Earnings Call Transcript - ASUR Q1 2021

Operator, Operator

Good afternoon, and welcome to Asure's First Quarter 2021 Earnings Conference Call. Joining us for today's call are Asure's Chairman and CEO, Pat Goepel; John Pence; and Vice President of HR, Cheryl Trbula. After the speaker's 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 First 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 I'd like to welcome everyone to our first quarter earnings call. We truly appreciate your interest, whether you're an employee, client, investor, analyst, or another interested third party. I'll start today's call with an update on some key metrics before reviewing business highlights for the first quarter. Then John Pence, our CFO, will review our financial results and provide an outlook for the second quarter of 2021. He will then turn it back over to me, and I'll provide an update on our strategy as we look to the second quarter. Since December 2019, when we sold the Workspace business, we increased our sales personnel from 33 to 64, right in the middle of a COVID pandemic. What's really important since that kind of progress has been made this quarter is that it represents a significant inflection point for Asure Software because it was the first quarter that we posted positive year-over-year revenue growth. We view this as an important milestone that sets us up nicely for 2021. The past 14 months have been different from any other we've experienced before. The mass shutdowns in response to COVID-19 forced us to find innovative ways to connect with our small and medium-sized business clients, prospects, and our own employees to overcome these challenges after more than a year since the pandemic began. I'm very proud of how the Asure team embraced the challenges and took a leadership role through this pandemic. For example, as part of our efforts to assist more than 80,000 SMB clients through the COVID pandemic, we recently introduced an employee retention tax credit, or ERTC, solution to help clients efficiently maximize this tax credit. ERTC is part of the CARES Act, which encourages businesses to keep employees on their payroll. Additionally, we're enriching our partner program by providing industry-specific educational resources to help our CPAs, brokers, and bank referral sources grow and prosper. When they grow and prosper, we grow and prosper. Although our sales channels continue to be impacted by the restrictions of face-to-face meetings and delayed decision-making by prospects, we've experienced growth in many key sales metrics. We are well positioned to take advantage of the opportunities as we transition back to normal market conditions. Our increased focus on small business continues to pay off as small business bookings, where most of the reps focus, increased more than 90% year-over-year for the third consecutive quarter, with more than 60% of new sales continuing to adopt multiple solutions. We also continue to add reseller partners, and our total bookings this quarter increased over 20% year-over-year. Compared to the fourth quarter of 2020, first quarter revenue, EBITDA, non-GAAP EBITDA, and non-GAAP EPS all increased sequentially. As a reminder, the first quarter is seasonally strong because this is when we recognize our year-end W2 and ACA recurring revenue. Even after backing out the year-end revenue, we performed well compared to the first quarter of 2020 in a very tough environment. The COVID-19 pandemic is still a headwind, primarily affecting our same-store sales due to the sustained level of lower client employees on our platform that continues to impact our top line. This resulted in tempered year-over-year comparisons. Additionally, first quarter 2020 was only partially impacted by the higher unemployment driven by COVID. Drilling down into the COVID impact on a monthly basis of the 1,050 of our 10,000 direct customers that paused last March 2020, approximately 900 returned through March 2021, resulting in about a 1% churn in our clients. Our pays per control, or same-store sales, which roughly tracks national unemployment rates, was down 14% year-over-year in Q2 of 2020. It improved to down 9% in the third quarter of 2020 and remained about that level in the fourth quarter of 2020. In the first quarter of 2021, it dipped initially and then recovered a bit in March, but the average for the quarter was down 13%. This has presented a headwind because in normal times, pays per control typically increases about 2% year-over-year. Still, since we've been adding more clients than we're losing, as same-store sales normalize over time, this will translate into increased revenue. Lastly, new sales bookings on a dollar basis were pressured as many small businesses continued to focus on surviving and adjusting their business models instead of changing payroll providers, even if they were willing to do so. However, we're pleased that the number of new clients booked is increasing alongside the broad adoption of multiple solutions being built. Our investments in sales personnel are also bearing fruit. We began 2020 as a transition year with 33 sales reps, and by the end of the first quarter 2021, we had 64. We expect to be between 75 and 80 by year-end. Most of these new hires are experienced and bring strong referral relationships. The selling environment will likely continue to evolve with differences on a regional basis as COVID cases and the reopening trajectory stabilize. We are optimistic that with the vaccine deployment progressing steadily, our clients are in the best position since the pandemic started to begin making buying decisions. Our initiatives to reduce expenses while accelerating our go-to-market and product innovation investments have positioned us very well for growth as the pandemic situation improves. We have delivered solid client growth and demonstrated our unique value to our clients and partners through some of the most difficult times. We believe that momentum in our business metrics will continue, and the economic conditions will improve as national employment levels gradually return to pre-COVID levels. As for acquisitions, the integration of the small reseller based in the Northeast that we purchased in December is going well. We don't have any acquisitions pending, but we expect to be opportunistic in rolling up our reseller partners that white label our human capital management solution. This aligns with our partners-for-life strategy, where our partners can provide referrals or white label and resell our solutions to join the Asure family. As an essential small business, Asure remains committed to helping more than 70,000 indirect and 10,000 direct small business clients grow in a 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. Now I would 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 of the financial figures discussed today are non-GAAP. You will find a reconciliation from GAAP to non-GAAP results as part of the earnings release made available earlier today and included in our most recent investor presentation posted in the Investor Relations section of our website at asuresoftware.com. As mentioned on our last earnings call, we continue to review the metrics used to explain our business performance. With the year behind us as a pure-play HCM software provider, following the separation of the Workspace business in 2019, it is a good time to simplify and add clarity to our reporting with the goal of making our progress on the execution of our strategy easier to follow. We believe this ultimately will require fewer GAAP to non-GAAP reconciling items to deliver that message. Additionally, we have added some additional slides to our investor presentation. We hope that this enhances the story around our results. We will continue to try and add more visibility and insight over the coming quarters. Both year-over-year and sequential quarterly revenue comparisons are challenging this quarter for different reasons. Year-over-year revenue comparisons are pressured, largely due to lower volume of employees employed by our clients and ultimately paid across our HCM solutions, as expected, because of the comparison of pre-COVID results in 2020 versus current year COVID impact results. Sequential quarter-over-quarter revenue comparisons need to be viewed with the acknowledgment of the annual seasonal impact of year-end fees and client transitions. With those caveats in mind, revenue for the first quarter increased 20.5% to $19.8 million from $16.4 million in the fourth quarter of 2020 and 4.5% year-over-year. Recurring year-end revenue was driven by fees generated by annual preparation regarding employee employer reporting of W2 income and ACA compliance. Year-end recurring revenue was $3.6 million in the first quarter of 2021 and drove overall revenue growth both sequentially and year-over-year as it increased from zero in the fourth quarter of 2020 and from $3.2 million in the first quarter of 2020. Additionally, we have added a slide to our investor deck to help visualize these revenue transitions. Finally, as a reminder about our seasonality, the first quarter of each calendar year is seasonally strong for revenue and profitability as year-end W2 and ACA recurring revenue is recognized in this quarter. The seasonal boost we experienced this quarter does not exist in the second, third, and fourth quarters. Recurring revenue continues to represent approximately 97% of our total revenue. Interest on client funds was approximately $400,000 in the first quarter, up from approximately $300,000 in the fourth quarter. The increase was primarily due to the change in the average balance of client funds held on behalf of our clients, increasing from an average of $185 million in the fourth quarter to approximately $234 million in the first quarter. As we consider the expenses, I will offer similar caveats regarding the expense comparisons. As we previously mentioned, in the first quarter of 2020, our employees had normal pay rates and benefits pre-COVID, which were reduced in the fourth quarter of 2020 to help the Company manage the impact of the reduced revenue. We returned pay rates to normal levels in the first quarter of 2021 and anticipate returning to normalized benefit levels in the second half of 2021, depending on continued economic improvement. Compensation and benefits represent approximately 70% of our cash expenditures, so these adjustments have a meaningful impact. This quarter, revenue growth has a significant impact on our profitability. Our sequential gross profit in the first quarter expanded by between 25% and 27%, depending on whether you use GAAP or non-GAAP gross profit as a performance metric. The first quarter of 2021 EBITDA was $2.6 million, representing a 13.1% margin, up from negative $1.6 million in the fourth quarter. Compared with the first quarter of 2020, EBITDA increased about 30%. It is important to point out that while revenue increased a little over $800,000 year-over-year, EBITDA increased by $1.5 million after taking out approximately $900,000 of transition services agreement expenses related to the Workspace sale. Non-GAAP EBITDA, which also removed stock compensation and one-time expenses from EBITDA, was $3.4 million, representing a 17.3% margin, up from the fourth quarter of $1.1 million, representing a 7% margin. The first quarter of 2020 was $4.3 million on this metric, which included more than $1.8 million of one-time expenses versus approximately $200,000 of these types of add-backs in the current quarter. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $24.3 million. At March 31, 2021, we had $22.6 million of debt, which is comprised of a $10 million term loan and an $8.9 million PPP loan, with the balance made up of seller notes from acquisitions. We have applied for forgiveness of the PPP loan, and we hope to receive a decision from the Small Business Administration sometime in the next few months, but have not received any new indication of timing for this decision. Now I'm going to turn to guidance for the second quarter ending June 30, 2021. This guidance is offered with the backdrop of a very challenging environment to predict future economic results, as evidenced by the significant miss on expected employment results last Friday and the revisions to previous employment figures. We are providing the following guidance: revenue for the second quarter of 2021 is guided to be in the range of $16.5 million to $17 million. Non-GAAP EBITDA is guided to be in the range of $700,000 to $900,000, and non-GAAP EPS is guided to be between negative $0.03 and negative $0.01. While we continue to be cautiously optimistic with the potential tailwind of the improving economy, given the uncertainty of when America returns to work, we want to be prudent with how we are running the business and describing our prospects. Accordingly, we are not yet restarting annual guidance but expect to do so in the coming quarters as we gain additional visibility. To provide a sense of how revenue was impacted by COVID in relation to overall employment levels, we have included a slide in our investor presentation, which is located at Slide 28. As I mentioned earlier, we've also added a slide to the presentation to help bridge the revenue transitions between quarterly comparisons, and that slide is located at Slide 29. Our investor presentation is located on our website in the Investor Relations section. And with that, I'll turn the call back to Pat.

Pat Goepel, Chairman and CEO

Thanks, John. I want to highlight that John and the management team did an excellent job with the investor presentation, which really gives a window of clarity into the business. As we enter our second year with COVID, we remain diligent in helping businesses continue to navigate the pandemic, and we remain hopeful that the worst is behind us. Throughout every stage of the pandemic, we have demonstrated our commitment to helping clients through our multifaceted response, such as our COVID-19 resource center and webinars, which continue to help thousands of small businesses. We continue to listen to and work with small and midsized businesses to provide the information, resources, and support they need. We've assisted our clients in quickly applying for and obtaining PPP loans. We have also helped them claim employee retention tax credits. Our experienced employees have really lived Asure's values of embracing change, leading with integrity, owning the outcome, delivering excellence, and being good humans. I give credit to the innovation, integrity, and hard work of our employees who will continue to show up for our clients, even while navigating the challenges of the pandemic in their own personal lives. This has helped our small and medium business clients get back to growth and navigate the complex stimulus legislation, develop return-to-office plans, and create vaccination policies. We're confident that our resilient business model, strong financial position, and dedicated employees and leadership team will help us finish 2021 even stronger than when we started it. We're particularly pleased with the trend line of revenue growth improvement, which troughed at an 18% year-over-year decline in the second quarter of 2020, improved to a 10% decline in the third quarter of 2020, to a 7% decline in the fourth quarter of 2020, and to a 4.5% growth in the first quarter of 2021. As John mentioned, our core operating metrics are now at a point where we are comfortable reintroducing quarterly guidance. For the second quarter, we expect revenue to be in the range of $16.5 million to $17 million. This range points to year-over-year growth of 17% to 20%, about half of this growth being organic and the other half inorganic. We believe this signifies an important milestone as we march toward our strategic goal of 10% organic growth, 10% growth generated through accretive acquisitions, and 20% EBITDA, which brings Asure more in line with the growth and profitability margins of other publicly traded SaaS human capital management companies that carry much higher valuations. Internally, we are getting back to normal. We're returning to our vision of providing human capital management software and services that help companies grow while nurturing a culture of growth around us. Our mission is to help customers grow by getting the most from their human capital. We also want to help our employees grow personally and professionally and build relationships in the communities that inspire goodness. If we do all of these things in a manner that grows shareholder value, we will all be happy. With that, we'll open it up for questions. Operator?

Operator, Operator

Our first question is from Ryan MacDonald with Needham. Please go ahead.

Unidentified Analyst, Analyst

This is Josh on for Ryan. Congrats on the strong quarter. Just wanted to start off; our checks and some of your competitor results indicate that the market improved in the month of March. Is that what you're seeing as well? And then how is rep productivity trending throughout the quarter?

Pat Goepel, Chairman and CEO

Yes. No, Josh, and I'll let John chime in as well. I think January and February, if you think back, we had a second wave of COVID and the election stimulus was probably a little bit delayed. So we saw some softness in January and February. March was relatively strong and started to bounce back a bit. That's how we thought about it. From a sales rep productivity perspective, first of all, we've been really happy with the reps that we've been able to get. Our average tenure of the sales reps is 10 months, so it is still a journey. I will tell you, I think our reps are developing really good referral sources, and we're learning how to sell digitally and have done an excellent job in a tough environment. We're cautiously optimistic that as America reopens, we will keep gaining productivity. But to be up in bookings over 20% in the first quarter year-over-year, I was very pleased with our sales rep performance.

John Pence, CFO

Yes, I agree with Pat's assessment. It was a little choppy in January and February, but it did come back in March. We're talking in May, right? So we've already forgotten the spike that happened during that time frame. So anyway, it did come back a little bit in March.

Unidentified Analyst, Analyst

And then following up on that, how should we think about the slower return to work that we were all very aware of, given what's happened in the last week, particularly in the troubled industries impacting your same-store sales later in the year? And then can we get some more color on how you're factoring that into Q2 guidance here? Or what assumptions you're using?

Pat Goepel, Chairman and CEO

Yes. Just in general, we're not pounding the table on a huge improvement. We're kind of modeling a steady state, if you will. In the back half of the year, towards September, we may have an opportunity for employment levels to start to increase a bit. But we'll cover that on the third quarter's call. As far as modeling the second quarter, we've really kind of looked at it as we're open for business. We're going to continue to drive results and keep fueling the trajectory that we have, but we're not expecting anything beyond that.

Operator, Operator

Your next question is from the line of Richard Baldry with ROTH Capital. Please go ahead.

Richard Baldry, Analyst

Firstly, can you talk about what you're seeing at the leading edge of your pipeline for your marketing funnel? Whether there's material changes to that and how that's been trending? And then maybe just kind of an easy one, but R&D was sort of flattish year-over-year below where it's been trending in the last several quarters. Is this sort of a new level to base off of? Or is there anything unusual in that number?

John Pence, CFO

Yes. I don't think you should read anything more into it than that. There was, I think, a little bit more capitalized this quarter, and it can kind of vary depending on what projects they're working on. So that's probably the transition more than anything. I don't think there's anything unusual about that number.

Pat Goepel, Chairman and CEO

I would agree with John. Regarding the leading edge of the funnel, I do believe we're working on some really interesting stuff and potentially bigger transformational accounts, but they're early in the pipeline. It's a factor of some of our resellers or value-added partners are now turning to us and saying, 'Hey, I have hundreds of clients; we could do something more meaningful. Let's talk to Asure.' So we're in the early innings of promising sales opportunities, but I don't anticipate anything immediate. But I would say toward the back half of 2021 or 2022, we certainly have some interesting opportunities, so we'll see how those pan out.

Richard Baldry, Analyst

And the last for me is, can you maybe dig into the M&A backdrop a little bit? I'm sort of curious whether COVID has altered some of the willingness of people to entertain the concept of sale or how it changes your ability to evaluate those companies given their 2020 results would look a lot different than they might have otherwise.

Pat Goepel, Chairman and CEO

As for where we are in business, we're really focused on our employees and our clients getting back to normal. We've built the business to scale, and we'll take advantage of opportunities to grow. I would say right now, we have some opportunities, and I think in the back half of the year, you will see some of those. In the first half of the year, we kind of want to finish what we started. We're aiming for double-digit growth and have a plan to achieve that in 2021. I anticipate that you'll see tuck-in acquisitions as we progress. Regarding expectations, I believe people are evaluating their options due to capital gains or potential new legislation. As for COVID, we understand its impact on small, medium-sized businesses better than anyone else being a provider. So we have insight into some of our resellers and other businesses to understand their situation well. I think you'll see some deals as we reach the end of 2021 and into 2022.

Richard Baldry, Analyst

Congrats on the return to growth and the guidance for strong growth in the second quarter.

Operator, Operator

Your next question is from the line of Eric Martinuzzi with Lake Street. Please go ahead.

Eric Martinuzzi, Analyst

I wanted to focus on the pays per control statistics and when we can expect to see a recovery there. A year ago, you were heavily concentrating on the installed base. What are your expectations considering we experienced a 13% decline in Q1? How does that situation appear for Q2?

Pat Goepel, Chairman and CEO

Yes. First of all, we do have a daily call at 9 a.m. every day. Goldstein runs that call with the management team, and I'm proud of everyone for showing up and providing the data we need to match our customer base and stay in sync with them. As for the second quarter, early on, there are two stories here. Regarding client perspective, last year, companies were uncertain about their future. They needed funding and were looking for financial support. We've lost probably 1% to 1.5% of our business because of COVID. The more important stat now is when employees return to work. We don't know the future. In the second quarter, we saw some improvement, and we anticipate further improvement in the third and fourth quarters. The vaccine has certainly had a positive impact, but the stimulus and increased unemployment complicate the current situation, so I don't think we've seen a complete return to normal yet.