Earnings Call Transcript - ASUR Q3 2023

Operator, Operator

Greetings. Welcome to Asure 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. 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.

Patrick McKillop, Vice President

Thanks, operator. Good afternoon, everyone. And thank you for joining us for Asure's third quarter 2023 earnings 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 folks of some upcoming investor relations activities. We will be participating in the TD Cowen HCM Conference, tomorrow, November 14, with virtual one-on-one meetings. On November 15, we will be attending the ROTH MKM technology conference in New York. And on November 16, we will be attending the 14th Annual Craig-Hallum Alpha Select Conference in New York, plus participating in the 13th Annual Needham Virtual SaaS 1x1 Conference. The management team will use a split squad to cover both events on November 16 to make sure we can accommodate all investors' meeting requests. This outreach is very important to Asure, and I would like to thank all of those that assist us in our efforts to connect with our 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?

Pat Goepel, Chairman and CEO

Thank you, Patrick, and welcome, everyone, to Asure Software's third quarter 2023 earnings call. I'm joined on this call by our CFO, John Pence. We'll provide a business update for the quarter, our outlook for the remainder of 2023, and our guidance for 2024. Following our remarks, we'll be available to answer your questions. As you can see from our reported results, our strong momentum continued into 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. Recurring revenues grew 19% versus the prior-year period, and our non-recurring revenues were up by $3.6 million versus the prior-year period, once again driven by ERTC revenue strength. We will discuss more detail on ERTC once we get to our updated guidance, which we provided in today's press release. Our HR Compliance revenues and AsureMarketplace 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. Over time, we believe that AsureMarketplace could become over 30% of our total revenues. Additionally, we benefited from increased interest revenues due to the rise in the yield curve and consolidation of bank accounts, which drives higher investable balances. We continue to build on our momentum by advancing our technology through leading partnerships and launching strategic sales initiatives, such as bundling our 401(k) products with Payroll to drive new client additions. This initiative was launched 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 offer 401(k) retirement solutions, but approximately 22 states in the U.S. have mandated 401(k) plans for small businesses, and we expect more to pass similar mandates. The U.S. Government's SECURE Act 2.0 aims to increase employee participation in retirement plans by funding the setup of employer-based retirement plans while providing the funding needed to do so. Asure has the solutions employers need to set up those plans. Our sales efforts in the third quarter produced a 26% increase in new sales bookings over and above the 91% increase we delivered last year. We've expanded our sales force during the year and have been very pleased with the quality of the new hires made. We're supporting our sales efforts with digital marketing, which is driving a higher level of sales leads and productivity in 2023. Based on our performance and current expectations, we're guiding for fourth quarter revenues to be in the range of $25 million to $27 million, which excludes any potential revenues from ERTC filing. We expect our 2024 revenues to be in the range of $125 million to $129 million, with EBITDA margins between 20% and 21%. Our 2024 guidance also excludes any potential contributions from ERTC filing but includes our plan to resume acquisitions in earnest. As many of you are aware, the IRS placed a pause on the processing of ERTC claims back in September to clamp down on some bad actors filing claims that should not have been filed. Asure is a processor of claims only, and we refer our clients to their tax advisors to see if they qualify for the ERTC credit. We continue to await further clarification from the IRS and expect the program will likely be resumed. However, given the uncertainty, we want to be conservative in our assumptions on ERTC revenue going forward. Now, I would like to hand it off to John to discuss our financial results in more detail. John?

John Pence, CFO

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. Reconciliations themselves are also included in 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: revenue reached $29.3 million in the third quarter, rising by 34% relative to the prior-year period. Recurring revenues rose 19% relative to the prior-year period, to $24 million. Third quarter recurring revenues grew on the strength of our HR Compliance solutions, AsureMarketplace, and increased interest revenues, with the average client balance exceeding $200 million in the quarter. ERTC revenues were recorded in the professional services, hardware, and other category in the current and prior year period. Non-recurring revenues saw an increase of $3.7 million on the strength of ERTC processing activity. Net loss for the third quarter was $2.2 million, a $2.3 million improvement over the prior year's loss of $4.5 million. Gross margins rose by 10 percentage points to 72% in the third quarter relative to the prior period, while non-GAAP gross margin rose 8 percentage points to 76%. EBITDA for the quarter was $3 million, up $1.7 million from the prior year period. Adjusted EBITDA rose by $4.4 million relative to the prior year to $6.2 million, and our adjusted EBITDA margin reached 21% in the quarter compared with 8% in the prior year period. Margin expansion was driven by growing high-margin revenue streams, continued progress with our efficiency initiatives, and scaled benefits from our growth. These gains more than offset the investments we are making in the 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 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 of debt, which substantially enhances Asure's cash flow, is accretive to earnings, and creates 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 million to $27 million, which at the midpoint of the range would equate to a growth of 19% year-over-year. Adjusted EBITDA for the fourth quarter is anticipated to be between $2 million to $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 2024 guidance, we expect revenues to be in the range of $125 million to $129 million with adjusted EBITDA margins of 20% to 21%. As Pat mentioned in his comments earlier, each of these new guidance figures exclude any contributions from ERTC revenues but assume a resumption of acquisitions. We are awaiting further clarification regarding the IRS pause 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 ERTC will contribute to revenues in 2024. The growth from our HR compliance, AsureMarketplace, as well as float revenues and our newly introduced 401(k) solution are all expected to continue being strong contributors going forward. Additionally, our payroll tax management product has multiple opportunities, with the platform being offered as a service to large enterprises, as well as HCM vendors. While the above mentioned are strong contributors to our growth, we also expect to drive growth through inorganic methods by acquiring businesses that we feel are attractive. Our growth profile going forward will be a mix of both organic and inorganic, and with the recent capital raise and debt payoff, we have the flexibility to resume making smart profitable acquisitions. In conclusion, we are pleased with our performance in the third quarter, and the 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 2024 as a potentially breakout year for Asure in driving profitable growth, leveraging the initiatives we have implemented across the business to drive sustainable growth, and creating shareholder value. With that, I will turn the call back to Pat for closing remarks.

Pat Goepel, Chairman and CEO

Thank you, John. We are 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 is really gratifying to see the positive reception by our clients to our solutions, as it tells us we're creating value for them and enabling them to focus on their core businesses. AsureMarketplace is just getting rolling and is expected to contribute to our growth for the longer term. Its results to date have been a meaningful contribution to our overall performance, and there's lots more to come. As I previously mentioned, the SECURE Act 2.0 gives small businesses the funding they need to implement 401(k) plans, which many states are mandating now, and we expect more to pass mandates as well. Our recent sales initiative in bundling 401(k) with payroll has garnered an enthusiastic reception thus far, and it's only early days into that effort. We also anticipate demand for HR compliance solutions to continue to be healthy as businesses increasingly seek to supplement their internal capabilities with external experts who can help them navigate the increasing complexity of day-to-day business operations. Our guidance in the fourth quarter and 2024 reflects our expectations for continued growth, which will be delivered through a combination of organic and inorganic means. 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 expanded the sales force and invested in marketing initiatives, and we now feel the business is right-sized for future success as we enter 2024. We'll continue to provide innovative capital management solutions that help small businesses thrive, human capital management providers grow their base, and large enterprises streamline tax compliance. Thank you for listening to the prepared remarks. So with that, I will send the call back to the operator for the Q&A session.

Operator, Operator

Thank you. At this time, we'll be conducting a question-and-answer session. Thank you. Our first question is from the line of Joshua Reilly with Needham & Company. Please proceed with your questions.

Joshua Reilly, Analyst

All right, thanks for taking my questions and nice job on execution here in the quarter. I guess maybe starting off with the topic de jure here. Can you help us understand how you're thinking about and preparing for the range of possible outcomes regarding the ERTC claims that you've already submitted, the accounting and cash flow ramifications included in the expectations, and maybe some more color on how that has affected your planning?

John Pence, CFO

We've obviously seen a little bit of a slowdown in terms of cash coming in from the IRS to our clients since September. We see that the ERTC revenue was actually down quarter-over-quarter. So, we felt we did a good job in the third quarter at collecting some of the prior amounts we had recognized for ERTC claims. As Pat has mentioned, we've tried to be pretty clear with regard to our guidance for the fourth quarter. We have not included any revenue in the numbers that we guided for revenue, which is $25 million to $27 million. For 2024, our guidance of $125 million to $129 million also excludes ERTC revenues. Now, we think that it’s going to get turned back on, so there could be some upside potential to that guidance. But we did not take it into account in the near term just because of the uncertainty about when it's going to get turned back on. But that's kind of how we've played it at this point.

Pat Goepel, Chairman and CEO

Yes, John, and I would say a couple of things. One, just I want to point out in our press release, the guidance was $125 million to $127 million, but actually, there was a typo there; it's $125 million to $129 million as we verbally stated. We'll make that correction as quickly as possible. As far as the guidance with ERTC, we're going to follow the IRS guidance. We do believe that the program probably will turn on, but we'll follow their guidance. We wanted to take it out of our numbers just to avoid ambiguity and adopt a very conservative stance. That being said, we are filing paperwork as we get it, and we know that on behalf of our clients, it's in the queue. And when and if that resumes, we'll process according to IRS regulations.

John Pence, CFO

Yes, if you think about last year's fourth quarter without ERTC, we were roughly $22 million. There was approximately $7 million in the fourth quarter last year, with $2 million in recurring and $5 million in non-recurring. So, we're looking at $22 million relative to the $25 to $27 million guidance, estimating that midpoint is kind of in the mid-teens growth, so looking at 14% to 23% growth quarter-over-quarter from the prior year when we exclude ERTC. So, we feel comfortable with our outlook, but it is a little bit of a muddy story.

Joshua Reilly, Analyst

Got it. And then just another follow-up on the Q4 guidance. If you look at the implied adjusted EBITDA margin, it's down sequentially, as you would probably expect with a little bit of loss of leverage from the lower ERTC revenue. But why would it bounce back? Can you help us understand how you see that happening in 2024?

John Pence, CFO

Yes, I think, again, we’ve been pretty consistent in this messaging. It's a scalable business. If revenue grows, that’s where we generate adjusted EBITDA. So, we’re guiding for '24 revenues at $125 million to $129 million, which we believe, after those revenue targets, will enable us to produce adjusted EBITDA in the range of 20% to 21%. With this year's guide, it was $118 million to $120 million, producing 19% to 20% adjusted EBITDA. The composition of the revenue is not the key; it’s really the absolute amount of revenues driving these margins. So, we’re feeling some of that impact in the fourth quarter due to decreased revenue because of lower ERTC revenues, but we believe with higher revenue figures, those adjusted EBITDA margins will rebound nicely.

Pat Goepel, Chairman and CEO

Yes, and just as a footnote to that, we made the decision six months in advance of, in many cases, where we’re going to go. Clearly, with ERTC, we knew we wanted to expand the sales force to 120, and we also aimed to do a capital raise to be more aggressive in replacing ERTC revenue. We had no ERTC at the time, so our trajectory didn’t change. We made those investments in the fourth quarter, which put a little pressure temporarily on EBITDA. But, as John mentioned, once we revert to the revenue numbers of $125 million to $129 million, that EBITDA will bounce back noticeably because it is a scalable business.

Joshua Reilly, Analyst

Got it, very helpful color. And I’ll pass along the queue. Thank you.

Pat Goepel, Chairman and CEO

Thank you, Josh.

Operator, Operator

Our next question is from the line of Bryan Bergin with TD Cowen. Please proceed with your questions.

Bryan Bergin, Analyst

Hi, guys. Thank you. I appreciate you providing an initial '24 outlook here amid the uncertainty. As we try and unpack the recurring growth rate implied in that '24 outlook, can you give us a sense of the growth pressures combined from the ERTC and float revenue as we turn the calendar from '23 to '24?

John Pence, CFO

Yes, I think from my perspective, float shouldn't have a big impact; it should be relatively flat. In terms of ERTC for the first nine months of this year, it's roughly $17 million that we have to grow over. So, if you think about what we're doing in terms of the guidance, that $17 million combined with our recurring revenues should put us around $100 million or $102 million exiting this year in recurring revenue. So, that $125 million to $129 million guidance literally represents 25% to 29% growth next year. This has been consistent with the model we've been discussing over the years, as mentioned in our IR deck.

Pat Goepel, Chairman and CEO

Yes, and the only thing I would add, Bryan, is if you consider the $100 million or so that John mentioned, and think about the second quarter being a little over 20% recurring growth, if you factor in tougher comparisons around float, you might have about a 6% headwind on that. But as for momentum in the business, this quarter continued close to that 20%. While float may create a headwind, and Marketplace could pose a slight headwind from lapping past growth compares, we feel really good about our sales motion and recurring revenue. That’s why we've been adding to our sales team, as we believe we can exceed the ERTC compares with our organic growth engine along with timely tuck-in acquisitions.

Bryan Bergin, Analyst

Okay, that makes sense. And I guess as you think about organic versus inorganic, is it relatively evenly mixed according to the long-term strategy as you consider that '24 view?

John Pence, CFO

I think so. It'll be lumpy, right. It's not perfectly linear; you're never going to see this line up 100% evenly, because we will spike it occasionally with acquisitions. But I do believe it's a fairly healthy mix of both.

Pat Goepel, Chairman and CEO

Yes, and we have good visibility to double-digit organic growth. Therefore, we have more reasons to pursue aggressive inorganic growth. We feel we have a pipeline of pent-up demand. So while it might fluctuate, there’s strong certainty regarding our revenue moving forward.

Bryan Bergin, Analyst

Okay, very good. And if I could just squeeze in one more question, can you comment on how client employment levels trended in the quarter?

Pat Goepel, Chairman and CEO

Employment levels were essentially flat. It’s interesting; small businesses still have more job openings than candidates. Some sectors struggle to hire, which continues even today. What I would say is that there seems to be a bit of a white-collar recession affecting higher-end employment, but we still see demand from small businesses, especially in blue-collar sectors where hiring remains challenging. Overall, we anticipated a seasonal increase but have noticed a desire for more employees, even when candidates are hard to find.

Bryan Bergin, Analyst

Okay, thank you.

Operator, Operator

Our next question is from the line of Richard Baldry with ROTH MKM. Please proceed with your questions.

Richard Baldry, Analyst

Thanks. Can you talk about the M&A pipeline? It seems to be factored in for '24. Are you seeing reasonableness in what sellers are looking for, and the interest levels to take action on it, plus any characteristics surrounding that? Additionally, given we reduced much of the debt in the quarter, what kind of terms or structures are you focusing on moving forward? Will it be more on the cash and stock side? How should we view that in terms of equity dilution?

Pat Goepel, Chairman and CEO

Yes, Rich, that's a lot of questions. I’ll try to unpack them, and John can add in as well. When I consider the environment for small business payroll companies, the landscape is pretty tough. First of all, regional banks have stopped lending, making access to capital the top concern. Additionally, the payroll industry is becoming increasingly regulated by state mandates including money transmitter licensing, Know Your Customer (KYC), and anti-money laundering measures. Small businesses are struggling to keep up with evolving legislation and the financial requirements that come with it. As for the situation with sellers, many smaller companies might be looking for a different exit strategy given these challenges, and we’re a sensible exit option for them. We’ve discussed acquisition potential with our resellers and trusted partners multiple times a year, and we believe the multiples are reasonable and starting to contract due to the current economic landscape. Consequently, we’re seeing it as a good time to pursue growth. The halt of ERTC births opportunities for us to go on the offensive. In terms of acquisition structure, we have three main levers: cash, seller notes providing low-cost financing, and stock, but we only rely on stock if the acquisitions can genuinely add long-term value. With over $30 million in cash, we’re in a position to pursue acquisitions while also being optimistic that the lending market will become more favorable over time, giving us greater leeway for future deals.

John Pence, CFO

Yes, I’d also add that against the backdrop of selling activity, there’s a fair range in terms of what sellers are expecting, but we’re prepared to navigate through the landscape effectively.

Richard Baldry, Analyst

And maybe flipping back to organic; you posted a 26% increase in bookings on top of the impressive 91% last year. Can you speak generally about your average tenured capacity—do you feel like your current workforce can sustain this growth, or does it require additional headcount to maintain organic growth?

Pat Goepel, Chairman and CEO

Yes, thanks, Rich. We are expanding from 100 sales reps to 120. We have successful people in our team and many of them will be attending our summit, which is a record number for us. The training programs we implemented have helped us attract high-quality talents, and our mentoring culture has been very effective. This will drive continued growth, and we believe that with our improved margins—almost doubling in the last couple of years due to scale, we want to invest in quality talent and add even more.

Richard Baldry, Analyst

Thanks.

Operator, Operator

Our next question is from the line of Brad Reback with Stifel. Please proceed with your question.

Brad Reback, Analyst

Great. Thanks very much. Heading back to 2024, is it correct to assume that about $10 million to $15 million from acquisitions will be factored into your guidance of $125 million to $129 million?

Pat Goepel, Chairman and CEO

Yes.

Brad Reback, Analyst

Great. And what are the employment trends you're modeling for '24?

Pat Goepel, Chairman and CEO

To put it plainly, we're anticipating employment levels to remain flat. We haven’t adjusted our expectations downward for 2024.

Brad Reback, Analyst

That's great. Thanks.

Pat Goepel, Chairman and CEO

Thanks, Brad.

Operator, Operator

The next question is from the line of Jeff Van Rhee with Craig-Hallum. Please proceed with your questions.

Jeff Van Rhee, Analyst

Great. Thanks for taking the questions. Pat, regarding the Secure Act, you mentioned early traction. Can you elaborate on that? Any quantification or additional color would be helpful. Also, regarding the 26% growth in bookings, does that include or exclude ERTC? If it includes it, what was it excluding ERTC?

Pat Goepel, Chairman and CEO

Yes, just to clarify, regarding the Secure Act, shortly after September 14, which was the pause on ERTC, we began pivoting toward the SECURE 2.0 Act initiative. For context, the SECURE Act is addressing future challenges related to Social Security due to insufficient retirement funding in America. Currently, many citizens lack access to a 401(k) plan. The SECURE 2.0 Act will provide funding for setting up 401(k) plans and tax credits. It has already seen adoption by 22 states, with more expected to follow, impacting 401(k) offerings significantly. Historically, we have already had visibility into 70+ plans for the fourth quarter alone and anticipate doing around 10% of our target this year. The interest levels we’re seeing have been incredibly high. Regarding sales numbers, the 26% growth in bookings does include ERTC, but we will start reporting bookings excluding ERTC in the future. We aim to clarify the ERTC’s role further, as it was more of a one-time revenue event. However, the 26% ARR bookings represent growth heavily not reliant on ERTC.

Jeff Van Rhee, Analyst

Thank you. And on Marketplace, did it ramp as expected? Could you provide more precise expectations for 2024?

Pat Goepel, Chairman and CEO

First, regarding 401(k), we previously looked at it as part of the broader Marketplace category. Now, we consider it a separate offering alongside payroll due to its significant potential. We announced the partnership with Lendio, aiming to address small business lending needs that regional banks can’t fulfill. We’re seeing great momentum with our Equifax partnership as we transition into the fourth quarter. While we will provide thorough updates on Marketplace soon, we are starting to see performance improve significantly. 401(k) is expected to gain traction quickly, so we’re excited about its future.

John Pence, CFO

On margins, I would suggest considering cost of goods sold aligned with past quarters. We believe fourth quarter costs will be similar to the prior three quarters.

Jeff Van Rhee, Analyst

Understood. Thank you.

Pat Goepel, Chairman and CEO

Thanks, Jeff.

Operator, Operator

Our next question is from the line of Eric Martinuzzi with Lake Street. Please proceed with your questions.

Eric Martinuzzi, Analyst

Yes, you provided the nine-month ERTC revenue figure. Can you break down the Q1 and Q2 revenue contributions?

Pat Goepel, Chairman and CEO

Yes, going from memory, I believe it was roughly $5 million for Q1 and $7 million for Q2, leading to a total of around $17 million. Most of that revenue was one-time professional services based on ERTC claims.

John Pence, CFO

Yes. We recorded approximately $1.4 million attributed to ERTC in Q3 last year, so $3.7 million in terms of year-over-year growth.

Eric Martinuzzi, Analyst

Got you. And regarding sales headcount, I know you are targeting 120 by year-end. How many do we currently have?

Pat Goepel, Chairman and CEO

We are currently at about 110 or 112. So, we're on track to hit our goal.

Eric Martinuzzi, Analyst

Thanks. I appreciate the answers.

Pat Goepel, Chairman and CEO

Thanks for your questions.

Operator, Operator

Our next question is from the line of Vincent Colicchio with Barrington Research. Please proceed with your questions.

Vincent Colicchio, Analyst

Yes, Pat, did direct sales productivity meet your expectations in the quarter?

Pat Goepel, Chairman and CEO

I would say it was slightly behind expectations, but overall, it was a good quarter. The IRS pause on ERTC caused some sales cycle disruptions, but we were already pivoting towards the SECURE 2.0 initiative. Overall, we are pleased with our sales staff and the organization, and we are excited about our pipeline heading into Q4.

Vincent Colicchio, Analyst

Any changes in the competitive environment, particularly regarding pricing?

Pat Goepel, Chairman and CEO

No, I would say our focus is on ARR and repetitive revenue. Acquiring new customers remains challenging, but we are successfully capturing market share with our value proposition, particularly around compliance. I feel confident about our position; it remains a tough sales environment, but I'm energized by our successful salespeople.

Vincent Colicchio, Analyst

Thanks, Pat.

Pat Goepel, Chairman and CEO

Thank you.

Operator, Operator

Our next question is from the line of Greg Gibas with Northland Securities. Please proceed with your questions.

Greg Gibas, Analyst

Hey, Pat and John. Thanks for taking the questions. I wanted to follow up on your guidance assumptions regarding recurring versus other revenue in 2024 guidance. How much ERTC could be factored in next year if not excluded? How much of that figure should we look out for based on the uncertainty?

John Pence, CFO

The majority of our 2024 guidance is focused on recurring revenues, with minimal non-recurring taken into account. As for ERTC, we recorded approximately $17 million for the first nine months this year; however, due to the current uncertainty, I can't specify how much that could contribute next year. I would have previously expected around $10 million but can’t project this effectively anymore due to the unknowns.

Pat Goepel, Chairman and CEO

Yes, to add to that, we have seen about $1.5 to $2 million in professional services revenue. So, while positioning ourselves conservatively for 2024, we also prepare for potential revenue from ERTC based on our filing strategies. The marketplace is poised to enhance our growth along with our HR compliance solutions.

Greg Gibas, Analyst

Thank you. You've been transparent about your growth and lead generation efforts. Could you comment on retention trends you’re seeing as well?

Pat Goepel, Chairman and CEO

We monitor retention daily, and it has improved significantly since COVID—about 2% improvement directly related to it, and about another 2% independent of that. Our retention rates are favorable, reflecting solid client engagement and performance. Cross-selling related to HR compliance and tax solutions are also performing well. We feel positive about factors within our control and intend to build on this momentum with a proactive stance towards lead generation.

Greg Gibas, Analyst

Great, thank you.

Operator, Operator

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.

John Pence, CFO

Yes, I've been here for 14 years, and I remember when pay cuts were necessary, and we had less than 50 employees while losing around $10 million. Looking forward, I couldn't be more excited about what we are building. The capacity and scale we’re beginning to achieve are remarkable. Our access to both phenomenal talent and clients is greater than before, and we’re growing significantly. While uncertainties may arise regarding the economy or ERTC, the fundamentals we control—such as business growth and positive client relationships—drive my optimism. As investors, I recognize the scoreboard is share price, but our goal focuses on building lasting value for shareholders. The best days are ahead of us in 2024, where we expect strong growth and the promotion of sustainable value for our shareholders. Thank you for attending the call.

Operator, Operator

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.