Asure Software, Inc. (ASUR) Q2 2016 Earnings Report, Transcript and Summary

Welcome to Asure Software's Second Quarter 2016 Earnings Conference Call. Joining us for today’s call is Asure’s CEO Pat Goepel, CFO, Brad Wolfe and Director of Human Resources, Cheryl Trbula. My name is Karen and I’ll be your coordinator for today. [Operator Instructions]. I would now like to turn the call over to Cheryl Trbula to provide the necessary cautions regarding the forward-looking statements made by management during today’s call. Cheryl?

Thank you, Karen. Good morning everyone. 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 or guidance. 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. It will be made available for replay via links available in the investor relation sections of the company’s website at www.asuresoftware.com. After we’ve completed our review of the quarter, we will 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?

Thank you, Cheryl and I'd like to personally welcome everyone. Thank you for joining us for a second quarter 2016 earnings call. In short second quarter for Asure was a spectacular quarter. It's almost a new normal for Asure Software and why we're so excited is we believe that with the acquisition of Mangrove in the first quarter our results are not only really, really good but they represent sustainability going forward. High level summary of the quarter and main highlights, first of all the Mangrove acquisition which we acquired in March in the first quarter this was our first full quarter since we made the acquisition. It's already starting to bear fruit with Mangrove now fully integrated. We're able to realize the cost savings and we had some onetime charges in the second quarter that will go away here in the third. We talked about that in our last call. We're seeing cross selling opportunities materializing. We're excited about how that's coming together and what that translated into is time and attendance and work space wins into our payroll base, what's it's also translated into is HCM sales into our time and labor customers as well as their workspace customers. We did have immediate cross selling benefits of this acquisition. It is important to note that some of these benefits aren't live yet and they'll be expected to hit revenue in the fourth quarter of 2016 or the first quarter of 2017. As far as the financial highlights. First of all pick a metric pro-forma revenue gross margin, EBITDA they were all up in the core business of Asure performed very, very nicely that with the addition of the Mangrove acquisition and the cost synergies realized was announced in the quarter for. In fact their gross margin I was just looking at was higher than any of our previous revenues. So really had a step up change in performance. Our cloud bookings were down but a lot had to do with a large sale and despite this cloud revenue was up significantly and Brad will go into the details and the business model around the cloud revenue with sales retention and implementation and price increase remains very, very strong. Q2 was another strong quarter from the enterprise sales perspective; we signed major names like MetLife. Procter and Gamble Allstate Insurance, State Street, Exxon Mobil, just to name a few. In summary, we believe Q2 was an all-round great quarter for us, the Mangrove acquisition and integration from a cost side is complete, from a product perspective we're launching version eight this quarter and we'll sell that through 2016 and '17 start. The cost synergies and cross selling activity is brisk and on top of this our core business is strong and we're positioned for even greater growth in the second half of 2016 which allowed us to raise our guidance for the full year. However before I go into further detail about our operational progress and I'll look for 2016, I'd like to turn the call over to Brad for the specific results of the second quarter. Brad?

Thank you, Pat and good morning everyone. I will take a few minutes ago to go over the second quarter financial highlights and then we will be happy to address any questions during the Q&A period. As Pat mentioned the Q2 marked the first quarter with Mangrove as part of our operations. For those newer to the Asure story we acquired Mangrove in late March for $18 million in aggregate consideration which included $11 million in cash, the portion of which was used to pay certain obligations of Mangrove and a $6 million secured subordinary promissory note just subject to adjustment as provided in our stock purchase agreement. We funded the cash payment with proceeds from our credit agreement with Wells Fargo, we also acquired the assets of Mangrove COBRAsource, a benefits administration service business which at the time was a wholly owned subsidiary of Mangrove. The aggregate consideration for these assets was roughly $1 million with Mangrove COBRAsource supply of certain with Mangrove COBRAsource applying payments to certain loan balances. That's earnings to our financial results for the quarter ended June 30, 2016. As Pat mentioned flat bookings for the quarter decreased due to a large customer win in Q2 of 2015, although our total bookings were up 17% year over year. Revenue for the second quarter was up 35% to $9.7 million from $7.2 million in the same quarter last year. The improvement in revenue was driven by increases in cloud, hardware on-premises software and professional services revenue. Our recurring revenue as a percentage of total revenue was 72.1% compared to 77.1% in the prior quarter and 69.9% in the second quarter of 2015. On a pro forma basis including the results of Mangrove as since the acquisition was completed on January 1, 2015 our total revenue increased 8% to $9.7 million from $9 million in the same year ago quarter. Looking at revenues by source, revenue in the second quarter of our workspace management solution Asure's phase [ph] totaled $4.7 million which was up 11% from the $4.2 million reported in the same quarter last year. Our cloud revenue increased $257,000 or 14% and our hardware revenue increased 33,000 or 5% for the same quarter last year. Our professional services revenue increased $379,000 or 62% over the same quarter last year also. For all these revenue sources were up year over year, we experienced decreases in maintenance and support revenue. In particular our maintenance and support revenue declined a 196,000 or 19% compared to Q2 of last year which was primarily due to the movement of clients from on-prem to on-demand cloud based solutions. Revenue for Asure of our workforce management solution increased $2 million or 70% to $5 million from the $2.9 million in the same quarter last year. This increase was primarily due to the acquisition of Mangrove which $2 million of revenue in the period. Cloud hardware on-premise software license and professional services revenue increased during the quarter driven by a 110% or 1.7 million increase in cloud revenue and $194,000 or 61% increase in hardware revenue. These increases were offset by a decrease in Asure's maintenance and support revenue of $153,000 or 30% compared to Q2 of last year. Our gross margin for the second quarter of 2016 was $7.5 million or 77.5% of total revenue, this represents a 50% increase from the $5 million or 74.3% total revenue reported in the prior quarter and a 42% increase from the $5.3 million or 73.8% of total revenue in the second quarter of 2015. Our EBITDA excluding onetime items for the quarter total 2.6 million compared to $388,000 in the prior quarter and $1.4 million in the second quarter of 2015. We incurred in $831,000 and onetime cost this quarter primarily incurred in conjunction with our integration of Mangrove. By GAAP basis our net income totaled $136,000 or $0.02 per share compared to $95,000 or $0.02 per share in Q2 of last year. Including onetime items our GAAP net income for the second quarter of 2016 totaled $967,000 or $0.15 per share compared to $227,000 or $0.04 per share in the same year ago quarter. On a pro forma basis including the results of Mangrove, our net income per share including onetime expenses total $0.15 compared to a net loss per share of $0.06 per share in the same year ago period. Please see today's earnings release which is posted on our website for further details including a reconciliation of our GAAP to non-GAAP results. Cash flow used in operations for the quarter was 0.4 million as compared to 0.3 million of cash flow provided by operations during Q2 of last year. Included in cash flow used in operations was approximately 0.9 million of cost related to the acquisition of Mangrove. In May of this year NASDAQ notified us that based upon our March 31 results we've fallen below the $2.5 million minimum level of shareholders equity required for continued listing on NASDAQ capital market and we did not satisfy the alternative requirements of market value of list of securities or net income from continuing operations. NASDAQ granted until November 14 to regain compliance before taking action to delist our common stock. I'm pleased to report that we've regained compliance as a result of our June 30 results that our stockholders equity back up to $3 million. Our compliance issue arose as a result of Mangrove acquisition and it's related cost. With that now behind us we do not anticipate any future delisting risk on this basis. Turning to our backlog which we defined as sales bookings that have not yet turned into revenue or deferred revenue including both repetitive and non-repetitive product line. For repetitive product lines one year value is including a backlog, at quarter end our backlog decreased 3% to $2.6 million from $2.7 million at the end of the prior quarter. We continue to expect our enterprise clients moving through the implementation process in the second half of the year which will result in converse from backlog reported revenue. As the cycle time from creation to revenue acceleration, we expect this process of conversion to revenue will increase, in turn this will put us in a better position to accelerate our revenue growth and meet our financial guidance for 2016. Along those lines we’re confident with our execution in the first half of the year and believe it's necessary to raise our guidance for 2016 on a pro forma basis which includes our acquisition of Mangrove and considers the condition that Mangrove and Asure has been combined as a single company from January 1, 2016. Due [indiscernible] from an expected realization of cost synergies and conversion of backlogged revenue along with our overall strong start for 2016, we have raised our financial guidance for the full year. Accordingly we have raised our revenue range by $250,000 and now expect revenue between $37.75 million and $38.75 million represented an increase of 40.3% to 44% compared to fiscal 2015 and 0.6% to 0.7% increase over our previous guidance. We currently expect EBITDA excluding onetime items to range between 7.75 million to 8.25 million for the year which represents a 107.6% to a 120.9% increase compared to fiscal 2015 and up 3.1% to 3.3% over previous guidance and finally we raised our net income per share range by $0.10 and now expect net income per share excluding onetime items to range between $0.22 and $0.30 which would be an improvement from $0.17 loss per share we reported in 2015 and an increase over our previous guidance of $0.12 to $0.20 -- our previous guidance of $0.12 to $0.20. At this time I would like to turn the call back over to Pat who will discuss our operational highlights for the quarter as well as our outlook for the rest of 2016.

Thanks, Brad. The Mangrove acquisition is a reminder, the reason the acquisition was so important to us is it's really transformational for us because it launches into the massive growth opportunity of human capital management space. Yet big companies like work day, ultimate software, [indiscernible] paychecks and I get asked what allows you to think that you can compete in that area and for us -- because we're already in the workforce -- in the work space as it is what the market is looking for is integrated solutions around the lifecycle of an employee from hire to retire or some will say from womb to tomb and now we're able to provide those services on behalf of our clients and what we're able to do is bring technologies like facial recognition and sensors to the table that brings this massive market, some say about $20 billion opportunity and that's just really North America specifically it expands worldwide. But we bring in new technology and service offering to this marketplace. We're excited about the opportunity we also have about 7000 clients that we can cross sell to and we take an average of $120 per employee on one of our products and now it gives a potential of $500 per employee per year to provide a good offering to our clients in the market. It's clear that the market is increasingly mobile and digital and those technologies are looking for companies to actively use the mobile market to recruit, manage, pay analyze their workforces in work space more effectively. Despite it's size the market is pretty fragmented and there is no current provider being a clear cut leader in the space. Lots of room to capture market share and because it's a back office function in many ways in some cases we've seen studies where the cloud if you're looking to put the cloud into one market it's in payroll for example. So we see over the next three to five years that there will be huge opportunity to make a technology shift and we think we're positioned pretty nicely to take advantage of those trends, also this acquisition gave us the opportunity to take market share which we just talked about, expand our software solutions but it also allowed us the leverage some cost synergy and we're able to take out $4 million annually in cost savings, some of it is redundant G&A providers, technology around the cloud that allows us to simplify our solutions because we're already providing those services within number of our clients and our technologies and I'm pleased to report that most of that $4 million annualized run rate savings from the synergies of the acquisition has been taken out already here as of June 30. We had a client conference within six weeks of the Mangrove acquisition and the client conference was a wonderful opportunity to test our vision and test the execution of how we see us integrating the products together and what we're very, very pleased was the receptive of our clients in going on that journey with us and we had established clients there as well as new perspective clients and prospects and the feedback was very positive, not only from a technology itself but also from the service paradigm we're coming from. The conference also gave us the opportunity to test drive our Version 8 product which we're launching for October starts. This latest version integrate human capital management, time and labor and space under one common user interface under unifying our entire suite of solutions and that will allow us to present $500 per employee per year offering. What it also does so in addition to unifying an experience it also allows entry points for -- if somebody wants just time and attendance or just payroll or just workspace we think that flexibility is key to the market and ultimately will be key to cross selling and growing revenue. Overall we're excited about the direction we're heading and how the acquisition and integration completes Asure's product offering to manage the employee lifecycle. We think it's important for investors to know how we plan and compete in this space. We have about 35 or so sales reps today, in '17 we'll probably have in the low 40s. We will go direct and compete in this space. We will also compete via partnership both in the U.S. and globally. We feel that we're just in the early innings of getting that situated but very, very pleased with our overall sales results. Digging deeper into the financials and the operational results. Our core business performed very, very well. As I mentioned we experienced growth in revenue gross margin and EBITDA, the company was profitable in the quarter and once we moved past some of the onetime items with Mangrove we can really start to generate healthy cash flow again. Area that had some opportunities was cloud sales. We had a very, very difficult compare. However I was very, very pleased with the cloud revenue being up as dramatically as it was and that speaks to retention across, cross sell, price increase power as well as additional services that we’re able to layer on. Brings to the point when you have enterprise sales opportunities sometimes you're bookings can be bumpy, what I encourage you to look at is the trend line over 6 to 9 months and overall bookings were up 35% year-over-year in Q1, 17% in Q2, 24% in the six month period and I think that's a trend line we should be focused on. We had great progress on the backlog conversion in the new wins, the acquisition is out of the way, backlog is being much managed much better and being converted to revenue faster than we initially expected. Last year we had a lot of really, really strong company wins but it was the first time we sold to the enterprise marketplace. This year we're able to get those implementations done far faster and some of the ones that push from last year is starting to come in this year. We think that faster conversion revenue is going to continue in the second half. In addition, the progress we're making on the backlog, two wins I will highlight, Procter and Gamble is expanded our reach. We're now into Russia, we're into Europe with Procter and Gamble in addition to United States we have a member of our team and the integration team in their consolidation of real estate footprint. We also had a nice win this quarter with MetLife and our people worked with their people in the New York and London office. So that truly was a global win and just pleased with the progress we're making in that area. Another area that we haven't talked much about but was in our press release was our global partnerships. Payscape which is a fast growing payroll provider in England has agreed to offer our time and labor management system sort of wide range spanning customer base in Europe. We believe this provides us a great complement to their cell service offerings and Payscape is just a tremendous organization. We're excited about partnering them in the future. Quora consulting is another partnership born in Europe and we believe that in the work space area especially around the efficient work space and real time analytics we think this is going to be enhanced our solutions as well as enhance their offering. They're going to also expand that partnership with us to Asia Pacific and we think we have huge opportunity with that partnership. We do see partnerships playing a big role in our future and we'll continue to work with best in class industry leaders those were two we would like to highlight in the second quarter. Finally some of our initiatives we look to execute the rest of the year they're bringing our current Human Capital Management wins live, we think October and January will be very brisk. We think the $4 million synergies now is largely past us. However we are going to hire some key growth people to make sure that we continue that growth in '17 and beyond and we feel that we have very, very strong initiatives that are now complete. So cash flow in the second half of the year should be very, very strong. The guidance we are thoughtful about raising guidance and we don't want to do that too impulsively but as we look forward Brand and I discuss the second half of the year and feel as prudent to raise guidance what would makes me pleased with the performance in the second quarter was the sustainability that we see in the future and so we think we have a great jumping off point to raise guidance in the third and fourth quarter. So to wrap it up, we're very pleased with the progress of the company especially with the acquisition. I think we're realizing the benefits quicker than expected which is a positive sign of over execution model. I think from a growth opportunity. We're very pleased and interested in some of the combinations of partnerships and revenue opportunities that we have going forward, we think we're really in the early innings of exploring those for the future, we love the market space, we position ourselves in in the area of human capital management, it's a huge marketplace, very robust, growing and think we have a ton of opportunities to move our business forward. Finally I'd like to reiterate that 2016 we feel is really a transformational point and an inflection point in the company. We have partners, clients, shareholders, employees have been with us since '09. In '09 I still remember it was survive, get cash flow, get compliance, cut costs, now it's really grow, grow and we’re having a lot of fun growing the business. So with that we're ready and able to answer your questions and Operator if you could provide the appropriate instructions.

[Operator Instructions]. Our first question comes from the line of Jeff Houston from [indiscernible].

It's great to see the increase in guidance and the strong 35% growth in bookings. Could you talk a bit about what the mix was between ForceBase and Mangrove in the increased guidance, it sounds like maybe a lot of it came from the synergies with Mangrove but a little bit of color there would be great.

Jeff, I think just on the revenue side I think last year we had really strong sales but our backlog probably we didn't implement our global deals as fast as we thought we would. So on the revenue side, our core business was strong and we think it's going to continue to be strong from a growth perspective. The human capital management side the integration and the cost synergies we're able to take our look quicker than we would have thought and so we're pleased on that side to have an integrated time and labor management with the human capital management business and so it's a combination of those two things, the growth of the backlog turning into revenue and the core business and the integration opportunity with the acquisition of Mangrove. Those two things that really led us to continue our guidance. As far as some of the details behind that will be in the Q which were release today but suffice to say really all areas of our business hit very well.

And then it sounds like cross selling was also a very strong with the Mangrove base, can you talk a bit about what the company sizes were? Where they small, mid-size or large enterprises that -- you’re having the traction with from cross selling your products in the Mangrove space and then cross selling their products into your base?

Yes, I think you know the average employee size so far across our journey it's been early but we're probably in the area of the 500 employees or so that’s where we've seen the most traction but it's interesting we've seen traction in England here with our time and attendance product. In work space we've seen clearly in some verticals we see opportunity whether they're in the financial services banking, pharmaceuticals, we've seen some areas there but I would say that the quickest traction so far has been in the mid-market and that is to be expected.

And then last question for me is it sounds like the Mangrove really enables you to increase your price per employee per year from 120 to 500 are you actually seeing some customers close to the $500 per employee for year now with some of this crossover ones?

I think it's still a little bit early to say that I think that metric is more -- a little bit aspirational right now. However we are seeing significant growth in our per employee. I think for us to have a firm metric around that would be early '17 I think we'd be able to report that.

And our next question comes from the line of Vincent Colicchio from Barrington.

First question is what portion of your 7000 existing clients would be good candidates for a comprehensive HCM solution, have you mapped that out yet?

First of all we think all of it would be selfishly right, but we think immediately there is a number of targets that we're going to go after and I would say we have about 1500 a hot list that we feel that the current capabilities of our products and services and the current technology and the industries that they're in match up very, very nicely that we're going to go forward and then as we go up market there's some features functionality that we're building in the system specifically designed to increase that and on the lower end we're looking at different type of offerings and how we can package our offering to expand that, so our initial hit list I guess if you will is about the 1500 and we'll continue to grow that over time.

And then the cross-selling revenue beat your expectations in the quarter?

I wouldn't say that but I think it's set us up for Q3 and Q4. So I think our core business did really well, our interest in bookings did really well but as far the HCM we had a lot of cross selling some of which will fully realize in revenue in late '16 and '17. So it was the cost cuts with the acquisition, it's the interest level on the cross selling and it's the implementation backlog that will continue to grow in '16 and '17 that once we hit that then the revenue will be realized.

So we're about halfway through the Q3 period, how are the cloud bookings progressing so far in this period versus the year ago?

I don't report in the middle of the quarter like that, I haven't seen that metric yet but I would say you know July I would say was a strong month, August to be determined but we think in looking at all the data it prudent to raise the guidance and feels really strong about that decision.

And how far long view progress in terms of the training of the sales force for the complete portfolio and when will that be complete if it's not?

I think it will be in phases, Phase 1 is obviously complete. Phase two is continuing around the targeting and really exploring which ones are good candidates etcetera. I think early '17 we will have even a stronger kind of training portfolio and program to continue to go after more and more clients. So I think we've had the quick wins section of the training along with what we feel we can absolutely delight the customers with those offerings from a product roadmap perspective we're layering in things we can do in '16 and '17 to delight a bigger set of customers. So I think you'll see it as an ongoing process through '17.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back over to Pat Goepel for closing comments.

Well thank you and I appreciate everybody on the call today and I just feel like we're really starting to hit our stride and really appreciate your interest in Asure and look forward to talking to you to talk about our progress in the third quarter and the next fall. Thanks again.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the presentation. Thank you. Have a great day.