quarter was $2 2 million, a $2 3 million improvement.
The prior year's loss of $4 5 million.
Gross margins rose by 10 percentage points to 72%.
Third quarter relative to the prior period.
While non-GAAP gross margin rose eight percentage points to 76%.
EBITDA for the quarter was 3 million up $1 7 million from prior year period.
Adjusted EBITDA rose by $4 4 million relative to prior year to $6 2 million and our adjusted EBITDA margin reached 21% in the quarter compared with 8% in the prior year period.
Okay.
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 an expansion of our sales and marketing activities.
We continue to believe there is substantial margin upside over the longer term as the business scales.
We ended the quarter with cash and Kevin cash equivalents of $32 8 million during the quarter, we completed an equity capital raise for net proceeds of $43 million.
We also paid off $30 9 million, which had which we have a structural gap.
This pay off substantially enhances enhances assures cash flow.
It is accretive to earnings increased financial flexibility as we execute our stated strategy to deliver double digit revenue growth by growing both organically and inorganically.
Now in terms of guidance for the fourth quarter 2023, 2024, we are guiding fourth quarter revenues to be in the range of 25.
$5 million to $27 million.
Which at the midpoint of the range would equate to 19% growth year over year.
Adjusted EBITDA for the fourth quarter is anticipated to be between $2 3 million.
Revenues for the full year 2023 are still expected to be in the range of $118 million to $120 million with EBITDA margins between 19% to 20%.
Moving on to the 'twenty 'twenty four guidance, we expect revenues to be in the range of 125 to 129 million with adjusted EBITDA margins of between 20% to 21%.
As Pat mentioned in his comments earlier each of these new guidance figures exclude any contribution from <unk> TCE revenues.
But assume a resumption of acquisitions.
We are awaiting further clarification from the IRS pause that was placed on processing claims in September and we feel that being more conservative is the best approach.
We believe that the program will resume with some modifications to make the application process more stringent and so there is a possibility that <unk> will contribute to revenues in 2024.
The growth from our HOA clients assure marketplace as well as for our revenues.
And our newly introduced 401k solution are all expected to continue being strong contributors going forward.
Additionally, our payroll tax management pride has multiple shots on goal with the platform being offered as a service to large enterprises as.
As well as HCM vendors.
While the above mentioned are strong contributors to our growth. We also expect to drive growth inorganic methods.
Our client businesses that we feel.
Yeah.
Our attractive.
Our growth profile going forward will be a mix of both organic and inorganic.
Which with the recent capital raise and debt pay off we have the flexibility to resume making smart profitable acquisitions.
In conclusion, we are pleased with our performance in the third quarter momentum, we have built on the strength of product development technology and sales.
Gives us confidence in our forward looking guidance.
We are excited about the remainder of 2023 and are looking forward to 2004 is potentially breakout year for sure and driving profitable growth and leveraging the initiatives, we have implemented across the business to drive sustainable growth, creating shareholder value.
With that I will turn the call back to Pat for closing remarks.
Thanks, Scott, we're pleased to continue to deliver growth in the third quarter, achieving 34% revenue growth. We achieved this growth by investing in products and technologies that make a difference for our clients. It's really gratifying to see the positive reception by our clients to our solutions.
It tells us, we're creating value for them and enabling them to focus on their core business says sure marketplace. Its just getting rolling and its expected to contribute to our growth, but the longer term. It's the results to date have been meaningful contribution to our overall performance and there's lots more to come.
As I previously mentioned the secure act to point out gives small businesses. The funding they need to implement 401k plan, which many states are mandating now and we expect more to past mandates as well.
Our recent sales initiative and bundling 401, K with payroll, it's gotten enthusiastic reception, thus far and it's only early days then to that effort. We also anticipate demand for our HR compliance solutions will continue to be healthy as businesses increasingly speak to something.
At their internal capabilities with external experts, who can help them navigate the increasing complexity of doing business day to day, our guidance in the fourth quarter in 2024, both reflect our expectation for continued growth, which will be delivered with a combination of organic and inorganic.
Organic growth our margins have continued to improve as the business has scaled and we have focused on improving efficiency across the business, which helps improve the cost structure in 2023, we've expanded the sales force as well as invested in the marketing initiatives and we now.
Ill feel the business is right sized for future success. As we added are lining with plenty more will continue to provide innovative human capital management solution that helps small businesses thrive human capital management providers grow their base and large enterprises streamlined tax.
Clients. Thank you for listening to their prepared remarks, so with that I will.
Send the call back to the operator for the Q&A session operator.
Okay.
Thank you.
At this time, we'll be conducting a question and answer session if.
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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment. Please we poll for questions. Thank you.
Thank you and our first question is from the line of Joshua Reilly with Needham and company. Please proceed with your questions.
Alright, Thanks for taking my questions and nice job on execution here in the quarter I guess, maybe starting off with the topic Du jour here can.
Can you help us understand how you're thinking about and preparing for a range of possible outcomes.
With regards to the ear Tc claims that you've already submitted and the accounting and cash flow ramifications included in these expectations and maybe some more color on how that impacts the 2020 for guidance and you highlighted in the press release.
Yes, John I'll take a first shot at it and Pat can add to it.
We have obviously seen a slowdown in terms of cash coming in from the IRS to our clients.
Since September.
Well, it was actually down quarter over quarter or so.
Doug you did a good job on the third quarter leasing question some of the prior.
Moneys that we recognized 40 RTC claims.
I think we kind.
Can be pretty clear with regard to our guidance for <unk>.
Fourth quarter, we've not included any revenue in the numbers that we've guided to that in terms of revenue, 25% to $27 million.
And then again for the fourth quarter.
For the $1 25 to 129 guide that we gave in terms of revenues also includes no.
Our middle ear TCE revenues now, we think that it's going to get turned back on so there'll be some kind.
Kind of upside potentially to that guidance, but we didn't want to take it into account in terms of the.
Near term just because of the uncertainty.
It turned out one of the house to get turned back on but that's kind of how we played it at this point.
Yes.
I would say a couple of things one just I want to point out in our press release, the guidance was $1 25 to $1 27.
Yes, there was a typo there its 125 to 129 and verbally said that.
We will make that correction.
As quick as possible as far as the guidance of the RTC, we're going to follow the IR absolute guidance and we.
We do believe that the program, probably will turn out, but we'll wait for their guidance and we wanted to take it out of the numbers. So there was no ambiguity and take a very conservative stance that being said.
We're filing.
Paperwork as we get it and.
We know that on behalf of our clients sits in the queue.
When when and if that resumes.
All process. According to the IRS regulation and put a little finer point to us on our fourth quarter guidance. If you think about last year fourth quarter.
Without the RPC.
We're roughly $22 million there was approximately $7 million in the fourth quarter of last year $2 million of it was in recurring and $5 million and the non recurring line. So we're looking at a $22 million relative to the 25 to 27 27 guidance, we think the mid point of that.
That's kind of in the mid teens growth. So there's kind of 2014% to 23% is what we're guiding towards in terms of.
Quarter over quarter.
From prior year, when we exclude the RTC. So that's the I think that's what we'll compare that then.
We want people to kind of focus on is if we're going to take it out of the Guy and he asks can you take it out of the prior year compare so we feel like it's still a pretty healthy growth, but it is a little muddy story.
Got it and then just another follow up on the Q4 guidance. If you look at the implied adjusted EBITDA margin.
Down sequentially as you would probably expect with a little bit of loss of leverage from the lower <unk> revenue, but why would it bounce back maybe you can help us in 2024 kind of that 20% to 21% range I think we've been pretty consistent I think in this messaging.
It's a scale business and we think that the revenue breaks that's where we generate the.
The adjusted EBITDA right. So we're back in our guidance kind of in that again for 'twenty for revenue guidance is 125 to 129, we think that after the revenue breaks we should be at 20% to 21% adjusted EBITDA company.
This year guide I think was 118 to $1 20 in total for the year, producing 19% to 20% adjusted EBITDA. So that the composition of the revenues is not the key is really that the absolute number the absolute amount of revenues and so we're getting a little bit of that impact in the fourth quarter with the decline in revenues as a result of that.
You know, what we RTC revenue, but we think in absolute numbers as that that revenue gets back into that.
We produce that amount of adjusted EBITDA sits.
As a footnote to that we make decision six months ahead of in many cases.
Where we're going to go clearly with E. RTC and if you think about the summer time, we know we wanted to expand a sales force of 120, we knew we wanted to do potentially a race too.
To get more aggressive in replacing your TCE revenue, we didn't know <unk> T. C. At the time was going to happen. So quickly. So our past doesn't change the fourth quarter. We have made investments in salespeople in tax filing we've made.
Since in the technology area and all of that was planned investments. So we started to make over the summer when he our T C.
Ted.
Pause on September 14th what we did is continue those investments and we're really happy with the raise in the ability to play offense, but what that did in the fourth quarter has put a little pressure temporarily out of EBITDA and so we've called that out now that we've taken here.
T C and as John mentioned as we get back to the revenue numbers. The 125 to 129 that EBITDA snaps back very nicely because it is a scale business.
Yeah.
Got it very helpful color I'll pass it along in the queue. Thank you.
Thank you Josh.
Our next question is from the line of Bryan Bergin with TD Cowen. Please proceed with your questions.
Hi, guys. Thank you I appreciate you providing an initial 24 outlook here just the middle of the uncertainty as we try and unpack an apples to apples recurring growth rate implied in that 'twenty four outlook can you give us a sense of what the grow over pressure combined from the <unk> and our float revenue.
B as you turn the calendar from 23 to 24.
Yeah, I think from my perspective.
Shouldnt have a lot of industry kind of flattish in terms of the RPC for.
For the first nine months of this year, it's roughly $17 million that we have to grow over.
So if you kind of think about what we're doing in terms of the guide and that 17 million LTC will probably over 100 102 ish exiting this.
This year in recurring revenue, where revenues so that $1 25 to 129, we're talking to really isn't you know 25% to 29% growth next year.
Again, just as we made the point clear in our prepared remarks, and that's going to be a combination of.
Both organic and inorganic so we started putting.
Some of the raise money to work and we're going to do some more of that.
Next year. So I think we've made in our pre transplant on that it's been pretty consistent with the model. We've been we've been talking about over the years right in the IR deck, we expect to kind of be.
Organic an organic grower overtime, yeah, and the only thing I'd say Brian.
If you think about the $100 million accelerate as John mentioned and then if you think about second quarter.
A little over 20% repetitive growth if you think about lapping into tough compares around.
<unk> you may have.
About 6% or so kind of a headwind signed up flow, but as far as momentum in the business you know this quarter continued.
Close to that 20% would be a headwind in the marketplace might be a little bit of a headwind.
Lapin growth compares but we feel really good about the sales motion and the repetitive revenue and then that's why we've been adding to it and feel that we can lap the year Tc compares with a combination of the organic growth engine that we built as well as.
The tuck in acquisitions.
We're in a unique position to execute and that's why we did the rates.
Okay, Okay that makes sense and I guess as the.
As you think about inorganic versus where inorganic is it kind of relatively even mixed according to the long term strategy as you think about that 24 view.
I think so it'll be lumpy right, it's not perfectly linear so youre never going to see this line up a 100% even so you'll you'll spike it once in a while with a with an acquisition, but I do think it's when I think about it.
It is a pretty healthy Mexico.
And we have really good visibility to double digit organic growth. So.
We will.
One of the reasons, we did the raise since we want to get aggressive with inorganic growth and we feel like we have a pipeline of some pent up demand so while it might be lumpy.
Theres pretty good certainty on the revenue going forward.
Okay, very good and if I can just squeeze one more in can you just comment on how it client employment levels trended in the quarter.
Really about flat.
It's interesting small businesses still have more jobs and people and there are certain industries that cannot get people hired and even today. What I would say is there is a little bit of a white collar recession and there is pressure on that higher end.
But I would say in small business, we've had a mixture.
Some of the pressure around the technology area and some of the higher end employment, but I would say the blue collar employment or in the areas of the restaurant in the areas.
Sure.
Even trades.
Can't get enough people so.
The overall hiring spent about flat and seasonally we would have expected maybe a little bit of an increase.
But clearly theres, a one third of hire more employees if they can if they can get them.
Okay. Thank you.
Our next question is from the line of Richard Baldry with Roth M. Can please proceed with your questions.
Thanks.
Can you talk about sort of the M&A pipeline seems to be factored in for 2000 and are you seeing.
Reasonableness and what sellers are looking for and interest levels to take action on it.
Just any sort of characteristics around that and then maybe getting we took down a lot of the debt in the quarter. When you look forward, what kind of terms or structures, you're really trying to focus on would it be a lot less on the debt side more in cash and stock how do we think about that in terms of equity dilution. Thanks.
Yeah rich a lot of questions in that question, so I'll try to unpack and John will jump in as well, but when I think about first of all the environment is small business payroll companies.
The environment is pretty tough.
First of all our regional banks have stopped lending so access to capital as is the number one concern to.
The payroll industry in general is getting regulated more and more by state money.
Money transmitter licenses <unk> C, which is know your customer AML, BMO, which is anti money laundering et cetera. So.
Small businesses have a tough time, keeping up legislatively they have it.
Time keeping up.
With the changing landscape of the laws they have.
Tough time, keeping up with capital need it and in some cases of HCA to some of the banks are requiring deposits that are tough to find especially as debt levels are tough to get so the backdrop is that what I would say is also when you think about how theyre going to grow there.
Business and what they look like in the interest rates are going up.
Very often they might be looking for a different exit strategy at this point in time to to counter what they're going through and we're a logical exit strategy for them. So we've had some conversation over the last couple of years, we get with our resellers and we get with our trusted partner.
Just a couple of times a year and many times you can telegraphed that early on we did a subsequent acquisition we put.
He is an extension of the queue.
In October already we do believe we have a pipeline as far as multiples.
The multiples are reasonable and feel that.
But they are starting to pull in given the backdrop in and then you know people are worried about potentially a recession or potentially a slowing down of the economy. So we think it's the right time to continue to grow and then for us.
We'd been purposeful about you know kind of growing this business and calling out it's a scale business the operational and technology initiatives that we've done to improve the bottom line and really grow margin.
Margin here or 10% over the last couple of years, we're ready to handle that volume and so many cases luck is preparation meeting opportunity. We feel it's really a good time to go in and be aggressive here and.
The pausing of the RTC has given us a catalyst as well to do that so those are some of the things of how we think about it and then as far as.
Your last question.
Around.
Lending or cash or stock for us we have three levers we have our cash we are a seller note, which is important to us because it's a low cost no there that protects us on indemnification and from a stock perspective, only if we feel that the acquisition could add value to us long term.
When we look at stock. We also you know you have a little over $30 million in cash and feel that we have the ability to make some acquisitions. We do think the lending market over time will be more reasonable than it is so that's a lever that we could add but some.
Some kind of cash stock and indemnification.
Vacation of a low cost low and will continue to be our model.
And flipping back to organic he posted up.
26% increase in bookings on top of <unk> 91, a year ago.
You talk just generally about average 10 years sort of capacity you feel like your utilization is or what's left we continue to grow or do you think you really have to focus more on adding head count to try to keep up the organic growth.
Yeah, Thanks, Rich and we are adding from a 100 sales reps to 120 in one of the reasons. We're adding is we have people successful we're going to have over 50% of them at the summit.
We have would say that you know.
That's a record number for us.
We are going to go there to summit in May have been successful on their training program. We put together the hiring of people we've been able to attract really good what I'll call athletes and to assure they have been successful. We also have a culture of mentoring and they've done a really good job bringing people.
And to the organization, so theres going to be no slowing down of continue to grow and then if you look at the model and we've improved margins here.
<unk> doubled margins the last couple of years, because we are starting to get scale, we want to not only invest in our talent, but then also add more and we believe that as we add more and get.
More gross dollars not only from productivity, but new people and the quality of the new people that adds to the bottom line. So it's a multi year commitment, but we feel really strong about it and we're fortunate to be in a position to be able to do that.
Thanks.
Yeah.
Our next question is from the line of Brad Reback with Stifel. Please proceed with your question.
Great. Thanks very much.
Heading back to 2020 for the guide from your commentary is it correct to assume about $10 million to $15 million from acquisitions.
And the 125 to 129.
Yes.
Yeah.
Great and the employment trends that you're modeling for 24.
I gave it in.
It's just flat we've kind of taken anything down we assumed our employers are going to stay relatively flat.
Uh huh.
That's great. That's all I got thanks very much.
Thanks, Brad.
The next question is from the line of Jeff Van <unk> with Craig Hallum. Please proceed with your questions.
Great. Thanks for taking my questions Pat just on the Securities Act, maybe you talked about early traction can you put a little behind that any quantification a little more color. There would be helpful. And then on the 26% growth in bookings does that include or exclude the E. R. T. C. If it includes what's the tax ERP see.
Yeah, just a couple of things first of all your first question Jeff.
It was around I apologize say that again the Securities Act, you said you're off to.
And I'm sorry.
Shortly after.
September 14th which are.
Put a pause on ERP see we've already begun to pivot towards secured 2.0 act than those that don't know about secures 2.0 axis.
It really is social security is going to be challenged over the future years with a retirement fund day, Yeah. There's still many Americans out there today that don't have access to a 401K plan and already now with the secured 2.0 at the government will provide funding not only to set up a 401K.
Plan, but also provide funding in the area of tax credits to employer matches and so we get people starting to save and create some independents. In addition that social security and that sliding scale of a match goes over five years.
That program has been adopted by 22 states already and we anticipate that it will continue to be driven and if you think about that.
Data that we sit on web.
As 401, K deduction codes.
And it also has a forms like the 5500.
To go over the plan, we're pretty I'm pretty visible and Ed are offering already is is around compliance and from a compliance perspective with its whether its minimum wage so sexual harassment training for those states that require it.
Our HR compliance, our payroll taxes or payroll wage and hour compliance is what we do and what we are skilled at so we're going after those clients in those prospects in the states that mandatory.
Mandatory 401K plan, we're excited to partner with the best well, which is also partnered with Jpmorgan Chase, which we're partnered with another company around our Treasury management system and so we're gonna go after 401K in a big way I anticipate that.
Will do.
Over 700 plans here next year, we're already probably use something like 10% this year and we have visibility around 70 plus plants.
To sell here in the fourth quarter I wouldnt be surprised if we beat that the marketing qualified leads the sales qualified leads the interest level is really really high and we've only been doing this in a little bit over a month. So people are pretty excited about the program as far as sales numbers.
The 26%, we have <unk> T C and we'll start reporting bookings Ax ERP see we'll also do some with ERP see some are standalone going forward, if we do book and the <unk> deal it would be a current client.
The current product so we will provide a bigger breakout of that.
But suffice to say, the 20% or 6% on a R. R is really largely without <unk> because.
And we will provide a bigger breakout of the definition of the RTC because either in and itself.
It was more of a onetime event in any event. It did get kind of a package. Then we'll have the kind of more have a nuanced breakout for you in future quarters, but the 26% IRR.
Bookings is on top of what we booked an error, which implicit in that number did not include the RPC.
Okay, Alright, great and then on marketplace did.
Would it ramp as expected in any more precise thoughts are bound around what it might do for 'twenty for that that's my first question and the last would be gross margin John just what what's how should we think about gross margin for Q4.
Do you want go first yeah, yeah, what percent of marketplace first of all.
401, K, we were looking at some big category of marketplace with the secured 2.0 lagged we pulled it out of the marketplace and really have it as a separate category with payroll also battle, perhaps take from the marketplace, but it is going to be a huge initiative going forward, we announced <unk> in the marketplace.
This past quarter, because small businesses do need lending options that are regional banks, so that'll be.
A good one the equifax relationship has gone very well into the fourth quarter and momentum is building across the marketplace will provide a more fulsome update because we got a lot of.
Partners that we're working on right now and as we speak into the first quarter of the following year, but suffice to say, we're starting to lap.
Some tougher compares by the same token we're gonna grow the marketplace.
Pretty excited about it and then 401K, we're going to take US a full category and we will take that out of the marketplace. Just because we think the traction level's going to be pretty high pretty quickly.
Margins I would say the way I think about it.
Would be to think about this kind of a cost of goods sold.
I'll leave that fourth quarter cost of goods sold will be in line with the previous three quarters. So if you take a blend of it I think we did like.
87848.
It's going to be in that range right somewhere between eight seven and eight so I think that's a fair way to think about and that the revenue will just generally I think the gross margin based on that cost of goods sold.
Got it okay, great. Thank you.
Thanks, Jeff.
Our next question is from the line of Eric Barton Newsy with Lake Street. Please proceed with your questions.
You gave us the nine months on the ear Chiesi Im curious can you give us the Q1 and Q2 revenue contribution.
Yeah, So you're talking about this year.
Yeah, Good point Greg.
Yes, im going from memory I can dig it out of my my notes here, but it was roughly I believe $5 million in the first quarter and $7 million in the second quarter and then about 5 million. This quarter. So that's a total of 17.
So testing my memory.
And in a lot of the onetime revenue of professional services revenue in Q1, Q2, and a vast majority of it was the RTC.
Okay. So was there any recurring revenue.
In Q1, and Q2 I know there was in Q4, but I think they are.
A couple of hundred Grand there might have been a couple of underground in Q1, but yes. It was we had a contract that we change.
Early in Q1 of this year that was going to look like a recurring contract and that it more as we modified it.
Got you so the real big quarter that we had the TC was in the fourth quarter, we occurring to the tune of about $2 million as we changed that contract. There might've been a couple of hundred thousand that bled into Q1, but the vast majority of <unk> is in the <unk>.
Personal services line.
Okay. John you said 5 million for Q3, but I had $3 7 million from your prepared remarks is that did I have there. That's the anchor that's the increase year over year I believe so I think we did one four in Q3 of last year. So the $3 seven it's just the increment.
Oh absolutely.
Okay, and then last question.
Sales head count I know, you're targeting 120 by year end, where are we now.
About 110 112.
Let's say, we have commitments to $1 12, I think as of today, So that's where we're at.
Got it thanks for taking my questions.
Thanks I appreciate it.
The next questions are from the line of Vincent Colicchio with Barrington Research. Please proceed with your questions.
Yes, Pat I'm curious did direct sales productivity meet your expectations in the quarter.
I would say slightly behind but all in all it was a good quarter, obviously, when the IRS pause year Tc on September 14th and caused a little bit of pivoting and just understanding and sales cycle disruption.
By the same token we were already well on our way to <unk>.
Pivoting again and working through the secured 2.0. So you know maybe we lost a couple of weeks in that area, but all in all we were very pleased with the quarter. We've been very pleased with the sales staff and and the organization. We think we have the right leaders and the right people in place and you know.
Pretty excited about the pipeline going into Q4.
So you know maybe a blip.
That we had that we had some change management, but all in all I was very pleased.
And any changes in the competitive environment.
Particularly interested in pricing.
Yes.
No I would tell you you know first of all I think we're.
We're focused on you know a or our repetitive revenue getting a customer.
It is tough I mean, we have good companies that we compete with and we get after it and I am very pleased in how we position and now we get our clients I think we're winning our share which is important and we're getting to.
Clients that are with value propositions that you know are probably more valuable than our competitors and broader in some respects, especially around compliance and legislation. So I feel really good about where we are you know in general it's a tough sales environment.
People, depending where you know if you're bullish or not.
<unk> recession, and all that kind of stuff, but.
We block out the noise, we have a value proposition that we feel is very very robust and we're getting our share of business.
And I get excited and energized talking to our salespeople, because they're successful and they're going to stay that way.
Thanks Pat.
Thanks Beth.
Our next question is from the line of Gregg Davis with Northland Securities. Please proceed with your questions.
Hey, Pat John and thanks for taking the questions.
I wanted to follow up on assumptions with occurring versus other revenue in 2020 for guidance and and maybe what could he RTC contribute next year, if not excluded like how much did you take out from guidance, reflecting that uncertainty.
So I think the majority of that.
Guidance for 'twenty four is recurring we've not forecasted nowhere near the amount of nonrecurring.
How much of RPC could it be that kind of space are limited.
We were running at a pretty nice clip if you could tell historically I don't know what it was going to keep at that clip going into 'twenty four.
If youre going to asking that question, maybe two or three months ago I, probably would have said.
Maybe $10 million or so for the year.
I don't know what that looks like now just based on all the uncertainty and that's why we didn't put it in the guidance, but to answer your first question.
The current guide the one five to $1 29.
As soon as almost all of that being recurring yeah Greg.
If you look through even our past numbers.
<unk> CRT D C. We're somewhere around one 5 million professional services or so if that so.
And that's a quarter. So let's say if you want to include data straight line. It is a number that's 4% to 6 million maybe professional services you know mentally I was coming into this year over the summer is saying I had or replace eight mill at $8 million to $10 million on CRT.
Do you see the program is going to change a bit I think it's going to be more stringent which is actually good and we support that because I think there'll be a flight to quality around vendors et cetera, but that's what I had kind of thinking that we would replace so.
If that's kind of.
Mentally where our heads that and then what what is to come we hopefully have taken a conservative stance.
And as we get revenue great, but by the same token we got to run our business in a way that we.
We can optimize and get the best value proposition to our clients and this is what we're going to do.
Great very helpful and I think it makes sense to excluded just great to get a sense of that potential upside.
You were thinking about it. So you know I wanted to follow up to it sounds like leads still remaining strong like are you seeing any slow down there and maybe anything if you could comment on retention any trends youre seeing there as well.
Yeah, No. We meet every morning, and we talked about retention and our retention numbers have been pretty positive.
Really since Covid, we probably had an improved bed around 2% that was strictly related to COVID-19. It in probably a 2% improvement that wasn't related to COVID-19. So our retention numbers have been very positive.
Our cross sell components around HR compliance and tax.
And some of the other products and services that we're able to layer on had been very positive.
So we feel like the things that we can control we're doing a great job at the end, we will continue to build on our momentum as far as the economy I think you know if.
If you turn on the TV, sometimes they're assuming below M. P recession, Miss in a recession that but when you talk to main Street America.
They still they want access to capital.
Wanted to grow their businesses they want to provide a value proposition to get better employees and more employees and there is still more jobs. Some people and some of that might change over time, but even if it does change I think it will bring more people to the workforce.
With Coalbed about 5 million Americans dropped out of the workforce I don't think we're fully back there yeah and do you think about where we are in a cycle. It's a country, where you have people retiring maybe faster than people coming into the workforce and very little immigration, there's going to be.
Sure to bring people to work for US if you do have a slide you know kind of a recession. If you will it'll bring more people back to work and I actually think thats. Good for small business America. So weird.
I'm pretty bullish pretty exciting I'll tell you.
We're gonna grow over year Tc here and.
When you look at our repetitive revenue company, that's $100 million talking about.
Got it to 125 to 129 next year and do that.
And that include any <unk> revenue you feel really good about your business and we think we have a lot of momentum and we think the value proposition that we have on behalf of our clients will stand the test of time so.
Thanks for the question and but that's how we're thinking about it right now.
Thanks, that's helpful.
Thank you.
At this time, we've reached the end of our question and answer session I'll hand, the floor back to management for closing remarks.
Yeah, I was just thinking about a 14 years I've been here I started.
People got ahead of it.
New pay cuts and and we had less than 50 employees and we're 10 million, losing $10 million.10 a share.
And what.
What I would say is when I look forward to turning the page on the calendar year I couldnt be more excited about what we're building and what we're doing we're starting to get.
No capacity and scale in this business.
Or have access to people that are are phenomenal we have a.
Access to clients that we couldnt get in our early days.
We're growing as a business and we're growing by leaps and bounds and.
I'm very optimistic in the future yeah, there might be some uncertainties here and there on the economy or D C or what have you but.
Things that really matter at the end of the day is growing.
Growing your business, helping your clients, helping your employees succeed as they build families and we think we have a lot of momentum so as investors, sometimes the scoreboard is the share price and I get that but I also believe that as we've done over.
Her time is still value in the share price and yes. When you look at the scoreboard it can be frustrating at times, but the best days of it sure are the best days that are going to happen here in 2024. So I. Appreciate you listening in and look forward to seeing you next time. Thank you.
This will conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation.