Earnings Call Transcript - ASUR Q4 2020

Operator, Operator

Good afternoon and welcome to Asure's Fourth Quarter and Full Year 2020 Earnings Conference Call. Joining us for today's call are Asure's Chairman and CEO, Pat Goepel; CFO, John Pence; and Vice President of HR, Cheryl Trbula. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the call over to Cheryl for introductory remarks. Please go ahead.

Cheryl Trbula, VP of HR

Thank you, operator. Good afternoon, everyone and thank you for joining us for Asure's fourth quarter and full year 2020 earnings call. After the market closed, we released our financial results. The earnings materials are available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find the investor presentation. This teleconference is also being broadcast over the internet and will be archived and available on our IR website. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items along with a reconciliation of non-GAAP measures to their most comparable GAAP measure 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 risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. Finally, I would like to remind everyone that this call will be recorded and it will be made available for replay via a link available in the Investor Relations section of our website. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Pat Goepel, CEO

Thank you, Cheryl. I'd like to welcome everybody to our fourth quarter and our full year 2020 earnings call. Asure appreciates your interest whether you're an employee, a client, an investor, analyst or other interested third-party. I will start today's call with an update on some key metrics before reviewing business highlights for the fourth quarter then John Pence, who will review our financial results and then he'll turn it back over to me and will update a little bit on our strategy and then we'll take questions. Our increased focus on small business is really paying off as new customer additions exceeded losses with broader adoption of multiple solutions. We performed well despite a choppy economy. The high-caliber sales representatives that we've added in the second half of 2020 also played a major role in contributing to fourth quarter's positive results. Compared with the third quarter revenue, non-GAAP EBITDA and non-GAAP EPS were all up sequentially. Small business bookings where most of the reps focus increased more than 100% year-over-year for the second consecutive quarter and more than 60% of new sales continue to adopt multiple solutions. We also continue to add reseller partners and our total bookings year-over-year growth was 13%. We believe that momentum with our business metrics will continue and that economic conditions will improve as national employment levels gradually return to pre-COVID levels. As a result, we hope to generate positive organic growth in 2021. Our strategic goal is 10% organic growth, 10% growth generated through accretive acquisitions and 20% EBITDA. As for acquisitions in late December, we purchased a small reseller based in the Northeast marketplace. This is in line with our partners-for-life strategy where our partners can provide referrals, white-label and resell our solutions and then join the Asure family. We don't have any acquisitions pending, but we do expect to be opportunistic in rolling up our reseller partners and white-label solutions. The COVID-19 pandemic is still a headwind, primarily putting pressure on same-store sales related to the sustained level of lower client employees on our platform and continues to impact our top-line resulting in unfavorable year-over-year comparisons. Drilling down into the COVID impact. On a monthly basis of the 1,050 of our 10,000 direct customers that paused last March, approximately 900 have returned through December resulting in about a 1% churn in our customers. Our pays per control, or what we call same-store sales, which roughly tracks national unemployment rates was down 14% year-over-year in Q2 of 2020. It improved to down 9% in the third quarter and it remained at about the same level in the fourth quarter 2020. This has presented a headwind, because in normal times pays per control typically increase about 2% year-over-year. However, since we've been adding more clients than we're losing, as same-store sales normalize over time this will translate into increased revenue. Lastly, new sales bookings on a dollar basis were pressured as many small businesses are still focused on surviving, adjusting their business models accordingly, instead of changing payroll providers, even if they're willing to do so. However, we're pleased that the number of new clients booked is increasing and with the broad adoption of multiple solutions to boot. Our investments in sales reps are also bearing fruit. As a reminder, we began 2020 as the transition year with 33 sales reps and we now have 65. As most of these new hires are very experienced bringing strong referral relationships. Still, as an essential small business, Asure remains committed to helping more than 70,000 indirect and 10,000 direct small business clients grow in a challenging environment. Our COVID-19 resource center, webinars for example, continue to help thousands of small businesses. Our product and operations teams quickly mobilized in December to react to stimulus and its impact on our clients. In addition to the changing legislative environment, the fourth quarter is also a very busy time of the year for our operation teams. As they work closely with clients on year-end processing of payroll W-2s, 1095, and annual tax form filings for federal, state and local agencies. Throw in COVID and the changes in the tax laws, we've had more activity this year than perhaps the last 10 years. We're extremely proud of our employees' level of commitment to our clients during this very busy time of the year and during these unprecedented times. While small businesses have experienced unprecedented economic headwinds due to COVID, we will continue to provide our clients with the service, technology, and support they need to survive at this and thrive when it's over. Before handing off to John to discuss our financial results in more detail, I would like to take a moment to mention that it is with a heavy heart that we learned about the recent passing of former Board member and friend Charlie Lathrop. Our thoughts and our prayers are with Charlie's family. John?

John Pence, CFO

Thanks, Pat. As Cheryl mentioned at the beginning of this call, a number of the financial figures discussed today are non-GAAP. And you will find a reconciliation from GAAP to non-GAAP results as part of the earnings release made available earlier today and also included in our most recent investor presentation posted in the Investor Relations section of our website at asuresoftware.com. Consistent with prior presentations, this table also presents our 2019 revenue, excluding the Workspace business, as well as non-strategic customer clients and non-core HCM businesses that exited in 2019 – in December 2019. We believe that was a year behind us as a pure-play HCM software provider, following the separation of the Workspace business, it is a good time to revisit the metrics we used to explain our business performance. Our goal is to simplify and add clarity to our reporting, with the goal of making our progress in executing our strategy easier to follow. We believe this ultimately will require fewer GAAP to non-GAAP reconciling items to deliver that message. More to come. Our comparisons are down year-over-year, as would be expected because of the comparison of post-COVID results with pre-COVID results. While these declines have improved substantially over the last three quarters, we think that sequential quarter-over-quarter comparisons are a more appropriate measure of our current business performance and an indicator of near-term future results. Revenue for the fourth quarter increased 3% to $16.4 million, from $16 million in Q3 despite a significant spike in COVID infections and resulting business uncertainties. Recurring revenue continues to represent 97% of our total revenue in Q4, which was in line with Q3. Interest on client funds was approximately $300,000 in the fourth quarter, up from approximately $200,000 in the third quarter. The increase was primarily due to the change in the average balance of funds held on behalf of our clients, increasing from approximately $100 million in the third quarter to approximately $185 million in the fourth quarter. Next I'll discuss our profitability metrics. We were able to achieve sequential gross profit expansion in the fourth quarter of between 8% and 6% depending on whether you use GAAP or non-GAAP gross profit as a performance metric. Q4 non-GAAP EBITDA was up 13% sequentially to $1.1 million, representing a 7% margin. As I will discuss in a little more detail later, we continue to be very mindful of all of our operating expenses as we begin to emerge from the cloud of COVID. Shifting gears to the balance sheet. Cash and cash equivalents were $28.6 million at quarter end, up from $12.9 million at the end of the third quarter. The increase is primarily the result of our successfully received secondary public offering of common stock in December. We received gross proceeds of approximately $21.7 million before deducting underwriting discounts and operating expenses from the sale of approximately three million shares of common stock. At December 31, 2020, we had $24.5 million of debt, which is comprised of a $10 million term loan and a $9 million PPP loan with the balance made up of seller notes from acquisitions. We have applied for forgiveness of the PPP loan and would expect to receive a decision from the Small Business Administration sometime in the second quarter of 2021. Concurrent with today's earnings release, we filed a Form S-3 and Form S-4 registration statement with the SEC. While we have no immediate plans to raise capital under the universal shelf or to utilize the acquisition shelf for any particular transaction, these registration statements, once effective, will benefit the company and our stockholders giving us the flexibility to quickly and opportunistically consummate strategic acquisitions with various purchase structures. As a reminder, these registration statements are not effective and we cannot sell securities or accept offers to buy securities prior to their effectiveness. At this time, we are still not providing specific forward guidance. We do expect to generate positive growth in 2021. And although we are cautiously optimistic, the potential tailwind of the improving economy, given the uncertainty surrounding COVID vaccine rollout and when there will be a return to normalcy and what that new normalcy will look like, we want to be prudent with how we are running the business and describing our future prospects. To get a little more color on this point, as a result of the pressures placed on our 2020 revenue by COVID, we implemented salary and benefit reductions across the entire company. We reinstated pay rates back to normal levels effective January 1st of this year, and we have told our team that we hope to reinstate all previously provided benefits in the second half of this year. First, I want to thank our team for the sacrifices they made to help Asure through this difficult operating environment; and second, I want to highlight that we are applying the same prudence not only to giving investors forward guidance, but also around how we are running the business. To provide a sense of how revenue was impacted by COVID and its resulting impact on employment, we have included in our investor presentation slide 24. And again, it's located on our website in the Investor Relations section. Finally, as a reminder about our seasonality, the first quarter of each calendar year is seasonally strong for revenue and profitability as annual W-2 and ACA fees are recognized in this quarter. The seasonal boost does not exist in the second, third and fourth quarters. Now I'd like to turn it back over to Pat.

Pat Goepel, CEO

Thanks, John. I want to acknowledge John Pence and the accounting team for their excellent work. John has shown admirable discipline and commitment, significantly impacting Asure. Thank you, John. I also want to expand on some points John made. We see our business as involving four key groups, and our decisions reflect their needs. Shareholders are one group, and we take their trust very seriously. We also consider our employees and their families in every decision we make. Our clients are the reason for our existence, and we are committed to serving them well. Finally, we care about the communities we serve. These are unprecedented times, but we believe things will return to normal. When making decisions, we keep these groups in mind. I want to shift the focus from metrics to our strategy. As an investor, I believe we are well-positioned for recovery as the macro environment and our operations stabilize. In 2020, we anticipated a transition year as we faced the unknown of COVID. We sold the space business for $121 million in December and completed a transition services agreement in June, normalizing our operations in the latter half of the year. We also discontinued some businesses to concentrate solely on human capital management. Our Board of Directors now consists of experienced executives in human capital management who have achieved successful outcomes, which has always been a strength of Asure. In the fourth quarter, we welcomed John and Todd Waletzki, our Chief of Staff, who was formerly President of CompuPay, as well as Yasmine Rodriguez, Senior VP of Tax and Compliance, who has also excelled in her role. We are structuring our capital to support our growth ambitions. Investments in our infrastructure, including our employees, will facilitate recovery post-COVID. We expanded our sales team, doubling its size in 2020 to drive organic growth, which we consider a fortunate achievement amidst the pandemic. Our product and technology teams are enhancing our solutions. We appointed Mike Vannoy, an industry veteran, and Brian Wehrle, formerly of GE, to strengthen our focus on delivering effective human capital management systems. We have a unique strategy for acquiring reseller partners, leveraging existing technology to enter markets, and fostering growth through affiliations like banks and CPAs, which ultimately leads them to join the Asure family profitably, as seen in our recent acquisition in the Northeast. In conclusion, we are well-positioned for success as the nation begins to reopen. It's not about if, but when we will resume full operations. Once we do, we will share the outcomes of our strategy with all stakeholders. After being here for 12 years, I am confident we're on the right track. With that, we will open the floor for questions. Operator?

Operator, Operator

Thank you. Your first question comes from the line of Ryan MacDonald from Needham. Your line is open.

Ryan MacDonald, Analyst

Hi, thanks for taking my questions. Pat, just first one for you. Obviously, we're not going back to specific guidance yet, but you obviously have sort of a goal of returning to positive organic growth in 2021. Can you give us a sense of sort of how you see that playing out as we progress through the year? And I guess, specifically in Q1 on seasonality, are you seeing any impact from fewer tax form filings? We've seen that, I think phenomenon with a few other payroll vendors recently as well. Thanks.

Pat Goepel, CEO

Yes, Ryan, there are a couple of points to address. First, regarding organic growth, we are focused on what we can control, which is acquiring more customers than we lose. We've been achieving that since July, which should enhance our performance throughout 2021. Secondly, concerning the reopening from COVID, the pace is uncertain. Some forecasts suggest a return to normal by 2024, while others indicate it could happen by the second quarter. The truth likely lies somewhere in between. However, if same-store sales and national unemployment start to normalize, it would be positive for us. As a provider for small and medium-sized businesses, we've faced significant challenges due to COVID. However, as the economy rebounds and with the help of stimulus programs, we believe we will perform well when those challenges turn into opportunities. Our focus remains on starting new accounts while minimizing losses. Regarding the second point of your question, I apologize, I mentioned organic growth, but there was another aspect, Ryan.

Ryan MacDonald, Analyst

As we look into the seasonality for Q1 typically that's a bit of a stronger quarter given the tax form filing. We've seen a bit of a phenomenon that in verticals that have heavier churn in 2020 since there was less hiring that maybe that's had an impact on the number of forms you might file W-2s in Q1.

Pat Goepel, CEO

Yes, Ryan, I apologize for that oversight. I was focused on your first question. From a company-level perspective, I can say that we're filing more tax returns than we did last year since we're processing for more companies. However, it’s important to note that there are fewer employees due to lower employment levels throughout the year. In the second quarter, we experienced about 14% less employment in our same-store sales. While it did improve somewhat over the year, our employment levels remain down. This decline is somewhat mitigated by the fact that we are processing for more companies than we did last year.

Ryan MacDonald, Analyst

Excellent. And then my last question and I'll hop back in the queue is around sales productivity. Obviously, you've hired some additional reps this year and made good progress there. Just curious what you're seeing in terms of improving productivity with those new reps particularly since you mentioned you've been adding more new customers than you've been churning since mid-2020. I just love to know how you're feeling about that going into 2021 and maybe plans for incremental hiring in 2021. Thanks.

Pat Goepel, CEO

Yes, Ryan. First of all, I believe the new sales reps have had a solid start. They are experienced enough to sell both face-to-face and digitally, thanks to their strong relationships. The second wave of COVID likely affected sales performance somewhat in the fourth quarter, especially with the election taking place. However, we're beginning to see hopeful signs with the availability of vaccines and the stimulus efforts as we start to reopen, although it's still too early to make definitive conclusions. If you were to ask me again about doubling the sales force during COVID, I would confidently say yes, we would. We've managed to bring in the right representatives at the right moment to capitalize on this situation. From a productivity standpoint, we had a strong third quarter and the fourth quarter was satisfactory. The only concern was in certain areas, particularly the West Coast and New York, where the second wave of COVID has somewhat dampened sales and delayed our expectations. Moving forward, we currently have about 65 or 66 reps and I expect that we'll average around 75. I hope to finish the year with over 80 sales reps, as we remain optimistic about our continued success.

Ryan MacDonald, Analyst

Excellent. Thank you.

Pat Goepel, CEO

Yes, Ryan, thanks for your questions. I appreciate your coverage.

Operator, Operator

Thank you. And your next question comes from the line of Derrick Wood from Cowen. Your line is open.

Nick Altmann, Analyst

Great. Yes. Thanks. This is actually Nick Altmann on for Derrick. Thanks for taking our questions. Maybe for starters, can you guys just talk a little bit about the bookings mix just in terms of bookings from channel partners versus direct sales? I know the channel side of the equation has been a bigger focus as of late. And just kind of following up on the last question. Can you just maybe parse out the bookings mix there versus channel versus direct?

Pat Goepel, CEO

We are not going to provide too much detail on this, but our main focus has been on small businesses and selling through the channel, including brokers, bankers, and CPAs, in addition to our direct sales. We were pleased to see our growth surpass 100%. Regarding the reseller model, we had a fantastic performance in 2018 and 2019, and some of those resellers are just now coming online in 2020. From a new sales standpoint, we are likely not where we would like to be, but we attribute that to the impact of COVID. Providing essential payroll and HR services for small businesses means we are committed to meeting their needs before considering switching them to another provider. This has positively impacted our customer retention. However, from a sales perspective, we have spent more time nurturing existing relationships, addressing issues like tax law changes, and supporting our clients during this challenging time. As we move into 2021 and conditions normalize, we expect to see growth in bookings through the reseller channel, but currently, this part of the business is the most affected by COVID.

Nick Altmann, Analyst

Okay. Got it. Yes, that makes sense. And then I guess you guys mentioned winning back some customers who had churned in your prepared remarks. And you guys also mentioned that last quarter. So I guess I'm curious just looking into this next year, how meaningful the growth driver do you guys think that could be just winning back some of those customers that had previously churned?

Pat Goepel, CEO

Yes. First of all there's a difference between churn and pause. Churn means that they've gone to either another provider to take their payroll in-house or potentially they've gone out of business for good. The ones that we're talking about are businesses that have paused. Maybe that restaurant that instead of going to a 25% opening, paused business till through with some normalcy. And now they're coming back. I think the key metric won't be the companies that paused. We did have probably a 1% churn. We may call that a day. Maybe we'll get a little bit extra companies coming back as COVID normalizes. But I think most of them now have dealt with opening. What I think the real benefit here is we were down 14% from an employee count. The restaurant that's open at 25% maybe they have six people, in a normal environment they'll have 20. So what we're anxious to see is at normal time does that six-employee company go to 20. There's the barber, who has four barbers and they used to have 12, do they go to 8. When do they feel comfortable hiring, when do the workers feel that they're either vaccinated or feel safe to work, when do the clients now return to normal those I think are few of the metrics that we'll start to focus on in 2021. And we'll give you kind of what we see and hopefully, we'll give you guidance as we return to normal.

Nick Altmann, Analyst

Got it. Thank you.

Pat Goepel, CEO

Thank you. And tell your camaraderie, I say, hi. Eric?

Operator, Operator

Thank you. Moving on, your next question comes from the line of Eric Martinuzzi from Lake Street. Your line is open.

Eric Martinuzzi, Analyst

Yes. I wanted to discuss the pays per control color you mentioned. Pat, you referred to the challenging Q2 with a decline of 14 and then a recovery in Q3 with a decline of 9, followed by another decline of 9 in Q4. You provided a good explanation for why the recovery seemed to pause a bit. We encountered a second wave in November and December that significantly affected Q4. As we are now close to the second week of March 2021, do you have any indications of an improvement in January or February compared to Q4?

Pat Goepel, CEO

Yes, Eric, I don’t want to get too detailed, but I think we are now discussing the completion of a significant stimulus. Over time, that should be beneficial. However, the reality is that this started around March 12. Also, when considering reopening mandates, and without taking a political stance, if a payroll company hires a few people, we typically see benefits after two, three, or four weeks. This delay can be due to paperwork or biweekly payment cycles with a lag. So, while we're hopeful, we haven't observed a substantial improvement yet. Stimulus is being introduced now, and vaccines are becoming more widely available, but it might still be a bit early to expect major changes. I think a cautious and hopeful approach is best, and if we exceed expectations, that would be fantastic. But we remain cautiously optimistic.

Eric Martinuzzi, Analyst

Okay. I have my own model that I'll be working on after this call, but you mentioned the hope of generating organic growth. Is it reasonable to expect that we could see most of that growth in Q4, or is there a possibility we might see something as early as Q3?

Pat Goepel, CEO

John, I think it’s important to acknowledge the great work you’ve done here. The main concern for us, especially in terms of guidance, is the factors that are beyond our control. The difference in same-store sales is significant depending on whether America opens up and normalizes or sees substantial improvement. In terms of modeling, whether it's J, V, or U shaped, we are focused on attracting more customers than we lose, and we believe that positive outcomes will follow. I think payroll tends to lag behind openings; small businesses usually take time before they decide to hire. Typically, once they do decide to hire, there can be a two to four-week delay. The stark comparisons from the second quarter, which was quite a shock, might influence the second or third quarters. The primary factor to keep an eye on is same-store sales and their improvement. John, do you have anything else to add?

John Pence, CFO

Yes, certainly. Eric, I'm still getting acclimated to the company and have been working to understand the broader trends and key factors influencing our decisions. From my observations, which echo what Pat mentioned, we have gained a larger number of customers compared to last year, but we're currently serving fewer employees. This could indicate that we are bringing on smaller customers than usual. I believe our current situation reflects the impact of COVID-19, which seems to have affected our customer base more significantly than larger companies that have managed to endure. Larger corporations typically have more resources, while small businesses have had to significantly downsize or find ways to stay afloat. The positive aspect is that our customers are managing to survive, and I hope that as we return to a more normal environment, we will experience stronger growth. However, it's difficult to predict the timing and nature of that recovery, which is why we're being cautious. Overall, we've managed to balance the lower employee counts by increasing our customer base, which is a hopeful sign for the future. That's my view on our direction, but determining when we will see a turnaround is uncertain, though I hope any stimulus measures will assist in that process.

Eric Martinuzzi, Analyst

Okay. And then Pat's goal regarding the 80 reps by the end of 2021, should we expect that to be kind of a byproduct of the top line recovering, or is that kind of straight-lined from here to December?

John Pence, CFO

I think, again, it's not a function of either. It's when we can find the right people. I don't think we have a set determined. We have to get this people by the state or we can't hire on this metric. So it's really when we're in the market looking for people all the time. And then when we get them if we find the right people, we'll go quicker. And if we can't find them we'll go slower. It's not prescriptive in that we have to have it on a certain date. We're more at for quality than quantity.

Eric Martinuzzi, Analyst

Understand. Thanks for taking my questions.

John Pence, CFO

Thank you.

Pat Goepel, CEO

Thank you.

Operator, Operator

Thank you. Presenters, I'm showing no further questions at this time. I would now like to turn the conference back to our CEO, Mr. Pat Goepel for any closing remarks.

Pat Goepel, CEO

Yes. No, I really appreciate your time today. And we had a longer call than usual. Just there were a lot of stuff to talk about with year-end and year began. And then, obviously everybody is interested in the economy and the stimulus and COVID and returning to normal. I want to thank everyone. 2020 was a tough year. I think it was a great year. It was a foundation year for us. We made some improvements. We'll continue to make some improvements. We'll continue to get better each and every day, and we appreciate your investment in us. We treat it really seriously, and we'll continue to improve for you through 2021. So, till we meet again thank you very much.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now all disconnect.