Asure Software, Inc. (ASUR) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Asure Software’s Corporate Conference Call. My name is Lorean, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today’s presentation. [Operator Instructions] As a reminder this call is being recorded. I would now like to turn the call over to Cheryl Trbula of Asure Software. Please proceed.

Thank you, Lorean, and welcome everyone to Asure Software’s conference call. Before we start, I’d like to mention that some of the statements made by management during this call might include projections, estimates and other forward-looking information. This will include any discussion of the company’s business outlook. These particular forward-looking statements and all of the statements that may be made on this call that are not historical are subject to a number of risks and uncertainties that could affect their outcome. You are urged to consider the risk factors relating to the company’s business contained in our latest periodic reports on file with the Securities and Exchange Commission. These risk factors are important and they could cause actual results to differ materially. This call is also being recorded on behalf of Asure Software and is copyrighted material. It cannot be recorded or rebroadcast without the company’s expressed permission and your participation implies consent to the call’s recording. After we’ve completed our review of the quarter, we’ll open up the call for questions from the financial analyst community. I would now like to turn the call over to Pat Goepel, CEO of Asure Software. Pat?

Thanks, Cheryl. And I’d like to welcome everyone to our third quarter earnings release. We appreciate our employees, clients, analysts, and interested third-parties as well as shareholders to be on the call today. Our third quarter really as I reflect on it, was a tale of two cities, city of despair, and city of hope. But I think there’s no way to sugar-coat it, we had a lousy third quarter from a results perspective. Revenue was down, gross margin was down, net income was down, EPS was down. And Brad will go through the specific results, but clearly we’re not happy with the quarter. I’ve been here 26 quarters. This is the worst quarter that I remember being part of, so I’m clearly disappointed. And we will improve from this perspective. Couple of events that happened in the quarter, we had a stock option expense that cost us $225,000. It was a non-cash expense and one-time of nature, we’ll always have stock option expense, but we did have a lot of stock options expire at the same time, so that was about $225,000 expense. We did complete some projects around straight-through processing and our expenses were high probably close to $200,000 or so in the quarter. Now that we’re largely behind that, we think we’ll have some improvement going forward. And then also we had some revenue that could have gone either way from a one-time perspective to a repetitive perspective and ended up going in a repetitive area and that compressed revenue from a results perspective. But no excuses, we didn’t deliver what we should have and again disappointed. And the city of despair, I’ve gotten that kind of verbiage off. But there’s also reason for optimism and as I woke up this morning in Austin and it was a cloudy day, I did have a spring to my step because they think there were some reasons for optimism in the company in the third quarter. Cloud bookings, first of all we’re up 160%, year-to-date they’re up 66% excluding PSSI. Really, really happy with the cloud bookings that will turn into repetitive revenue going forward. It bodes well for us in 2016. We have a quest to become a cloud company and we are making really, really good progress in the area of cloud bookings. As far as our initiative around on-premise to on-demand, we’re making really good progress. Our customers are migrating; migrations are up 186% quarter-to-date, 73% year-to-date. Over time, that bodes very, very well for the company. Sales quota as I looked in November, we have almost ten sales reps down on sales quota more than we had last year. So while our numbers are the same, our sales people are more mature and they are on quota, as we speak, as opposed to us hiring them, but they’re in training. We think that will transition us nicely in 2016, becoming a growth company. Our backlog is up to $3.2 million or was up $968,000 in the quarter. We are selling cloud business, we’re selling larger business, enterprise business, and backlog -- these customers will get implemented; it is longer than we would have thought when we started the year, and that backlog is starting in January. As we install it, it will be very favorable for our results. Hardware-as-a-service is another product that we’re selling where we traditionally sold hardware on a one-time basis where the customer paid for it, and then they had a maintenance bill. Now in some cases, the customer that doesn’t have capital budget or doesn’t have the cash, they decided to expense the hardware. That revenue was up by 194% for the quarter, 72% year-to-date, that also is largely repetitive-based revenue or project-based revenue, and we do feel that we’ll get that revenue in the future, in many cases, so that’s good for us long-term, not so good for a short-term. Also from a retention perspective, the clients that integrate hardware and software stay with us longer, and our average retention rate is about 90%. So, we’re excited about this initiative in the long-term. Cash flow was up 23% – or 22%, excuse me, in the quarter, 19% year-to-date. We had very strong cash flow, despite the operating results, and that to me is a good sign for the business going forward is we’re able to generate cash. Because we generated cash, we paid off the Roomtag note, which allowed the only debt in the company to be Wells Fargo. Wells Fargo is our consolidated lender, and we mentioned that we’re looking at acquisitions to get bigger and to get scale. Clearing the way with the Roomtag note, that’s now paid off, is good for us long-term because it makes it easier for us to integrate an acquisition. Also early in the year, we had some initiatives that we’d spoke about, our global initiative with some of the sales around Morgan Stanley and Exxon and Stanford is going very, very well. Many of those clients are now becoming hoteling clients where not only we’re in the conference room, but we are really in the whole building and clients are sharing, seating as supposed to everyone having their own desk. There’s big real estate initiative savings that the clients enjoy based on what we are able to provide, we are excited that those initiatives are starting to payoff. We just want to get them installed sooner and we underestimated how quickly we could install among we put together the plan last year. Our update on PSSI, our largest customer in the facial recognition area, they now have gone and are implementing at full speed again. We are excited about that and that will serve us well in 2016. And finally straight-through processing, Brad has been very busy with straight-through processing where we’ve had a new billing system and new financial kind of processes around really from a marketing lead all the way to billing a client, where we are reducing the amount of touches or manual intervention, and we are making really, really good progress in that initiative and we expect that to serve us well into 2016. Finally, from an outside recognition perspective, we were thrilled to be a part of the Deloitte Fast 500 that came out today and we are number 411 and recognized our growth over the last few years, so excited about that validation. So just in summary, before I go to Brad, results were lousy and some of the key items that I know investors care about revenue growth, gross margin, net income, EPS. However, out of the darkness comes the dawn and we are excited about some of the leading indicators of the business around cloud bookings, backlog that is going to get installed in January in 2016. Our cash generation and hardware-as-a-service initiatives, those are all good, good things for the business and we’re pointing to 2016. Also we will return to quarterly guidance next year. I know this past year we had annual guidance with today, our third quarter being an update. We will measure ourselves now that Brad has been in this scare for over a year, quarterly, I think that’s will serve the investor community well and ourselves well. With that, I’ll turn it over to Brad for specific results.

Thanks, Pat. Good morning everyone. I’ll take a few minutes to go over the third quarter financial highlights and then we’ll be happy to answer any questions during the Q&A period at the end of this mornings call. In the third quarter, revenue was at $6.7 million, a 5% decrease from the $7 million reported for the same quarter last year. Third quarter revenue was down $505,000 or 7% from the $7.2 million reported in the previous quarter. Year-to-date revenue was at $20.1 million, up $40,000 or 0.2% from the $20.1 million reported for the first nine months of 2014. The year-over-year decrease in third quarter is comprised primarily of decreases in professional services revenue and maintenance and support revenue offset by a smaller increase in hardware revenue. Year-to-date 2015 revenue remain consistent with the year-to-date 2014 revenue. Year-to-date 2015 hardware revenue increased as compared to year-to-date 2014 offset by decreases in professional services revenue and maintenance and support revenue. AsureSpace revenue was $4 million for the third quarter, a decrease of $317,000 or 7% from the $4.4 million recorded in the third quarter of 2014. A majority of the decrease in professional services and maintenance and support revenue. Professional services revenue decreased $181,000 or 21% and maintenance and support revenue decreased $124,000 or 12% as compared to the third quarter of 2014. These were offset by an increase in cloud revenue of $96,000 or 6%, we continue to emphasis the sale of integrated cloud based solutions. AsureForce revenue for the third quarter was $2.6 million, a decrease of $59,000 or 2% from the $2.6 million recorded in the third quarter of 2014, this decrease was primarily in cloud revenue with a decrease of $123,000 or 7% as compared to the third quarter of 2014. Hardware revenue increased $148,000 or 69% as we increased our focus on hardware sales along with software sales. AsureSpace revenue for the first nine months of 2015 was $12.1 million an increase of $81,000 or 1% from the $12 million recorded in the first nine months of 2014, this increase was primarily due to an increase in cloud revenue and hardware revenue offset by decreases in maintenance and support, on-premises software license and professional services revenue. AsureForce revenue for the first nine months of 2015 was $8 million a decrease of $40,000 or 1% from the $8.1 million recorded in the first nine months of 2014. On-premises software license and hardware revenue increased by $235,000 or 92% and $272,000 or 36% respectively, offset by decreases in cloud revenue of $396,000 or 8% as compared to the first nine months of 2014. Recurring revenue as a percentage of overall revenue for the quarter was 75% compared to 70% last quarter and 73% in the third quarter of 2014. Recurring revenue as a percentage of total revenue was 74% year-to-date as compared to 76% last year-to-date. Gross margin for the quarter was $4.9 million or 74%, down by $531,000 or 10% from the $5.4 million or 77% year-over-year and down $376,000 or 7% from the previous quarter gross margin of $5.3 million or 74%. Year-to-date gross margin was $14.9 million or 74% as compared to the $15.6 million or 77% for the first nine months of last year, a decrease of 5%. EBITDA for the quarter was $767,000 excluding one-time items compared to $1.4 million reported for the previous quarter and $1.4 million in the third quarter of 2014. We incurred $21,000 in one-time items this quarter. Year-to-date EBITDA excluding one-time items was $3.1 million, down from the $3.7 million reported for the same period of last year. For the year, we’ve incurred $436,000 in one-time items, which include $110,000 loss on the early termination of our Warwick, Rhode Island lease. GAAP net loss and net loss excluding one-time items for the quarter was $0.09 per share. Year-to-date net loss, excluding one-time items was $0.09 per share. Year-to-date GAAP net loss per share amounted to $0.16 per share. The per share difference of $0.07 is due to one-time items. Cash flow from operations for the quarter was $1.1 million and $2 million year-to-date. Capital expenditures were $282,000 for the quarter and $1.3 million year-to-date. Cloud bookings from the quarter increased 160% from third quarter of 2014, cloud bookings year-to-date increased 66%, excluding PSSI and 8% including PSSI, over last year-to-date. We introduced backlog as a metric last quarter. We defined backlog as sales bookings that have not yet turned into revenue or deferred revenue, including both repetitive and non-repetitive product lines. For repetitive products, one-year value is included in backlog. Backlog as of September 30, 2015, is $3.2 million, up $865,000 or 39% from September 30, 2014, as these clients move out of backlog it bodes well for next year’s growth. Results were hampered in this quarter by the $1 million increase in backlog, which also affected the full year results. Accordingly, we are adjusting our 2015 guidance we expect year-to-date revenue to be between $27 million and $27.5 million with EBITDA excluding one-times of $4.2 million to $4.75 million and net income per share excluding one-time items of negative $0.04 to positive $0.04. At this time, I’d like to turn the discussion back to Pat Goepel, our CEO, for closing comments and then we’ll open it up for questions. Thank you.

Thanks Brad. So going forward, Brad mentioned, the revenue and EBITDA outlook, 2016, as mentioned, we’ll go back to quarterly guidance. First of all, a lot of good things to build on, Deloitte recognition. Thank you to Deloitte. Cloud bookings, the backlog that’s going to get installed, the hardwares, the service, cash flow, the Roomtag note that allows us to get an acquisition in a clean way from a debt perspective, all those things are tremendous things to build out. As I look to the future, those will service very, very well in 2016. I also don’t want to runaway and hide that we had a lousy quarter. If this is a trend, we’ll do something about it. We don’t believe it’s a trend. We do believe there is reason for optimism on why we talked about. We think we have some really good people. We think we have some good processes. We like our product mix and awful lot. We’re winning in the marketplace. We’re just winning in a much more repetitive way, but it’s taking us a longer to install the business than we originally thought. And so with that, we’re going to execute on our plan to be very, very successful, but I will also tell you I have a healthy amount of impatience and I won’t be sitting here with many quarters like this. So, I will absolutely drive this business forward. With that we take any questions that you may have and I appreciate your listening to our long winded speech today.

[Operator Instruction] Our first question comes from Jeff Houston from Northland Securities. Your line is open.

Hi, guys. Thanks for taking my questions. Can you provide some more color on the one-time revenue that became repetitive revenue in the quarter, which is arguably a good thing? And is there more on the pipeline like this?

Well, thanks, Jeff, for the question. I appreciate it. A couple of things: one, we've had a number of the large tailwinds, which we’re thrilled about, one is Morgan Stanley, but it is a phased implementation win. And so when that happens, some of that is going into backlog. We also have some of our on-demand or on-premised, on-demand, where clients are switching to on-demand, which we’re thrilled about, but their switching starting January 1st or starting April 1st next year. And that’s typically not been in our model, so the revenue gets pushed out three months to six months when we were in the planning cycle, last year. So we have captured it in backlog, but those were a couple – one was StarTech, which will be a January start, Morgan Stanley, which will be a phased implementation. We’re thrilled that we’ve got those competitive wins, but those were examples, where the revenue was pushed out three months to six months in some cases via the plan.

Got it, and I know you haven’t provided guidance for 2016 yet. Should we expect a significant pick up in growth giving the strong backlog and bookings and assuming the implementation of the backlog is remedied?

Yes, 2016 will be a growth year for Asure and in many cases our message today was the revenue has been pushed out, but indications of 160% cloud bookings and backlog going to $3.2 million are – bodes really well for 2016.

Got it. Thank you.

Our next question comes from Vincent Colicchio from Barrington Research. Your line is open.

Yes, Pat, last quarter, I know you had very strong improvement to the sales pipeline, year-over-year. I’m curious sequentially that you are continuing to see improvement, how did that look?

Pipeline is high as it’s ever been. We feel very good about the pipeline. We are in bigger deals, and I would say we’re in multiple hundreds of thousands if not multiple million dollar deals, which is very positive for us but it is uncharted territory in some cases. So we feel good about the pipeline, what I would say is clearly the install times are slower than we would like with the phased implementations. And then from a deal pursuit, we’re in longer deal pursuits than we historically were and that trends with the average sized deals. But I would say our product set around hoteling, around facial recognition, is gaining traction. We’re going from a product company to a platform company. There is more to sell. That’s awesome news for us, but in the short-term, it’s made the buying cycle a little bit longer than we historically have been used to.

And so, you say that the delivery times were elongated. Is that for both Force and space? Could you give us some clarity to that?

Yes, backlog is up in both products, and it clearly -- it has to do with our focus – our products are getting the attention of larger companies and larger companies take longer to implement than smaller ones.

Okay. So it’s not – okay, that’s good, that’s good. It sounds like good news relative to what we’d be hearing today, but…

Yes, long-term it’s good news, short-terms it’s…

Not…

It’s disappointing…

And the hardware-as-a-service is that – do you think that that could be a meaningful line of business for you and is that unique to you?

No, other companies, especially in the clock space provide that kind of service, ADP, has a rental of the clocks. We provide both options: the sale option and a rental option. We are seeing more and more customers that are capital budget constrained, would like to rent the product for us, and that’s a good offering. Long-term, it will be pretty successful for us, but in the short-term it does hurt us a bit because we would have got all the revenue and now we’re getting just three-month portion of it.

Do you have a sense for – it would be helpful if you had a number on what portion of the pipeline is big companies – say 41,000 now versus the year ago period. Do you have something like that?

Yes, I think that’s a good question, and I’d be happy to provide that as we provide our 2016 guidance on the next quarter’s call.

Okay. Thanks that’s all I have for now. Thank you.

Thank you.

[Operator Instructions] Our next question comes from George Melas from MKH Management. Your line is open.

Hi. Good morning, Pat. Good morning, Brad. Brad just a quick comment, I think it would be better when you give your numbers to focus more on the numbers that are not in the press release and to go slower and so it’s possible to absorb that, just a comment.

Okay. All right, I appreciate the feedback.

Yes there is no point in repeating the press release and if you spend more time on sort of breaking down Asure and Force, so that we can understand the dynamics better. On the note to the cash flow statement, you talk about the notes, note receivable from a customer for $600,000. Can you explain what that is?

Yes, George, this is Pat. We entered into an agreement in the second quarter. We announced this in the second quarter. We had a provider MPAY that had a legacy software solution and they agreed, we gave them an on-premise license in the area of about $800,000, $200,000 we recognized in the second quarter and the other $600,000 we’ll recognize as they make yearly payments in second quarter of the following three years.

So, it’s over three years?

Yes.

And, I'm sorry, I don’t understand, are they your customer or are they a partner, or reseller?

They are reseller of ours that has a limited on-premise license and it’s older technology for us, or technology that we don’t currently use. What they did is they bought that on-premise in an installment kind of period. And so, there is a four year installment period, 200 [ph] was recognized second quarter of last quarter. And then there’s three other payments there will be made over the following three years. What they also do is, resell hardware for us and some other services.

Okay, okay great. Cloud bookings, they up a great deal, I have in my model and I was trying to glean to the various numbers that you’ve given over the quarters that, last year’s cloud bookings were $3 million in the September quarter. Is that right, and does that mean that cloud bookings in this past quarter were $4.6 million?

We, usually we don’t give the amount of deal, we just give the percentages, so I don’t have that number in front of me. But with, I believe the overall bookings, might have been that number, I don’t believe the cloud bookings was that high.

Okay, can you tell us what the cloud bookings were this quarter in dollar terms?

We usually don’t provide that number but, let us look at that for 2016 and be happy to give you more granularity in that area as we give guidance.

Okay, okay great. And if I look at the historical numbers of the various platforms you have, and I think you have roughly six platforms, you have ADI, Legiant, and iEmployee and then you have PeopleCube, Meeting Room Manager and Roomtag, on the space side all three of them seem to be growth platform or growth systems, let’s say over the last few years. Now there seem to be a real drop up in revenue at space. Can you sort of help me understand where that’s coming from?

No I actually George I think when I look at the drop in space its more one-time related. Last year at this point in time where we had a huge sale that was primarily hardware and service with KPMG, and when you look at the drop, it’s largely that. We didn’t have that large of the sale especially in hardware and services all in one quarter. When you look at the cloud-based revenue, we have two platforms the mid-market MRM is very strong and then Resource Scheduler in the cloud. And I think when I look at the backlog I’m comfortable with 2016 the reparative revenue of those products will grow, especially Resource Scheduler. soared out (0:30:28):

Okay. And just a little question on ADI, I think, at one point you were sort of talking about how that space is so dominated at the high end by Kronos and by ADP that I guess OEMs Kronos. And you were sort of becoming a contender for these large deals. Can you help us understand if you actually have been in contention for some large deals and if you have one any large deals or what would it take for you to actually be more of a player at that high end.

Yes I think we’re seeing George and it’s a great question, is in around facial reorganization we have a real strength, compared to some of our value competitors. And where we seen some big opportunities are in companies that are decentralized at the headquarters and kind of regionalized at different locations. So if you think of home healthcare, you think of janitorial services, you think of retail, what they’re historically depended on its some kind of punching in on a decentralized basis but then trying to roll that up at headquarters. And we think facial recognition with our phone device or panel device will end up playing very, very well against our competitors in that area. We are – our pipeline is very strong in that area and we feel that we are going to breakthrough with some decent sales activity here, the rest of this year and in 2016.

Okay, and then to sort of one last question, and it’s for you, Pat. Over the last three years sort of mid-year as you always sort of recalibrated the guidance down. And in the previous two years, that were sort of mid-year or this year it’s happened in the September quarter, or I guess in the November quarter. It would be good when you give the 2016 guidance to give us some kind of – I’m not sure, maybe some greater confidence or some system for us to believe that it will not happen again. And so maybe, it’s trying to give us sort of more information for us to sort of get the confidence, because I think the confidence is somewhat eroding at this point.

Yes, I look at this, George. So first of all, I thank you for your thoughtful comments. I do think, where our business and I’ll remind the folks on the call, we’re at ten losing ten, six years ago, were a business that’s still made a tremendous amount of progress. If I’ve been optimistic in the past, you could say I’ve been – we’re also business that is undergoing a lot of transformation. I think no one wants to get this right better than I do, and I think the employees at Asure want to get it right as well. I think we are making significant strides, where I could talk to four years ago, and I couldn’t tell you cloud bookings were up. I couldn’t tell you we had a backlog, I couldn’t tell you we’re in large deals. So the leading indicators are up, I will make sure that we do a more of a guidance beat model, perhaps my optimism or by people’s optimism get ahead of us sometimes. But nobody takes this more serious than we do, and if you look at the results over the short-term and the long-term, I’m very proud to be working at Asure. And as far as our investors, I’ve talked to every investor, as many times as they call, and we’ve had good loyal investors. And you are right, it’s disappointing to hear this news, but in the future, I think that’s good food for thought as we guide and want to make sure we guide right, but also want to make sure, we move the needle. And so we will be focused on that, going forward, and I look forward to talk to you in 2016.

Okay, Pat I’m one of those loyal investors I have been in this thought for a long-time. So it just what I recommended that, as you give the 2016 guidance, try to provide any more granular way, so we can understand how you build that guidance. So it helps us build confidence in the numbers that you’re providing?

Yes, and George I appreciate that and I think you appreciate your coaching as always and I think you will see that in 2016.

Great, good luck.

Thank you, any other questions?

I’m showing no further questions. I would like to turn the call back over to Mr. Pat Goepel for closing remarks.

Listen, I appreciate everybody’s time today. Again, we were disappointed in the news that we hadn’t delivered today that same. By the same token we are excited about some of the leading indicators to the business. And we do feel like we are making some traction going forward. We appreciate your interest in Azure and look forward to talking to you on the next call. Take care.