Asure Software (NASDAQ:ASUR) Q3 2020 Earnings Call

0:00 Good afternoon and welcome to ASUR's third quarter 2020 earnings conference call. Joining us today for today's call are ASUR's CEO, Pat Goepel, CFO, John Pence, Vice President of HR, Cheryl Trebla, and Jay Powers. After the speaker's remarks, there will be a question and answer session. I now would like to turn the call over to Cheryl for introductory remarks. Please go ahead.

0:27 Thank you, operator. Good afternoon, everyone, and thank you for joining Assure's third quarter 2020 earnings call. After the market closed, we released our financial results. The earnings materials are available on the SEC's website and our investor relations website at investor.assuresoftware.com, where you will 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 the most comparable GAAP measures can be found in our earnings release.

1:12 Today's call will also contain forward-looking statements that refer to future events and as such involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. Finally, I would like to remind everyone that this call will be recorded and will be made available for replay via a link available in the investor relations section of our website. With that, I would now like to turn the call over to Pat Goepel, CEO, PATH.

1:44 Thank you, Cheryl, and thank you for all of you being on the call today. We'd like to welcome everybody to our third quarter earnings 2020 call. I appreciate your interest, whether you're an employee, a client, investor, analyst, or other interested third party. I will start today's call with an update on some key metrics and our response to COVID-19 before reviewing business highlights for the third quarter and recent changes to our senior leadership team. Next, I'll review our financial results, and then I'll take questions. In the third quarter, small business new bookings grew by over 100% year over year. Revenue was also better than expected, and we generated positive free cash flow. Our key metrics benefited from a backdrop of gradually improving economic conditions, including higher employment levels and increased business activity.

2:42 We also onboarded many high quality caliber sales reps. Our number of sales reps increased. 264 from 33 at the beginning of the year. We're delighted how quickly these new reps have become productive. While hiring these terrific reps sooner than expected led to higher sales expenses in the quarter, non-GAAP EBITDA was still at or above expectations. We view the early hiring of extraordinary sales reps as a very attractive trade-off that we expect to benefit organic growth in 2020 Second Half 2021 and beyond. In May and August, we provided updates to our business as we were responding to the impacts of COVID-19.

3:31 We also talked about the headwinds in our key metrics at that time. While the pandemic continues to impact our top line, resulting in unfavorable year-over-year comparisons, we have experienced a steady increase in paid as well as an increase in sales leads and sales productivity in the quarter. We usually do not provide detailed monthly metrics, but this year to help our investors to understand the impact of COVID and how they've been trending as the economy recovers. First of all, the pandemic has impacted our key metrics in three ways. If we take number one, looking at our 10,000 customers, approximately 1,050 paused in March. And since that time, over 600 returned at the end of June and about 900 at the end of August.

4:25 And we've retained that level through October. So essentially, about one and a half of our base or 150 clients continue to be paused. Over 50,000 indirect customers that Assure serves through resellers have experienced similar trends. Second, on our pays per control, or what we call same-store sales, which really tracks national unemployment rates, it was down 14% year-over-year in Q2, but we've improved to about down 9% in Q3. To provide a sense of the headwinds this presents, in normal times, pace per control is usually a tailwind, increasing about 2-3% year over year. Lastly, new sales bookings were pressured as many small businesses are focused on surviving and adjusting their business models accordingly instead of changing payroll providers even if it's a pain point. But this pressure has been offset by our investments in sales and products. Demonstrating this point, We began 2020 with 33 sales reps, and we now have 64. Most of those new hires are very experienced, bringing strong referral relationships, and they've ramped and hit quota quickly. Small business bookings, where most of these reps focus, increased more than 100% year over year in the third quarter.

5:59 Pointing to higher product adoption, over 95% of new customers bundle human capital management products with payroll. Also, new sales units and starts are exceeding losses every month since July. We expect this to drive organic growth as national employment levels gradually return to pre-COVID levels. It is important to note that we also hired human capital management developers and client service people to meet the changing requirements for small business. Some of the new products that we recently rolled out include simple payroll entry and essential HR. Adopting new COVID compliance requirements has also been a major initiative in 2020. I've been in this industry a long time.

6:52 There have been more payroll changes and tax filing changes in the last six months than the past decade. to navigate complicated changes in legislation. Our solutions were invaluable to clients in adapting to the new environment of a remote workforce as they begin to reopen and get back to business. Our COVID-19 Resource Center and webinars in particular have benefited tens of thousands of small business attendees since the launch in the first and second quarter. Also, during the third quarter, we hosted our annual reseller conference. This well-attended virtual event featured more than 25 training sessions over two days.

7:46 Representatives from many of our existing 200-plus resellers participated as well as prospects and new prospects of resellers. We're extremely proud of our employees' level of commitment to our customers and their excellent execution during these unprecedented times. I can't thank them enough for rising to the challenge. Approximately 90% of our workforce continues to work remotely as we're committed to ensuring our employees' safety. Our investments in back office technology over the past couple of years has made this transition possible. While small businesses have experienced unprecedented economic headwinds due to COVID-19 pandemic, We will never stop providing our clients with the service, technology, and support they need to survive the crisis and thrive when it's over.

8:42 As such, we continue to make progress on strategic initiatives, including product innovation, go-to-market investments while controlling expenses. These go-to-market investments resulted in strong new business bookings in the second and third quarter. Still, as expected, the heightened unemployment rate and 150 basis point cut-in rates continue to adversely impact Assure's results in the third quarter, a bit to a lesser extent than the second quarter. As an essential small business, Assure remains committed to helping our 60,000 small business clients grow in this challenging environment. and we remain optimistic about our long-term strategy and expect to be well positioned once the macro environment and our client's operations normalize.

9:34 Shifting to a couple of leadership and board changes. We announced in the earnings release that John Pence has been appointed CFO replacing Jay Powers. John has 28 years of leadership experience in accounting, finance, and operations at a variety of both publicly traded and privately held technology companies that have served both large and small businesses. Most recently, he served as CFO of a leading HR benefits provider and helped them direct a successful exit for the company's investors. We also announced that Jay Powers resigned as CFO due to family health matters. Jay will leave after a transition to John in the next couple of weeks.

10:21 Also, independent board member Charlie Lathrop is resigning due to health reasons, effective December 31st. We're delighted to welcome John to the Assurance Leadership Team. John brings a strong track record of success leading high-performing finance organizations at technology companies. At the same time, while we're disappointed about Jay and Charlie's departure from Assure, because of their outstanding backgrounds and valuable contributions, our thoughts and prayers are both with Jay and Charlie and their families during this difficult time. Next, I'll cover the financial results, then Jay and John will say a few words before turning over to Q&A. Turning over to our third quarter highlights, For comparison purposes, we provided recapped 2019 revenue numbers that exclude the workspace business as well as non-strategic customer clients and non-core HCM businesses we exited in December 2019.

11:26 As usual, all non-revenue financial figures discussed today are non-GAAP unless I state them as a GAAP measure. And you will find a reconciliation from GAAP Two non-GAAP results and recapped revenue numbers in today's press release. During the quarter, small business bookings increased more than 100%. We increased our sales representatives to 64% at the end of October, up 94% from a 33% increase we began the year with. They will be impactful in the fourth quarter of 2020 and into 2021. We are encouraged by the strong momentum with new business bookings and continue to manage costs prudently demonstrated by positive free cash flow this quarter.

12:13 Although revenue, gross profit, and adjusted EBITDA year over year, declines are still being driven by the pandemic. related lower check volumes. These declines have improved substantially over the last two quarters. We remain confident about our financial and competitive position and look forward to a gradual return to a more normal operating condition. Revenue for the third quarter decreased 10% to $16 million from an adjusted $17.9 in Q3 of last year. Reoccurring revenue represented 95% of total revenue in Q3 compared to an adjusted 96% in Q3 of 2019. Next, I'll discuss our profitability metrics.

13:01 Q3 non-GAAP gross profit was $10.3 million, equating to a non-GAAP gross margin of 64.3%. This compares to $11.6 million of gross margin of 65.2% in Q3 of 2019. We continue to be laser focused on gross margin. We're taking actions to drive improvement. Interest on client funds exceeded $190,000 in the third quarter, down from $460,000 in the third quarter of 2019. We expect 2020 level of interest on client funds to be between $900,000 and $1 million. Q3 non-GAAP EBITDA was $1 million, down from $3 million in the third quarter of 2019. In the third quarter of 2020, our non-GAAP effective tax rate guidance is still at 0%, as we feel this more accurately measures our expectation for actual performance.

14:05 That operating loss carried forward stands at $34 million. We generated $2.4 million of cash from operations, less $1 million of property, plant, and equipment and software capitalization, resulting in $1.4 million of free cash flow for the quarter. Shifting gears to our balance sheet, Cash and cash equivalents were $12.9 million at quarter end. At September 30, 2020, we had $23.7 million in gross debt, which are the amounts payable for our term loan and our seller notes. This is down $10.2 million from $33.9 at the end of Q2 2020. The PPP loan represents $8.9 million in gross debt.

14:54 While we expect this to be forgiven, we expect the Small Business Administration to grant that decision sometime in the second quarter of 2021. Our total deferred revenue on the balance sheet at September 30th, including both short-term and long-term combined, was $3.7 million, down from $4 million in the second quarter of 2020, Our DSO or day sales outstanding in Q3 was 29 days, up from 23 days in the year-ago quarter. As for forward guidance, although we expect the tailwinds on reoccurring revenue to keep improving, we think it's prudent to wait for John to be on board before revisiting a return to providing guidance. And given the economic uncertainty with the election stimulus, COVID, you know, we just think that makes a lot of sense for us.

15:52 To provide a sense of forward revenue growth trajectory, on slide 19 of the investor deck, we show how after adjusting for non-strategic customer contracts exited in 2019, second quarter 2020 trot, at a negative 13% year-over-year decline in revenue, primarily due to COVID, and improved to a 5% decline in the third quarter. In the fourth quarter and into 2021, we expect this trajectory of revenue growth improvement to continue because, number one, new customer starts are outpacing customer losses. Two, our new sales reps continue to ramp the full quota, Three, U.S. employment continues to improve, and four, easy year-over-year comparisons begin in 2021.

16:47 Before turning our call over to Q&A, Jay and John would like to say a few words. Jay, perhaps you can go first.

16:56 Hey, Pat, thank you. I'd like to thank you and the Board for the opportunity to serve as Chief Financial Officer, but I think it's in the sheriff's and my own best interest to resign so I can focus on my family health matters. Thank you so much.

17:10 Thank you, Jay, and we appreciate the hard work and the diligence of which you serve.

17:17 Despite the unfortunate personal situation that caused this opportunity to become available, I am excited to join Assure's experienced leadership team. Assure is uniquely positioned as a leading SAS HCM provider for 60,000 small businesses. and I am eager to help the company build on the foundation built by Pat and his team and continue on its plans for double-digit organic and inorganic growth.

17:48 Thanks, Jay, and thank you, John. With that, we'll open it up to questions. Operator? Ladies and gentlemen, if you have a question at this time, please press star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press to start the pound key. Thank you. Your first question comes from the line of Ryan Mayers with Lake Street Capital. Your line is open.

18:17 Hi, guys. Thanks for taking my question. First one for me. So when we look at the strong bookings number, how much of that would you attribute to overall economic recovery? And then how much would you attribute to the Salesforce expansion?

18:29 You know, it's a good question. It's probably a little bit of both. I do think... We were able to really acquire and get about 20 sales reps early, and they're experienced sales reps that have been in the industry, so they definitely came with kind of well-trained, really strong contacts in the industry and we were able to hit the ground running. I do think in the second quarter there was some pent up demand in the sense that businesses were trying to figure out if they were in business and then in the third quarter they kind of settled down and said okay we don't like the pandemic but we know how to operate and certainly we did get some sales. Now pivoting forward What I'm really excited about is the fourth quarter and first quarter 2021, where we have improving conditions. We have the sales reps, 20 of them with a quarter now underneath their belt, and the pipeline is really strong. So we're selling a lot for January 2021 right now. So feel really good about how we're positioned.

19:40 Okay, then that's kind of a good segue to my next question. Can you give us some insight on what you're seeing so far from customers here in the fourth quarter and kind of how the bookings have been tracking?

19:49 Yeah, you know, I think from a business perspective, you know, the pandemic is You know, I think the election, you know, I think you have a couple things, right? You have the election, you have, is there going to be a third wave? But from a customer perspective, people are saying, hey, I got to deal with this one way or the other. I think we're getting a little bit more return to normalcy. And, you know, certainly you do have different industries pushing. Now, if we get a stimulus, obviously that'll help, but you can't count on that. but I would say our pipeline growth has been strong. We feel good about where we're positioned and I think people are starting to return to normalcy of buying habits and they're getting used to deal with the ambiguity of the pandemic.

20:39 That being said, you know, is there going to be policy changes? You know, I can't speak to that. But what we got to do is control what we can control, which is if we keep selling and starting more customers than we lose in a month, we're going to be in good shape going forward.

20:56 Okay, that's good to hear. And then last one for me. So how are you thinking about sales hires for the fourth quarter here and then into 2021?

21:04 I think you'll see in 2021 we'll position our sales headcount around 75. We have about 64 right now. We'll hire some in the fourth quarter and the first quarter to get ready for the 2021 season. but we see this is a good opportunity to get share to stay close to our customers and grow and we feel good about our competitive products and the rollout of our new products and we think right now is the time to grow and so I think you'll see us run at a number of about 75 in 2021 from a sales rep perspective.

21:44 Awesome, thanks for the help.

21:46 Thank you and thanks for the call. Your next question comes from the line of Derek Wood with Colin. Your line is open.

21:56 Great. Thanks for taking my questions. Pat, nice to speak with you and everyone else. I know you entered the year with focusing on the sale of space and reinvesting sales capacity and and other things back on the HCM side. So congrats on starting to see the dividends of that. I wanted to, you know, as you onboard all these new reps, is the focus going to be more on cross-selling the base or is it more towards generating new customers would be my first question.

22:29 I think the first question for us is we've got a lot of momentum selling new customers in the sense of, you know, we have benefit providers, CPAs and banks that, you know, they're actively looking to engage us in books of business and growth opportunities. and we're really looking to take advantage of that strength in the marketplace. Some of our competitors are starting to compete, for example, with the benefit brokers where they're looking to steal the broker record. We're taking the opportunity to work with the benefit providers, and we think that there's some really good opportunity to continue to grow with those type of partnerships, so we'll take advantage of that. From a cross-sell perspective, as we roll out our new products, we do feel, for example, the attach rates Thank you for joining us.

23:50 kind of logical events will cross-sell those opportunities and continue to drive the attach rates in all our customers.

24:00 Yeah, that makes sense. And, Pat, you made a point in your remarks that 95% of new customers tend to buy a bundle. I mean, that's pretty encouraging. So what's the most frequently adopted HCM module with payroll and I guess how should we be thinking about, at least out of the gate, what the average deal size uplift is when you do some of these bundling versus just standalone payroll?

24:29 Yeah, you know, the average bundle per unit is about 50% or so up from a pricing perspective. And, you know, really what we're seeing is time of attendance, HR, and HR consulting and bundles. And especially with the pandemic, people are looking at, you know, all kinds of HR advice, whether – They have to lay off whether they hire, you know, how they deal with the pandemic, overtime, and different legislation around payroll taxes, et cetera. So they're increasingly looking for our advice around that, and that's what we're seeing, frankly, the bundles come about in those three or four areas.

25:12 Okay. Last question for me, just on all the kind of back office, middle office investments that you've made.

25:20 Just in terms of what you're expecting to yield from that, I kind of think of three different things.

25:24 One would be easier ability to onboard M&A. One would be easier ability to cross-sell. And one would be maybe better sales and marketing efficiency. Obviously, there's cost savings on the cost side. But from the revenue synergy standpoint, is there anything you'd call out now that you've kind of made those investments and where you see some yield coming from?

25:49 Yeah, I know, I think that's a great question, Derek, and we're going through the planning cycle right now, and we're completing that this quarter. You know, how I look at it is, first of all, I think we could double the size of our company, and the GA span will continue to drive down. You know, we're really attacking the GA, the general and administrative span, and we think we have the people, process, and technology in order to double in size without You know, really adding a lot of cost and that's a big focus of ours. From a product innovation perspective, what we believe that's going to continue to do is drive down COGS as a percentage and drive up gross margin over the next couple years and I think you'll see improvement.

26:35 From a sales perspective, I'd like to spend probably 1% or so more a year as a percentage of revenue to keep our sales coverage growing and organic growth growing even after acquisitions. And then finally, on our development perspective, tick up spending about a point a year or so where we continue to drive and innovate new products, etc. And all of that we believe then will be a highly leverageable model where we can grow organically and with acquisitions and where we can double the growth there and overall almost triple the bottom line. And that's really what we're trying to drive and those are kind of the expenditures and the benefits we hope to receive.

27:23 Makes a lot of sense. Okay, thanks.

27:26 Thank you, Derek. Your next question comes from the lineup, Ryan McDonald with Needham. Your line is open.

27:35 Hi, thanks for taking my question. Pat, I guess first one for you. You talked about how about 90, I think 900 or so of the 1,000 shutdown customers have returned. What should we expect for the, I guess, additional 100 to 150 clients that are still paused? Do you Do we need to wait for stimulus to get those back online or do you think those are just customers that are pretty much returned?

28:01 you know a good thought you know in our daily calls we cover that and Eyal Goldstein covers that every day and what I would say in general you know I think at this point they're probably gone you know or they might come back with some stimulus but I've kind of said hey those 150 or so they're not coming back and if they do great and we'll keep in touch with them and have done that but that's how I'm viewing it now conversely Some of the data around the U.S. Chamber of Commerce would be that in the fourth quarter, customer formations and new customers forming businesses is really snapping back at an all-time high.

28:46 And we're really focusing on getting our share of those businesses, especially on board in the fourth quarter as we look at 2021. We're helping customers deal with COVID. We're making sure they have the data where they can return to us on a moment's notice, but we're really playing a lot of offense because we think the business conditions are such that you're going to see a lot of businesses come into these pause businesses and If you do get stimulus or you do get credit for new business formation again, we see that there's a lot of robust activity in that area and that's our focus.

29:26 Super helpful. You mentioned also that you had the reseller conference during the quarter. Just love to get a sense of sort of what you're hearing from your resellers in terms of sort of health of business or their viewpoint on the market and then How should we think about the expansion of the reseller network as a growth driver for fiscal 21?

29:47 Yeah, no, I think, Ryan, you know, our focus internally has been a couple things. One, first of all, we had a banner year last year of selling more resellers and getting people to sign up. You know, this year from a reseller network, and if you think about these resellers, you They're overall, let's say they're one to two to five to eight million dollar businesses. They're looking at dealing with PPP. and what we're working with in many of the cases is helping them with their end clients, get those end clients back to processing and their metrics are very similar to ours where they lost about 10, 10.5% early in the year that due to pause and now they're getting customers back depending on what area of the country they are, etc., and then on an employment level as the U.S.

30:43 returns to more full employment, they're hoping to get those employees paid back. So very similar trends. as far as where we're focused on in 2021 with the reseller network we'd like to continue to grow at a positive rate with the amount of resellers but then from an engagement around multiple products we want to make some exponential impact around that area and then help them really with profitable add-on products that they can add to their current customers. So our focus is really keep growing the network, look for opportunities to grow from a solution perspective, and then help them position to get their end clients back and the employment levels up where they can drive their bottom line. So that's really our focus.

31:38 Great. Thanks a lot. Your next question comes from the line of Jeff Van Rie with Greg Hallam. Your line is open.

31:50 Great. Thanks for taking my questions. I've got several. Pat, on the bookings number, I think last quarter you said new bookings were up 21% year-over-year, and I just wanted to be clear, the number that you're giving is 100%. I think you said new SMB. Are those apples to apples, and if not, do you have a comparable to last quarter's?

32:09 Yeah, Jeff, we're down about 10% in overall bookings. We're up over 100 in SMB. We did have a difficult compare in our reseller area where we had several large resellers and it was a competitive thing where one of our value competitors got hit with the ransomware. So we did have a number of large resellers. Overall, our bookings were down 10%. In the direct market, it was over 100% increase.

32:40 Okay, that's helpful. And then on the resellers, I think in the prior question you were talking about, eventually you'll get back to these resellers and really try to drive deeper penetration beyond the payroll into some of the incremental products, time and attendance, HR. What is it, as you obviously have existing relationships to those resellers, what is it that you have to display? So I would assume those wouldn't be greenfield, or maybe they are, but what's there now with respect to time and attendance and HR?

33:08 Well, you know, first of all, Swipe Clock does a really nice job and there's some other competitors out there in the marketplace that do a nice job. So in some cases, it's displacing there. But if you think about our product strategy and our web product deployment, you know, we've – rolled out simple payroll entry, which automatically gets you to the web. Once you're on the web, Essential HR gives you a base level of HR that you normally don't have. Once you're on Essential HR and you want to go to Advanced HR, all you do is click on a drop-down menu. From a consulting perspective, you know, we've done a lot of our consulting and put it onto the web, so... as you want to bundle that payroll offering and that light HR offering with consulting regulations and how do you give performance reviews, the employee handbook, all that's online into a nice bundle. And so those are some product innovation that we didn't have last year and that we have this year.

34:12 And those are the things that we're going to continue to bundle going forward. and we think we're going to get some pretty good traction. And then at the user conference, you know, we roll those out. You know, Essential HR already has over 100 clients and, you know, we think that there's an opportunity to grow that in the network.

34:35 Very helpful. And last for me, just to be clear, I think you had scrolled the payroll Tax Management, Acquisition. Just refreshing, was there any revenue contribution in the quarter from that? I don't recall if you ever shared that.

34:47 Yeah, you know, we didn't give exact numbers there. What I would say, you know, if you think about the second quarter over the third quarter, you know, we went from 14.1 to 16 million. If you think a little bit less than half of that was PTM and a little bit more than half was organic growth, that would be kind of the neighborhood you would look at.

35:14 Thanks, Pat. Very helpful.

35:16 Thank you. Appreciate it. Your next question comes from the line of Vincent Colicchio with Barrington Research. Your line is open.

35:28 Yeah, Pat, I was hoping that you can give us an update on in terms of how far along you are in terms of the actions you've taken to improve gross margins.

35:36 You know, I really think if you look in 2021, Vince, you know I think we'll see a tick up of a couple percentage points you know what we've worked on a product perspective in the rollout this past quarter of single payroll simple payroll entry and essential HR you know it really sets the stage for more of a touchless experience so you know I think we have some good traction AWS and the consolidation of AWS is well in place and We're really working on optimizing that. So the first was the lift and shift AWS. Now the next stage is driving efficiency and we have some good programs that will start to impact in 2021.

36:26 And then just looking at kind of standardization and harmonization of some of the hubs that we have and how they run at peak efficiency, I'm really pleased with some of the leadership that we have in each location. And now that they're starting to benchmark each other, I think you're going to see some opportunities. How we look at it is I'd like to be over 70% gross margin in this business. We're not there yet, but I think certainly a 3% a year uptick can certainly be achievable as we get there.

37:03 Thanks for all that color. One other question for me. SG&A ticked up in the quarter. Was that all tied to the new sales hires?

37:11 Yeah, I mean, we really made a fast forward on the sales perspective because we had the opportunity to get some sales reps that were highly experienced and we wanted to take advantage of it. So the vast majority is in the sales area.

37:28 Thank you, Pat.

37:30 Thank you, Beth. Okay, again, ladies and gentlemen, if you'd like to ask a question, please press star then the number one on your telephone keypad. There are no further questions at this time. Presenters, you may proceed.

37:57 First of all, I'd like to thank everybody for joining the call. I'm really excited about the business. I bought a sure stock with my own money recently. I'm really excited about the business. We have an investor relation deck. I turn you to page 19. We do believe that second quarter was a trough. We understand that with COVID, there's some uncertainty out there. but we're going to sell and start more customers than we're going to lose and that's going to pay off for us. I think the investment in the sales people is the right investment. We're going to grow. We feel very optimistic as we look in 2021 and we appreciate your involvement as a shareholder, employee or client or somebody listening to this call and we'd like to thank you for the time you invested today and we'll see you in the first quarter of 2021.

38:56 Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.