Earnings Call Transcript - ASUR Q3 2025

Operator, Operator

Good afternoon, and welcome to Asure's Third Quarter 2025 Earnings Conference Call. Joining us today's call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Vice President of Investor Relations, Patrick McKillop. Following their prepared remarks, there will be a question-and-answer session for the analysts and the investors. I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead, sir.

Patrick McKillop, Vice President of Investor Relations

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Third Quarter 2025 Earnings Results Call. Following the close of the markets, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find the investor presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non-GAAP measures to 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 and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I will hand the call over to Pat in a moment, but I just wanted to take a moment to remind people of our upcoming Investor Relations activities. During the month of November, we will be attending the following conferences. On November 18, the Craig-Hallum Alpha Select Conference in New York; on November 19, the ROTH Technology Conference in New York, and the Stephens Conference in Nashville. On November 20, we will attend the Needham Technology Conference in New York. On December 16, we will participate in the Northland Growth Conference, which is being held virtually. We also expect to schedule some additional non-deal roadshows. Investor outreach is very important to Asure, and I would like to thank all of those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Patrick Goepel, Chairman and CEO

Thank you, Patrick, and welcome, everyone, to Asure Software's Third Quarter 2025 Earnings Results Call. I am joined on this call by our CFO, John Pence, and we will provide a business update for our third quarter 2025 results as well as our outlook for the remainder of 2025 plus our initial guidance for 2026. Following our remarks, we'll be available to answer your questions. We're pleased to report that our third quarter revenues were very strong, coming in at $36.3 million, a 24% increase versus the prior year third quarter. Our revenues reflect what we believe is an inflection point of increasing growth, which was broadly based across all our product lines such as payroll, benefits, recruiting, time and attendance as well as our payroll tax management business. Organic growth in the third quarter improved sequentially from the second quarter, and we're forecasting continued improvement in the future. Our performance this quarter is reflective of what we believe is strong demand for human capital management products from business owners of all sizes. Our recent acquisition of Lathem Time is also performing well, and our team is continuing to work on achieving revenue and cost synergies going forward, which we believe can be obtained over the next 12 months. As a reminder, we believe the addition of Lathem will further increase cross-selling opportunities for us and quicken the pace at which we can get new payroll clients started. As we've discussed during past earnings calls, we have made investments in order to improve our technology as well as integrate the different point solutions we have acquired over the past few years. Today, we are excited to announce that we recently launched a new client interface, which we call Asure Central. Asure Central will offer clients a new experience with a brand-new look and feel and improve their workflow as well as enable us to amplify items such as event-driven marketing efforts. We believe that this new client experience will also further accelerate the rate at which we can drive our cross-selling or attach rates with more than our 100,000 clients going forward. Our team has just started this rollout in the past week with our direct clients, and we plan to introduce it to our indirect clients soon. Our bookings for the third quarter declined by 41% versus a year ago due to large enterprise deals, which were booked in the third quarter of 2024. Excluding those deals from the comparison, our bookings were up 21%. Now I would like to hand it off to John to discuss our financial results in more detail as well as our guidance. John?

John Pence, Chief Financial Officer

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. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. The reconciliations themselves are also included on our most recent investor presentation posted in the Investor Relations section of our website at investor.asuresoftware.com. Now on to the third quarter results. Third quarter total revenue was $36.3 million, increasing by 24% compared to the prior year period. Recurring revenues for the third quarter grew 11% versus the prior year to $31.8 million. Our professional services and hardware revenue was $4.4 million in the quarter compared to $700,000 in the third quarter of last year. A majority of the revenue growth in this category was driven by hardware sales tied to our recent acquisition of Lathem Time. Our organic growth improved sequentially to approximately 4% in the third quarter compared to 1% in the second quarter. The impact of HRC ERTC-related churn in the second quarter was 4%. And in the third quarter, it was 3%. So, in summary, our organic growth, excluding HRC ERTC-related churn in the third quarter was 7% compared to 5% in the second quarter. Float revenue was down slightly versus prior year due to previous rate reductions made to the federal funds rate, partially offset by an increase in client funds. Regarding our outlook for interest rates, yesterday, the Federal Reserve cut rates by 0.25 points, and we are now modeling another 0.25 point interest rate cut in the remainder of this year. We believe that as our client fund balances increase, this will help offset some of these rate cuts. Our cross-selling efforts showed good results this quarter with our attach rates, which measure clients that take more than one product, continuing to move higher sequentially in the low single digits versus the second quarter. Gross profit for the third quarter increased to $23.1 million versus $19.7 million in the prior year third quarter. Gross margins for the third quarter were 64% compared with prior year at 67%. Non-GAAP gross margins for the third quarter were 70% compared to the third quarter of the prior year at 73%. Our overall gross margins were down due to revenue mix as we experienced an increase in lower-margin nonrecurring sales, primarily driven by the recent Lathem acquisition. Net loss for the third quarter was $5.4 million versus a net loss of $3.9 million during the prior year. EBITDA for the third quarter was $3.9 million, up from $2.2 million in the prior year. Adjusted EBITDA for the third quarter increased 49% to $8.1 million from $5.4 million in the prior year, and our adjusted EBITDA margin was 22%, an increase of 300 basis points compared to 19% in the prior year. Turning now to the balance sheet. We ended the third quarter with cash and cash equivalents of $21.5 million, and we have debt of $70.4 million as of September 30, 2025. As we discussed on prior earnings calls during 2025, we have and continue to invest in our technology and our product offerings to achieve our continued revenue growth and improve profitability goals. We continue to model for a relatively stable cost structure for the remainder of this year and into 2026. Our fourth quarter and 2025 full year preliminary 2026 guidance is based on continued positive momentum in our business. Now in terms of guidance for the fourth quarter of 2025, we are expecting fourth quarter revenues to be in the range of $38 million to $40 million, and adjusted EBITDA for the fourth quarter is expected to be between $10 million and $12 million. Therefore, our full year 2025 results should be between $139 million to $141 million in revenue, with adjusted EBITDA margins of between 22% and 23%. Today, we are also providing our initial view on 2026 revenue, which we believe will be between $158 million and $162 million, with adjusted EBITDA margins of between 23% to 25%. Our belief is that at these higher revenue levels, combined with a consistent cost structure, we will begin to deliver consistent GAAP profitability. In conclusion, we are excited about the remainder of 2025 and look forward to 2026 being an inflection point for Asure's business. With that, I will turn the call back to Pat for closing remarks.

Patrick Goepel, Chairman and CEO

Thanks, John. We are pleased to have delivered strong results in the third quarter of 2025. Our business has performed well during the first nine months of the year, and we're excited about the future. We believe that we are at an inflection point in the business with all the hard work we've done to improve our product offerings, invest in our technology and integrate acquisitions. We will continue to increase our growth organically while potentially being GAAP profitable in Q4 of 2025 and for the year 2026, both of which are important milestones for the business. As we look forward to 2026, we'll continue to grow organically, invest in sales and marketing, roll out technology and look to acquire value-creating opportunities. We're not slowing down. Our guidance for 2026 implies continued improving organic growth and margin improvement. We're well on our way to our medium-term plan of between $180 million to $200 million in revenues, where we believe we can achieve adjusted EBITDA margins of 30% plus. We are super excited about the launch of Asure Central, which we believe is going to be a major enhancement to our client experience. Our R&D team has spent an enormous amount of time on this development, and I would like to thank them for their efforts. Asure Central is the latest in this list of the many accomplishments we achieved during this past year. In summary, we're very pleased to have delivered a strong performance in quarter 3. The outlook for a combination of improved organic growth, more free cash flow and potential GAAP profitability, we believe, is a great recipe for success. We continue to work diligently on creating increased value for our shareholders and our stakeholders. We'll continue to provide innovative human capital management solutions that help businesses thrive, human capital management providers grow their base and large enterprises streamline their tax compliance. Thank you for listening to our prepared remarks. So, with that, I will send the call back to the operator for the Q&A session.

Operator, Operator

Our first question comes from Joshua Reilly with Needham & Co.

Joshua Reilly, Analyst

All right. Nice job on the quarter here. I just wanted to hit on the 2026 outlook to start with here and get a better understanding of what are you assuming in terms of the traditional organic growth and enhanced organic growth assumed in the trend there? And then along with that, how are you thinking about where the balance sheet is at today to kind of continue the reseller acquisitions at a pace that you have been going at in the first half of this year and what you were doing in 2024?

John Pence, Chief Financial Officer

Yes. I'll respond to your question. I think we are quite satisfied with the current state of our balance sheet. We will continue to be opportunistic regarding smaller acquisitions. We haven't projected anything remarkable in terms of enhanced organic growth for next year. Our outlook mainly reflects the impact of previous acquisitions we’ve made. Regarding capacity, we opted for mid-cap because we have utilized our current committed facility. However, we have the capability to support ourselves if attractive opportunities arise. To summarize, we are not anticipating much in the way of enhanced growth beyond what we've already acquired. We believe that with our lending partner, we can pursue larger transactions if they come up. Now, let’s turn it over to Pat.

Patrick Goepel, Chairman and CEO

Yes, Josh, I believe we are at a turning point. The second quarter marked this turning point. We expect organic growth to increase each quarter as we finish the year, and this trend will continue into 2026. The guidance for 2026 suggests a consistent increase in organic growth, especially in the first half. The anticipated $160 million indicates an increase of around 7%, but we remain confident. Our outlook for the year is based on what we can already see and measure. As we approach the second half of 2026, we expect that our plans will solidify further, allowing us to increase our projections. Regarding profitability, we are now in a position to generate cash. We have cash reserves on the balance sheet and are also generating cash that will be available. As John mentioned, if needed, we can expand our lending capacity from a mid-cap perspective. Overall, I feel we are gaining momentum. The second quarter was a critical point, and we are positioned to achieve further increases in both GAAP profitability and organic growth. From an acquisition standpoint, while we see opportunities for growth as the year progresses, we currently do not have any major plans in place.

Joshua Reilly, Analyst

Got you. I have a follow-up question regarding the 7% adjusted organic growth for the ERTC HR Compliance item. Could you clarify how much of that improvement is due to cross-selling versus new business units? Any additional details would be appreciated.

Patrick Goepel, Chairman and CEO

Yes. What I would say our cross-sell results were up 7% quarter-over-quarter, and that's without Asure Central. And Asure Central brings all the products and solutions together under one common UI. The other thing to point to that, which is really exciting, is the fastest growing of the sequential growth is in three, four, five products. So people are wanting to buy the whole solution. And from a technology and delivery perspective, we're increasingly capable of setting that up for clients and really leaning into that. So I think you're going to see that be a big driver and a big theme into next year. And like I said, I think Q2 was the inflection point, a down payment here in Q3. You'll see an increase in Q4. You'll start to see an increase in Q1. We really have some pretty good momentum in this area. And then we've been planning for it in the entire organization, whether it's technology, sales, marketing, implementation, we're bringing all these products together from point solutions to a solution for the entire business, and that's really exciting.

John Pence, Chief Financial Officer

And I think just to your point on ERTC and we believe that there's probably another 1% maybe impact in the fourth quarter, and then we'll never have to talk about it again. So I think we're getting pretty close to having ERTC and compares and talking about that out of our contract.

Operator, Operator

Our next question comes from Bryan Bergin with TD Cowen.

Jared Levine, Analyst

This is actually Jared Levine on for Brian. Can I just start, can you talk about sales cycles and pipeline views across your key offerings? Has anything kind of materially changed since last quarter?

Patrick Goepel, Chairman and CEO

No. I think from a small business perspective, I think in some cases, decisions are quick. In some cases, I would say there might be multi-solution deals that take a little bit extra-long. But in the segment of the market we play, which is largely in the small business, medium-sized business market, we're not seeing too much slowdown, if you will. On the large enterprise deals, you may see an extra 30 days of measuring once or measuring twice, cutting once. But nothing material for us to talk about today. I think it's really business as usual in the small business area despite what happens in the broader macro environment.

Jared Levine, Analyst

And what about those pipeline views as well?

Patrick Goepel, Chairman and CEO

Pipeline views look pretty strong. I do think you're going to see us lean in more to marketing in '26, and that was implied in our guide already that we'll continue to look. We think there's opportunities to continue to market and sell to that base. As far as the pipeline this year, pipeline is up quite a bit.

Jared Levine, Analyst

Got it. And then in terms of that 7% organic growth assumed for FY '26, I just want to double-click on this. Can you highlight what are the key drivers underlying this and whether that's kind of key offerings under within the business there? And then how much of a headwind will float revenue be to that organic growth rate?

Patrick Goepel, Chairman and CEO

Yes. From a float revenue perspective, we've modeled two more cuts in '26, and we think that we'll be somewhere between 3% and 3.25% at the low point. Now we also believe account balances going up will partially offset that. And then as you know, in our Q, we have roughly $90 million or so that is in long term. So that protects that float quite a bit. So, really, we're probably a small degradation planned in next year, but we're hopeful that, that gets minimized by some of the things we talked about. We model kind of flat employment, if you will, nothing heroic there. And as far as the solution offering and the reason we're so excited about it at Asure Central is as we bring these solutions together, the ability to sell, let's say, an ASO offering with multiple products and services similar to, let's say, a PEO without the PEO kind of insurance policies, et cetera, or employee leasing. And it allows us really to be a back office for a small business and be compliant across all products and services, whether it's HR, payroll tax filing. We think that's a winning proposition, and that's the one we're going to lean into in general. Some of our point solutions will continue to grow as well. And then obviously, with the acquisition of Lathem, we think the attach rates of time to payroll will continue to grow up as part of those offerings.

Operator, Operator

Our next question comes from Eric Martinuzzi with Lake Street.

Eric Martinuzzi, Analyst

Yes. Regarding the Lathem time, you had said last quarter that you were anticipating about a $15 million revenue contribution over the 12-month period from July through the end of June of 2026. Is that still an accurate number?

John Pence, Chief Financial Officer

Yes. In this quarter, the net impact before the acquisition was approximately $4.7 million or $4.6 million, which represents a part of the 24%. About 40% of that is hardware or nonrecurring, while the remaining portion is recurring. So around $2.7 million out of the $4.7 million or $4.6 million is recurring, making it relatively straightforward to predict. That $2.7 million translates to $10 million in recurring contribution annually for Lathem. The real uncertainty lies in the pace of hardware sales. I believe a projection of $15 million is reasonable, although it might increase if we experience unexpected successes. It's important to note that we intend to slightly modify Lathem's business model. Traditionally, they focused on selling hardware as a one-time event and then upselling software or solutions. We're likely to adopt a more bundled approach, especially as we introduce payroll and other products. Therefore, I'm cautious about viewing the $15 million as definitive; it could be higher, but we're planning to adjust their business model and go-to-market strategy, which makes it less likely to accurately represent Lathem's future potential.

Patrick Goepel, Chairman and CEO

The other point I'd say is the integration is right on schedule as far as bringing Asure and Lathem together. Lathem has some areas where they have channel partners, et cetera, and we're not going to change too much of that model. But as we integrate the offering between Asure Payroll and Lathem, I think we've already seen some pretty good synergy from a revenue perspective coming together with our offering. So excited about the possibilities for '26.

John Pence, Chief Financial Officer

Yes. And the way I think about it, too, just as another point on Eric, they have 15,000 customers right now that are using their time and attendance solutions that don't have a connection with us in terms of payroll. So when we look at that business, yes, they brought us the customers, but we're going to take credit for when we start to sell the payroll into them. So that's where we see a lot of growth. It's going to be into that Lathem base, but it's going to be our product on top of that Lathem base.

Eric Martinuzzi, Analyst

And if I could follow up on the hardware. Obviously, you had a higher number in Q3 because of Lathem. That $4.4 million number for professional services and hardware, is that kind of a safe new run rate for that portion of the revenue?

John Pence, Chief Financial Officer

I estimate about $3 million. For the near term, it's reasonable to consider $2 million for hardware over the next 12 months. A fair estimate for professional services would be around $1 million, although it might fluctuate. The variability in professional services will depend on the large tax deals we are working on, which can differ significantly from quarter to quarter as they progress. Overall, I believe it's sensible to start with a projection of two million for hardware and one million for professional services over the year. Does that cover everything?

Patrick Goepel, Chairman and CEO

Yes, I believe that's exactly right. The two and one is a safe estimate, and there may be some potential for upside in the future. For now, that's a solid modeling position.

Operator, Operator

Our next question comes from Richard Baldry with ROTH Capital Partners.

Richard Baldry, Analyst

I'm curious if Asure Central, the rollout of that will cut any of your sort of legacy technology stack support costs and whether it's already includes as a front end for Lathem or if that's sort of a near-term thing that will develop?

Patrick Goepel, Chairman and CEO

Yes, Rich, that’s a great question. First, from a legacy development perspective, we are already seeing some effective cost initiatives regarding our expenses. The newer products and services we’ve launched are significantly more cost-effective. We are also allocating less money to maintenance and more to new development, which has been growing over the past couple of years as we focus on the future. We have stabilized and improved the back end, and now we are enhancing the front end. When we consider the new development costs and products, maintenance expenses are definitely lower. I’m really excited about that. Regarding Lathem, we are looking at months rather than years for integration with Asure Central. Most of the other products are either already online or will be this quarter. Lathem is expected to be targeted for the first quarter, and we are making good progress towards that.

Richard Baldry, Analyst

Great. Well, you're seeing the improvement in the organic growth. Can you talk about sort of what's the underlying drivers there? Is it sales headcount improvements? Is it sales efficiencies? Is it sort of unit driven or ARPU driven, just sort of the pieces underlying that?

Patrick Goepel, Chairman and CEO

Yes, Rich, we said earlier in the year that attach rates are going to be kind of a driver. And the 7% sequential, we think is a pretty good proof point from second to third quarter. And then if I dive into those numbers, which is two or more products, if I look at three, four, five products, that's the fastest growing. So I think as we look at this year, we've been kind of run rating it. As you look at 2026, I think you're going to see us spend more money in sales and marketing. That's implicit in the guide. We're also bringing online the technology development really that we've been building towards for the last couple of years. So you'll continue to roll that out. That's in the guide. I think we really are sitting on an opportunity to really grow exponentially here as we bring all these point solutions together. Now any time you're bringing them together, it's kind of crawl, walk, run. I would say we're walking fast, and we'll continue to do that and get momentum here, not only this quarter as we've done in the third quarter, but fourth quarter will be increased, first quarter will be increased. And we anticipate each quarter in '26 to continue for us to get better at selling, implementing, servicing multiproduct installations, and we anticipate that area to grow.

Richard Baldry, Analyst

Last for me would be with the rollout of some of the newer AI-driven sort of development tools, but other agentic things to help back offices be more efficient. How do you think about the connection or leverage on top line growth versus operating expense growth sort of near term, long term now?

Patrick Goepel, Chairman and CEO

Yes. John and the team have effectively managed to grow our scale. In 2021, we generated approximately $76 million with an adjusted EBITDA of $8 million. Our long-term revenue goal is between $180 million and $200 million, with the medium-term target of achieving 30% profit margins. For this year, our guidance for 2026 indicates margins of 23% to 25%, showing our commitment to enhancing profitability. Regarding revenue, we have focused on software solutions, particularly multiproduct software, which offers numerous advantages. With our AI workflow, utilizing Luna as our generative agent and linking her to other agents, we believe we can effectively shape the narrative in both software and workflow management. We see significant opportunities in this domain. Additionally, we plan to concentrate on compliance. For instance, a business with 20 employees needs to report to COBRA; our system can inform the client about this requirement and assist in fulfilling it with their consent. This AI-driven experience not only generates revenue but also streamlines costs through improved workflows. Expect to see many examples of this in the coming year.

Operator, Operator

Our next question comes from Greg Gibas with Northland Securities.

Gregory Gibas, Analyst

Could you maybe speak to attach rates, the trends you're seeing there? You mentioned, I think, 400 basis points of year-over-year improvement last quarter. Wondering if that trend remained relatively consistent.

John Pence, Chief Financial Officer

Yes. I think what I said in my prepared statements, I think Pat just made a comment to it as well. I mean it's single digits sequentially increasing. So I think you said 7%. I think that's about right, is somewhere in that range sequentially in terms of the improvement quarter-to-quarter.

Gregory Gibas, Analyst

Got it. And then to follow up, just to clarify, you mentioned about, I think, 7% implied organic growth in 2026. Is that consistent with your expectations for Q4 of this year?

John Pence, Chief Financial Officer

Yes, I think so. I think we did that in Q3. So we expect, I think, maybe a little bit of a tick up based on the fourth quarter, just implied in the guide. It has to come basically from organic a place for it to come from.

Joshua Reilly, Analyst

Fair enough. And I guess, lastly, as it relates to integration plans with Lathem time, relatively early still, but could you maybe discuss further integration plans that are maybe currently underway?

John Pence, Chief Financial Officer

I mean I think there's some really exciting things. Like we've talked in the past about the AsurePay card, which we're still in the early stages of. But imagine what they've got is they've got a time clock, right? So pretty simple, you go and you wand in with a badge to log in and clock your time in and clock out. Well, what we can do and what they're working on is another integration point is usually AsurePay as that wanding device. So you've got in the hand of the employee, you've got a device not only that allows them to clock in and clock out, but also as a way to get paid. And that can be the vehicle that they're going to get their paycheck. So that's just one example. We feel like there's a lot of potential with that deal.

Patrick Goepel, Chairman and CEO

Yes. Regarding that, their client base and our direct client base in Chile consist of 30,000 clients. We have the opportunity to collaborate and improve book-to-bill across all those products. We touched on integration, and there's potential for back-office systems to achieve integration through 2026. We're really excited about it and the talented people involved. We're optimistic about the progress in terms of revenue, scale, and efficiency.

Operator, Operator

Our next question comes from Alex Neumann with Stephens.

Alexander Neumann, Analyst

Could you talk a little bit more about Asure Central? Just what are the major differences here in the new platform? And then just secondly, how do you feel about the upgrade platform from a competitive standpoint and if you're expecting any uplift in price from it?

Patrick Goepel, Chairman and CEO

Yes. Over time, we expect to see some improvements in attach rates and revenue per unit, and we anticipate noticeable increases, especially in 2026. In Q3, we reported a 7% improvement in unit volume, even without Asure Central in place. We believe that having a consistent look and feel across all products and services will enhance adoption of our cross-selling efforts, creating more revenue opportunities. We are eager about this development. While we'll have more concrete data on revenue per unit in 2026, we are currently seeing indicators that this growth is underway. We are implementing this across various areas of our business—marketing, implementation, sales, operations, and technology. Based on my previous experiences, I believe we are at a critical juncture where integrating these solutions will be advantageous. Additionally, moving towards event-driven marketing will simplify the cross-selling process and speed up implementation. We will leverage our data and artificial intelligence to accelerate this growth. Our guidance suggests a high single-digit growth rate, and we believe there’s potential for us to exceed that as we progress. We will have the opportunity to provide more evidence and updates on this each quarter.

Operator, Operator

There are no further questions at this time. So I would now like to turn the floor back over to Pat Goepel for closing comments.

Patrick Goepel, Chairman and CEO

Yes, I really appreciate everyone's interest today. I believe we are at an inflection point, which we reached in the second quarter. We're experiencing growth and integrating all our products and solutions that we've been developing over multiple years. We've shown strong growth in various areas, particularly in our money movement and tax filing businesses, and we expect that trend to continue. We believe we are on the brink of increasing results, which you will see through the end of 2025 and into 2026. We appreciate your support. Patrick mentioned that we will be participating in roadshows, client events, and investor conferences, and we look forward to sharing our story and connecting with you. Thank you for your time today, and again, I truly appreciate it. Take care.

Operator, Operator

This concludes today's teleconference. You may now disconnect your lines. Thank you for your participation.