Earnings Call Transcript - ASUR Q2 2021

Operator, Operator

Good afternoon. And welcome to Asure's Second Quarter 2021 Earnings Conference Call. Joining us for today's call are Asure's Chairman and CEO, Pat Goepel; John Pence, Vice President of HR; and 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, Vice President of HR

Thank you, operator. Good afternoon, everyone. And thank you for joining us for Asure's second quarter 2021 earnings call. After the market closed, 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. 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 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 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 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, Cheryl. And welcome, everyone, to Asure Software's second quarter earnings call. I will begin today's presentation with an update on our business performance and strategy, then will turn the call over to our CFO, John Pence, for a more detailed review of our financial results and outlook for the third quarter of 2021. We'll then conclude the session with time to answer your questions. In the second quarter, Asure delivered total revenues of $17.2 million and net income of $3.7 million. Our revenues grew 22% versus the prior year, with recurring revenues rising by 17%. Importantly, our revenue growth was balanced with nearly equal contributions from organic growth and acquisition-related growth in line with our strategic aspirations. I'm pleased to reaffirm our long-term strategy to grow roughly 20% each year, made up of 10% organic and 10% inorganic, which remains unchanged. A significant contributor to our inorganic growth in the quarter was the acquisition of Payroll Tax Management last July. The new tax platform has improved operational efficiency for our payroll operations and accelerates our ability to integrate accretive acquisitions. It also expands our capabilities to new small business clients, resellers, and large brands who have already expressed interest in using our tax engine to power their payroll and treasury departments, regardless of which payroll platform they use. The integration of a small Northeast-based reseller acquired in December 2020 is now complete. This is important because it provides a positive proof point regarding our acquisition model. This model works and is highly accretive to customers, the business, and our shareholders. We'll continue to be opportunistic in rolling up our reseller partners that white label our capital management solutions. Acquisitions of our resellers continue to be a part of the growth strategy, and we will continue to be active in the marketplace. We're also pleased to announce that we signed a commitment letter with Structural Capital Investments through third-party LP and want to express our thanks to Wells Fargo for their partnership over the years. Shifting now to organic revenue growth, same-store sales, which roughly tracks national unemployment rates, were up 7% year-over-year for the second quarter of '21 and up 5% sequentially compared to the first quarter of 2021. This marks the first uptick since the start of COVID pandemic, both sequentially and year-over-year, indicating an improving environment for our clients and for Asure. We previously outlined our plan to significantly increase the number of direct sales representatives across the United States. We continue to be active in this area. At the end of the second quarter, we had 65 direct sales reps, up slightly from 64 at the end of the first quarter and up significantly from the 31 at the start of 2020. At year-end 2021, we expect to have about 75 to 80 direct sales professionals. The investments in sales and marketing are paying off. Bookings were up 48% year-over-year and 51% sequentially. We'll continue to invest in this area and expect even more productivity from existing sales reps as their tenure increases. The successes have been possible with our continuing focus on small business, which is where most of the sales efforts are. This is evident in our small business bookings, which increased more than 133% year-over-year. As we've discussed in the past, the previous 16 months or so have been different from any other time that we've experienced before. We're encouraged by the early signs of the economy reopening, as our small business clients are largely back to business. Yet uncertainty obviously remains with COVID and its new variants. That said, we're optimistic about tailwinds in our model as employment levels rise, clients and partners become more available for face-to-face meetings, and the uncertainty that freezes buying decisions returns to normal. I continue to be very proud of how the Asure team embraced these challenges and took a leadership role through the pandemic. For example, as part of our efforts to support more than 80,000 small business clients navigate the complex COVID regulations, we introduced an employee retention tax credit solution to help them efficiently maximize this critical stimulus program. I couldn't be more proud of our team as they helped our clients file for nearly $100 million in tax credits in the second quarter. These stimulus dollars can help our customers hire staff and grow their business. As an essential small business, Asure remains committed to helping more than 80,000 small business clients navigate unprecedented compliance changes and grow in a very challenging environment. We're committed to ethical business practices, a values-based culture, innovation, social responsibility, and leadership as well as our support for small businesses throughout the United States. Overall, we are pleased with our second quarter results. The business has returned to organic growth following the negative impacts of COVID and has allowed us to return our employees to their traditional compensation structures. Our acquisition model has delivered tangible positive results and created new areas of strength for Asure. We continue to be vigilant in managing expenses while improving our scalability so that future revenues can effectively drive higher levels of EBITDA and cash flow. Now I'd like to hand off to John to discuss our financial results in more detail. John?

John Pence, CFO

Thanks, Pat. As Cheryl mentioned at the beginning of this call, several financial figures discussed today are non-GAAP. You will find a description of our GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. And the reconciliations themselves are included in our most recent investor presentation posted in the Investor Relations section of our website at asuresoftware.com. Before I get into the details of our second quarter results, it's important to remind you that our first quarter results feature a seasonal lift related to recurring revenue generated by annual preparation of federal reporting regarding employee and employer reporting regarding employee and full year reporting of W2 income and ACA compliance. This lift happens each year in the first quarter and has a significant impact on our quarter-over-quarter comparisons in Q2, but does not affect year-over-year comparisons. Now on to the results. When excluding year-end fees from the first quarter to second quarter sequential revenue comparison, revenue was up 5.6% to $17.2 million. In this first quarter, where we had a post-COVID comparison for year-over-year results, we were up a little over $3 million or nearly 22% from $14.1 million in the same quarter of the prior year. As Pat indicated, our revenue growth was well balanced with strong contributions both from organic and inorganic sources. Recurring revenue represented approximately 94% of our total revenue for the quarter. Interest on client funds was approximately $400,000 in the second quarter, flat from the first quarter and up from the prior year of approximately $100,000. The average balance of funds held on behalf of our clients was approximately $203 million in the second quarter, down from approximately $234 million in the first quarter and up over the prior year of $94 million. Non-GAAP EBITDA in the second quarter was $1.1 million. This compares favorably to the first quarter, which would have been approximately breakeven after taking effect for the year-end fees recognized in the first quarter. And this is down approximately $300,000 from the prior year's second quarter. This small decrease year-over-year was realized despite the increase in salaries as we absorbed pay and benefit increases following the implementation of our temporary reductions related to COVID. Compensation represents approximately 70% of our cash expenditures. So these adjustments have a meaningful impact. Additionally, expense comparisons are also impacted due to expenses related to the transition service agreements from the sale of the base business at the end of 2019. And finally, as Pat mentioned in his remarks, comparisons are also affected by an increase in the number of sales representatives as we invest in our sales organization to drive higher revenues in future periods. While there were some headwinds in our second quarter expenses related to sales force expansion and pay restorations, we view these investments in our organization and people as critical for building momentum in our business. Underlying those increases are significant efforts to increase the scalability of our platforms and improve our cost efficiency. We have a broad set of initiatives underway that will standardize our processes, simplify our internal and external interactions, and enhance our self-service capabilities. As previously mentioned, we intend to return full benefits for our employees in the second half of 2021, which will include bonuses and company matching of 401(k) contributions. We expect this range statement of these costs to be offset by some of these anticipated cost efficiencies, yielding a net neutral operating profitability contribution. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $20.3 million. On June 30, 2021, we had $13 million of debt which comprised of a $9 million term loan and the balance made up of seller notes from acquisitions. Since December 31, 2021, we have reduced our indebtedness to $13 million from $25 million. A large component of this reduction was the forgiveness of $8.6 million of our PPP loan during the second quarter. On an income statement, you will see the extinguishment of the PPP loan created a gain of $8.7 million, which contributed to our net income in the quarter of $3.8 million. This gain, however, is not reflected in the non-GAAP EBITDA I previously discussed. As Pat mentioned earlier, we are also pleased to announce the signing of a commitment today with Structural Capital Investments for a $50 million term loan facility. Once closed, availability of the facility will be based on an advance rate based on our pro forma annual recurring revenue. Besides maintaining this ratio, there are limited financial covenant compliance metrics. This new facility has a four-year term, and once closed, we believe that combined with our previously filed registration statements, we possess the financial structuring flexibility to aggressively pursue our previously stated strategy regarding organic and inorganic growth. We anticipate that this facility will close before the end of the third quarter and are very excited about the potential of this new agreement and the opportunity to work with our new partners at Structural Capital Investments. It is our intention to use the proceeds to repay our existing $9.8 million facility and to deploy the balance of the proceeds for growth opportunities. As Pat indicated earlier, we have demonstrated our ability to make accretive acquisitions that are beneficial for both our customers and our shareholders. These acquisitions create new revenue opportunities by expanding our footprint and accelerating product sales opportunities. As we have consistently communicated, we plan to pursue acquisition opportunities, and this new facility lays the groundwork to accomplish our strategic goals. Now I'm going to turn to guidance for the third quarter ending September 30, 2021. This guidance is offered with the backdrop of the continuing challenging environment to predict future economic results given the ebbs and flows of employment trends and COVID. We are providing the following guidance: revenue for the third quarter of 2021 is expected to be in the range of between $17 million to $17.5 million. Non-GAAP EBITDA is guided to be in the range of $800,000 to $1 million. And non-GAAP EPS is guided to be between $0.03 negative and negative $0.01. While the economy and labor markets continue to be volatile, we focus on the levers of the business that we can reasonably control. We expect to accelerate our acquisition program for resellers of our software solutions. At the same time, we are also continuing to drive significant process efficiencies throughout the organization to build scale and enhance operating leverage, which should benefit our results in future periods. With that, I will turn the call back over to Pat for some final remarks.

Pat Goepel, Chairman and CEO

Thanks, John. In summary, our second quarter results are very encouraging. We have developed some early momentum in terms of revenues and are starting to turn a corner. We've also substantially improved our balance sheet. And once we have closed our new term loan agreement, we believe we will have provided a foundation and have flexibility to drive future value creation. The second quarter results also show the positive impact on our financials of recent acquisitions that provide us and our clients with enhanced solutions and capabilities. We continue to further integrate our payroll, HR, time and attendance and tax products for an improved user experience while also streamlining the back-end hosting and system architecture to simplify support and reduce cost of goods sold. We're also streamlining and improving our internal and external processes in order to build scalability and to make it easier to do business with Asure. These include substantial standardization and simplification efforts, as well as enhanced digital and self-service capabilities. And over the past year or so, we focused on significantly improving the quality of our Board and key executives. In that regard, I am pleased to announce that we've created the new role of Chief Technology Officer. We're excited to appoint Yasmine Rodriguez to this role. Yasmine brings over 20 years of experience in building world-class human capital management technology solutions, and she will lead our IT infrastructure, process automation and technology roadmap, driving innovation to better serve our clients. Congratulations, Yasmine. So that concludes our remarks. And with that, I'll turn the call over to the operator for the Q&A session.

Operator, Operator

Thank you. Our first question comes from Joshua Reilly from Needham. Your line is now open.

Joshua Reilly, Analyst

Hey, guys. Congrats on the quarter, and thanks for taking my questions here. So if you look at the significant improvement in bookings during the quarter, how would you attribute the results to the improving macro versus sales execution? And then second, how do you think about the opportunity for rep productivity improvement for the rest of the year versus where it's at today? And maybe how did it trend in the quarter? Thanks.

Pat Goepel, Chairman and CEO

Yes. I think, Josh, thank you for the questions on sales. A couple of things. One, I'll remind people that our average tenure of our sales force right now is about 10 months. So I think the best days are ahead for quite some time. I do think the macro environment is improving, but I also think we're improving almost on a daily basis. So I'm very pleased with the progress. I think the focus is there. I do think you'll see growth at this level or potentially more throughout the year. And I really think we're set up for 2022 and beyond as well. So I'm really encouraged by the productivity and the progress that our salespeople are making.

Joshua Reilly, Analyst

Okay, great. And then maybe just one follow-up. The same-store sales improved nicely in the quarter. What are you seeing in terms of outlook here in August so far, I guess it's early, but in July? But what do you think about the improvement here for the rest of the year on that? Thanks.

Pat Goepel, Chairman and CEO

We're not modeling a ton of improvement. We see, I think frankly, a lot of fits and starts. And I think we're all hopeful that maybe coming in the August, September timeframe when some of the unemployment programs might potentially end that there might be some hiring improvement down the line. So we haven't modeled a ton into it. I think we're taking a cautious approach to that in our models going forward in our guidance. John, I don't know if you have anything to add.

John Pence, CFO

I think we considered it when we came up with the guidance that we just gave you. So $17 million to $17.5 million reflects kind of our view, and it's tempered because we just really are still, as Pat pointed out, seeing fits and starts.

Operator, Operator

Thank you. And our next question comes from Eric Martinuzzi from Lake Street. Your line is now open.

Eric Martinuzzi, Analyst

Hi, congrats, as well on the quarter. I had a question regarding your pipeline for the back half of the year. I know we're coming up on kind of evaluate the current platform season or evaluate alternatives for those prospects who might be willing to entertain switching over to Asure. I'm wondering if you could just kind of reflect on last year and take us back to 2019. Is pipeline behavior similar to two years ago as far as lead generation? Because I know people kind of got to be in the market here over the next two, three months to make that year-end switch.

Pat Goepel, Chairman and CEO

No, Eric, I think a couple of things. One, when I think about two years ago and last year, and I'll kind of normalize for COVID last year. I think our pipeline was pretty strong in the small business area. I think this year, we have some emerging pipeline in the mid-market that I think, frankly, shows a significant improvement over last year. If you think about our acquisition of PTM, we have some tax filing pipeline that really interests us and think will move the business forward. Small business pipeline is strong. And then from the reseller opportunities, I think there are a couple unique opportunities there. So I would say compared to two years ago, our pipeline is broader compared to last year, normalized, again, I think we're excited about a number of products and services. It's not just small business growing, but I think the pipeline in some of the other areas, whether it's mid-market tax and some of the other product lines, we have some excitement. Now we're in that summer season, and we're really pointing to the third quarter and fourth quarter here and primarily the fourth quarter. But I would say we're cautiously optimistic.

Eric Martinuzzi, Analyst

Okay. I want to follow up on the reseller opportunities. Obviously, you're lining up a credit facility here. M&A for Asure is a little bit different than M&A for a lot of tech companies in that you're probably already working with these people. In many cases, they're founder-owned types of businesses. So as soon as we get the green light on the credit facility, could we expect to see some kind of a surge in the inorganic side?

Pat Goepel, Chairman and CEO

Yes. I mean I think we're not opening a credit facility for our health, right? We're interested in putting it to use. I would say if you think about some of the tax changes that have been floated and talked about, I think there are some opportunities. I'm less concerned about timing. I'm more concerned about lining it up to our strategic vision and execution of the business, but I would anticipate we'll be active.

Operator, Operator

Thank you. And our next question comes from Richard Baldry from ROTH Capital. Your line is now open.

Richard Baldry, Analyst

Thanks. Could you talk about challenges in hiring sales in a still semi-quarantine environment, I guess? Finding the right people, vetting them, onboarding them, sort of building up without the ability to sort of be in person, which it would have been prior?

Pat Goepel, Chairman and CEO

Yes. No, Rich, I think it's a thoughtful question. First of all, I think coming out of COVID, people want to make a change. And so I think there's some pent-up demand, which gives us opportunity. I think because of our leadership team having been in the marketplace for a number of years, we can place six degrees to almost every candidate very, very quickly. So we know who's good. It's almost like if you're thinking about basketball recruiting awards and you have your five-star athletes, four-star, three-star athlete. A lot of people are jumping into the transfer portal. We want to take advantage of that. Certainly, we have to be judicious around the digital media and the interviews and why they're making a change. But if I step back, we have a number of different products and technology and open territories that are bigger in our competition. People have the opportunity to really make a lot of money, and they're interested in pursuing options at this point in time. So I think the recruiting environment has some challenges from face-to-face, but it also has some opportunities that are like no other that I've seen over the last couple of years.

Richard Baldry, Analyst

And maybe looking into the same-store sales a little bit, a sub-5% sequential. I think last quarter, you said that the pays per control was down about 13% year-over-year. So do you feel like that same-store sales has a lot of room to keep moving over the second half, obviously, there's some uncertainties around Delta, but maybe think about the linearity of that 5% to really come on late in the quarter and it feels like it's still ramping? Or was it sort of consistent throughout that.

John Pence, CFO

Again, let me take a shot at this one, and Pat can fill in some of the gaps. Again, I have the luxury or disadvantage of not having the history. But when I look at it, I consider the overall average client size of where the company sat prior to COVID to where it's at now, and it's still down. So from my perspective, there's a decent amount of room to go once that hiring comes back on a per customer basis. Now how quickly that comes back in core models has changed, I don't know. But I can tell you, there's still a definite impact pre and post-COVID in terms of the overall employee count at our customers.

Pat Goepel, Chairman and CEO

Yes. And Rich, just to echo what John says, I agree with everything he said. I do think there's opportunity for employment to come back. I think we're a little bit cautious on getting ahead of it or modeling it. We'd rather see it take place.

Operator, Operator

Thank you. And our next question comes from Jeff Van Rhee from Craig Hallum. Your line is now open.

Jeff Van Rhee, Analyst

Great. A couple for me. On the bookings front, just talk about what you saw in there that might have been different in the mix of new and existing. And then along those lines, how have your competitive win rates varied over the last two, three quarters, sort of through the overall macro headwinds that everybody is facing? How are you faring versus your typical competitors?

Pat Goepel, Chairman and CEO

Yes. Jeff, I would just say, I think the competitive win rate hasn't changed much. I think we have an opportunity, and we're very competitive and we win. I think the turbulence sometimes is there a process slowdown based on COVID, or are there other business concerns. So sometimes the drivers within it are turbulent. But as far as the competitive win rate, I think we're in pretty good shape. I would point out the ERTC funds. I think as a company, we've done that program really well. We've helped companies get access to the money, and I think we're nimble enough to help them better than some of our competitors. I think that's led to some loyalty and sales that will benefit us not only this year but in future years, so I'm excited about that. But that's how I see the marketplace. And then I'd point out that we haven't said in the investor deck, the tenure of our sales reps and the productivity, with our average tenure being 10 months. I think over the next couple of years, you'll see the experience of some of the salespeople going through this environment, and I think they'll be very productive in the next couple of years.

Jeff Van Rhee, Analyst

You put in a new CTO, and what is it, at this point, you're most focused on delivering on the product side that you might not have done in the past?

Pat Goepel, Chairman and CEO

Yes, Yasmine Rodriguez came to us in December, and she's run some of the tax business and the systems around that. We have a common tax filing platform within the company, and then we can market on a standalone basis. When I think of COVID, we probably had more tax changes in 16 months than we've had in 16 years. Yasmine has really handled that well. But for me, it's a number of things. First of all, the operational efficiency, and as we have integrated resellers, the automation of processes around bots and stuff like that have made a big impact and will continue to have a big impact going forward. The standardization of processes and using technology will enable that. The acceleration of some of the product efficiencies and the integration opportunities. So I don't think it's anything completely new, but I think it's an enhancement and speed of a total solution, and we think we can make significant improvements. Lastly, I think in the area of money movement and treasury management systems, I do believe there's a continued acceleration focus in that area.

Operator, Operator

Thank you. And our next question comes from Vincent Colicchio from Barrington Research. Your line is now open.

Vincent Colicchio, Analyst

Yes. Good afternoon, Pat. Nice quarter.

Pat Goepel, Chairman and CEO

Thank you.

Vincent Colicchio, Analyst

I'm curious, are you seeing, given the tight labor market, wage inflation pressures, how should we think about that?

Pat Goepel, Chairman and CEO

Somebody told me one time that when they talk to a CEO, they never say they're overvalued, right? So I do think from an employment perspective, I think competition for good employees is intense, and employees are clear about how they want to work, where they want to work. The stress of COVID, the stress of coming out of COVID, has made people rethink their families. I think people are more open to different possibilities than they were pre-COVID. So I think what that's done is create a talent match that is greater than the last five or six years. That's the backdrop. I would say people are also open to tools available to us to do business differently. Maybe it's robotic automation as opposed to more manual processes that are available to us. We can make our roles attractive and satisfying, allowing employees to really leave their footprint for the future. I think we have a competitive value proposition. There is a war for talent, and whether it's wage inflation or a value proposition, employees are looking for that. But I also think there are opportunities for flexibility, different work schedules, and hybrid offerings. Some will be money motivated, some will be flexibility-oriented, and some will be about schedule. Others will seek opportunities to eliminate mundane tasks and learn something new. So it's not one-size-fits-all, but I see opportunities for job improvement through attracting talent. The marketplace is unlike anything I've seen in the last five years.

Vincent Colicchio, Analyst

Did you continue to add organic resellers in the quarter?

Pat Goepel, Chairman and CEO

We had some small reseller improvements and a few significant deals for us. We're starting to open up in that area considerably. I think COVID froze some potential partnerships for a while. But people are out now making decisions, and they're kicking the tires. More important, I think they will be ready to buy here. So we're excited about some of the prospects we have.

Vincent Colicchio, Analyst

And are you seeing improvement in cross-selling activity?

Pat Goepel, Chairman and CEO

Yes. Cross-selling has almost become bundled sales. People are buying more collective products right at the point of sale and collective solutions. So we're seeing that improving significantly. It's almost become the standard. I believe there's potential for more cross-selling activity. The ERTC or employee retention tax credit has helped our clients access money. As clients gain access, they want to invest in more solutions. That's been a catalyst for us.

Vincent Colicchio, Analyst

Thanks for answering my questions.

Pat Goepel, Chairman and CEO

Thank you.

Operator, Operator

Thank you. And now I'm showing no further questions. I would now like to turn the call back over to Pat Goepel for closing remarks.

Pat Goepel, Chairman and CEO

Well, thank you. I sure appreciate all of you. We've been on this journey, and I think COVID was a crazy trip here for 15 months or so. I think we've managed through it in a logical way. I think we're making some progress. Hopefully, you feel that way, too. I think we're setting this business up for what should be a pretty exciting next couple of years. I think we have the right people, the right initiatives, and the right market opportunity to make a difference. For those of you that have been around a long time or are just getting acquainted with the story, I'll tell you why I think we're going to do some special things, and I appreciate all of you. Until next quarter, have a great day. Thank you.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.