Asure Software, Inc. (ASUR) Q3 2016 Earnings Report, Transcript and Summary

Good morning. Welcome to Asure Software's Third 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 Amanda and I will 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, Amanda. 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 outcomes. You're 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'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?

Thank you, Cheryl and I'd like to welcome everyone; our clients, employees, investors, analysts and other interested third-parties to our third quarter 2016 earnings call. Our high level on the third quarter we had a real strong and productive and encouraging quarter for us, it not only represented our first full quarter of realizing some of the costs savings that we announced last quarter from the Mangrove acquisition but it also represents the second quarter of a new normal for Asure back with our market focus now expanded and our solutions are unified under one common user interface with Version 8. We built the right foundation to scale our business either -- even further in the future and are really, really excited about that. Some of our particular successes during quarter three, pro forma revenue, gross margin, adjusted EBITDA were up over the prior year which let us to being profitable for the second quarter in a row and we feel real good about that. Some of the percentage increases that we were up in revenue gross margin without the acquisition were good to see in the 42% range on revenue. Bookings were up 19% for the quarter, our cloud bookings were little down due to a large win we had in Q3 but despite that, being up 19% in total bookings and up 39% year-to-date in total bookings give us comfort for the future. We had a strong conversion of backlog to revenue and for our enterprise clients and clients that were in the background of -- in the backlog from even the big ones from last year. And then backlog as a whole increased over Q2 due to a new three-year deal where we secured one of our largest clients, PSSI. We're definitely seeing backlog turn to revenue but we're also seeing some enterprise clients booking with us which we're exciting about in the PSSI win, we're going to now take on their Canadian locations and I think that that's a great project in addition to the U.S. locations. From a client activity, in addition to PSSI -- really excited about some enterprise wins, Procter & Gamble which is taking us worldwide; ExxonMobil with our smart move, Merck was another great win to the cloud, and finally Apple. And to earn business from apple, you have to be technology savvy, both within the software and the people that are selling and servicing it, I'd like to thank the tech team for that win as well. In addition, to the interest we received for our kind of labor in workspace management solutions, we're really out in front of a lot of HCM opportunities as well, and we launched Version 8 which has a common user phase to work space and time, and the message the market has been received real well. Pipeline as a whole continues to grow in strong, and the overall pipeline of deals increased by a little more than 200% which shows the progress we're making integrating our sales opportunities with the entire suite of solution. With Mangrove, I have mentioned this was our first full quarter of realizing some of the cost synergies from the acquisition, and remember we closed almost $4 million of acquisitions in the second quarter but in addition, perhaps more important long-term than the cost savings, we're seeing an increasing number of cross-sell opportunities in the marketplace and in the quantification of our growth and cross-selling opportunities, we saw 452% increase. I encourage you we're early in our game on that but we see -- think that will board well for 2017. We're clearly very, very happy with how quickly we've been able to integrate Mangrove, we're happy to be in the HCM business and space, and we think shareholders are going to reap the benefits for quite some time of the Mangrove acquisition. As far as guidance, if you recall last quarter, we upped our guidance, we're pleased with our performance; we think we have a good line of sight into -- it's a guidance in the fourth quarter so we are reaffirming our full year guidance that we upped last quarter; and as far as 2018, we'll talk about that in the next call but believe we'll finish the year strong in 2016. Before I go into other detail about our operational progress, and our outlooks; I'd like to turn the call over to our CFO, Brad Wolfe who will walk us through the financial details of the quarter. Brad?

Thank you Pat, and good morning, everyone. Turning to our financial results for quarter ended September 30, 2016, cloud bookings in the quarter as Pat alluded to decreased by 7% due to a large client win in Q3 of 2015 while our year-to-date bookings were up 39% year-over-year. Revenue for the third quarter was up 42% to $9.4 million from $6.7 million in the same quarter last year. Improvement on revenues was driven by increases in cloud, on-premises software and professional services revenue. Our recurring revenue as a percentage of total revenue was 74% compared to 72% in the prior quarter and 75% in the third quarter of 2015. On a pro forma basis, including results of Mangrove, as if acquisition was completed January 1, 2015, our total revenue increased 6% to $9.4 million from $8.9 million in the same year ago quarter. Looking at our revenue by stores, revenue in the third quarter for our workspace management solutions Asure space totaled $4.2 million which was up 4% from the $4.1 million recorded in same quarter last year. Our cloud revenue increased $200,000 or 11% and our professional services revenue increased $319,000 or 46% over the same quarter last year. Hardware revenues decreased $225,000 or 48% while maintenance of product decreased $194,000 or 21%. The decrease for both sources of revenue was primarily caused by the movement of clients from our on-premises to on-demand cloud-based solutions. Revenue for Asure force -- our workforce management solutions increased $2.6 million or 103% to $5.2 million from $2.6 million in the same quarter last year. This increase was primarily due to the acquisition of Mangrove which added $2.1 million of revenue in the period. Cloud, hardware, on-premises software license and professional services revenue; all increased during the quarter driven by a 128% or $2 million increase in cloud revenue at 378% or $462,000 increase in on-premises software license revenue and a 787% or $252,000 increase in professional services revenue. These increases were partly offset by a $160,000 or 33% decline in maintenance this quarter revenue as compared to Q3 of last year. Our gross margin for the third quarter of 2016 was $7.4 million or 78.5% of total revenue. This remained consistent with the $7.5 million or 77.5% of total revenue we recorded in the prior quarter, and represented a 51% increase from the $4.9 million or 73.7% of total revenue in the third quarter of 2015. Our EBITDA excluding one-time items for the quarter totaled $2.3 million compared to $2.6 million in the prior quarter and $767,000 in the third quarter of 2015. We incurred $365,000 of one-time cost for the quarter, primarily incurring production with our integration of Mangrove. On a GAAP basis, our net income totaled $315,000 or $0.05 compared to net loss of $574,000 or $0.09 per share in Q3 of last year. Excluding one-time items, our GAAP net income for the third quarter of 2016 totaled $680,000 or $0.10 per share compared to a net loss of $553,000 or $0.09 per share in the same year ago period. On a pro forma basis including the results from Mangrove, our net income per share excluding one-time expenses totaled $0.10 compared to a net loss per share of $0.10 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 provided by operations for the quarter was $400,000 as compared to $1.1 million of cash flow provided by operations during Q3 of last year. Included in our cash flow used in operations was approximately $400,000 in severance, professional fees, and other one-time charges associated with integration of Mangrove. Cash flow during the current quarter also reflected a temporary delay in the realization of receivables associated with our HCM business. These collections are anticipated to normalizing Q4 with our assimilation of Mangrove. Turning to backlog, which we define as sales bookings that have not yet turned into revenue or deferred revenue including, both repetitive and non-repetitive products lines. For the repetitive products, one year's value is included in backlog. At quarter-end, our backlog increased 49% to $3.9 million from $2.6 million at the end of the prior quarter. During the third quarter we experienced a strong conversion of backlog revenue from our enterprise clients. The movement of enterprise clients through implementation is anticipated to lead to greater reported revenue during the fourth quarter. As a cycle time for creation to revenue accelerates we expect the process of conversion to revenue to increase. I'd like to add that the increase in backlog and the addition of new products and cross-sell opportunities has set the company up for a strong 2017. In addition, the investments we're making both in our infrastructure and process is increasing both leverage and scalability of our business which enables us to achieve higher throughput and lower operational cost. From this enhanced operational position, we can then ramp up our investments and product portfolio, sales and marketing initiatives to further accelerate our overall expansion. Based on the results for the quarter, and first nine months for the year, as well as our backlog conversion process through today and how our pipeline is shaping up. We have permanent guidance for 2016; as a reminder, we expect our revenue for the full year to be between $37.75 million to $38.75 million which is up 40.3% to 44% increase over our revenue in 2015. Our EBITDA excluding one-time items, we expect these numbers to range between $7.75 million to $8.25 million which is a 107.6% to 120.9% increase over the prior year. And finally, we expect our net income per share excluding one-time items to be between $0.22 to $0.30 per share which is a considerable improvement from $0.17 loss we reported in 2015. At this time, I'd like to turn the call back over to Pat who will discuss our operational highlights for the quarter as well as our outlook for Q4 2016 and fiscal 2017. Pat?

Brad, thank you and we're very pleased again with the quarter. It's clear from the results we have a strong quarter, we can look at any of the key matrix and wait, you can see that we made great progress from where we were last year in some cases where we were just a quarter ago. Even without Mangrove our revenues and gross margin on a pro forma grew nicely over the same year end while our adjusted EBITDA was considerably as Brad mentioned. With another quarter profitability generated positive cash flow from operations and even some of the one-times we had during the quarter and will continue to disappear overtime. Going forward we'll see stronger cash flow generation. On an operational overview, in additional looking at some of our growth matrix backlog increased nicely with some enterprise sales but we also heartened that we worked off some backlog and especially the large ones with PSSI was an important win for us and a three year commitment going forward. Our backlog process is improving, especially in the area space; if you recall, last year we had number bookings that were very positive and key wins in Morgan Stanley and Five Service [ph] and Rogers Telecommunication; all those customers are now moving through the implementation process that are now live. Clients that are signing up now, we believe won't be implementation as long as they were when we came out with the product last year. So very encouraging and I'd like to thank the employees and sales people for their effort in making the sales become a reality. Total bookings were up considerably year-over-year which is about 39%, even though our cloud bookings were down slightly with the one sale in the third quarter of last year. I mentioned this had to do with that client, it's also important to remember that bookings can be lumpy and we will see some numbers bounce around. This quarter our hardware number was a little bit light; we do think that our hardware number will be strong in the fourth quarter. Along as far as the bookings, again on the product side -- we're really happy we rolled our Version 8, it's a common user interface across all products, it's really a cornerstone of allowing us to cross-sell and we had some significant wins. We now have about 12 clients that are in the backlog, that are re-integrating all of our products and the first two now have gone live. We're clearly enhancing our products wherever we can but our major focus is building our client base and leveraging the scalability back into the business model. When you look at one of our products that we were sold, many times it was sold at about $100 per employee per year in the last couple of years. Now with the entire solution, the pricing is more -- closer to almost $500 per employee per year. So we'll continue to sell an enterprise platform as supposed to an individual product solution. And we think that's a learning process for our employees and our clients who are excited at the potential progress. Finally, some of our client wins -- again, very happy to get Apple, to get Merck, and those were with long-term negotiation so happy about that. Mangrove and the client activity; coming way back when we started acquiring Mangrove in March that we had the user conference in May, we're starting to get some fruit not only earlier on in that client conference but also now in the fourth quarter as some of the clients were waiting for Version 8 and we're excited that they're going to come onboard for a January start. Finally, our -- within Mangrove, I'll tell you -- acquisitions are always tough and this one is gone about as well as -- can be expected, we've gotten the cost out, we've had clients sign up for cross-selling efforts, clients have been engaged and want us to succeed in the success, the service model is going very, very well and the employees have done a really, really nice job, both the employees that came over from Mangrove, as well as our employees in helping with the integration. Our payroll on-time now is integrated and that's a big focus for us in order to cross-sell both products into each other's marketplace. As you know, stepping back from a human capital management is a massive market, a multi-billion dollar marketplace; it's also pretty fragmented and we think we have more than enough room to capture market share using our technology and our service solutions. And then finally, perhaps the most encouraging part is our current clients. We have all our current clients to up-sell, cross-sell and grow with and you're -- we have a program of land and expand that we're working pretty heavily and are cross-selling those opportunities. In addition to all those growth opportunities we're also going to be active in looking at tuck-in acquisitions in the marketplace; we think we have some -- especially that are tied to the acquisition of Mangrove, and we'll obviously be selective with those but I would say there are some opportunities for us to get bigger and all along, if you followed a share for a number of years, our mid-term goal or what have you is a $100 million company. So we're going to continually look to grow from a 20% organic look to have tuck-in acquisition and obtain a lease of 20% EBITDA. We're not always successful but those are the goals for us and I would say the move into the HCM marketplace is allowing us to get closer and closer to that realization. And then as far as guidance, we are reaffirming guidance, we think the uptake in backlog and factor we're taking down some of the backlog that's older and turning it into revenue. From a visibility perspective, we believe we can hit the guidance that we opt last quarter and then 2017 as I mentioned, we will give an update on the next earnings call to talk about the year, suffice to say we expect to grow in double digits, we're going to be active and looking for tuck-in acquisitions, and we continue to drive to 20% EBITDA plus and profitability. And we are excited about having the second quarter in a row on profitability. In closing, we're very pleased with the progress of the company, we expect a strong finish to the year, we're happy about where the organization is positioned in the HCM marketplace, we think we can accelerate cash flow that will drive growth and value to our shareholders. We are going to grow organically, look at the tuck-in acquisition, I think we have the right foundation, at the right time, at the right place to take advantage of the sector growth in addition to our company growth, and we think the wind now is on our back. Finally, we did have some analyst activity where -- we're very thankful for our two partners, Northland and Barrington; we're also very pleased that welcome Late Street, Roth and Wunderlich to covering us. I would say the activity around the stock and the analyst has been brisk, I think people are seeing the benefits of the acquisition and the synergies in the growth. And so there has been more interest in our stock and more interest in the company and we are excited about that interest because we think that will bode well for all of us down the line. Finally, with that we're open for questions that any of you may have. And operator, if you could sort through the questions we would be happy to answer them.

Thank you. [Operator Instructions] Our first question comes from the line of Eric Martinuzzi from Lake Street Capital. Your line is open.

Thanks and congratulations on Q3. I wanted to dive into the guidance for Q4, midpoint based on backing out the first nine months, I've got the midpoint at $10.25 million that be a substantial step-up here, Q3 to Q4, how much of that is explained by recovery in the hardware and how much of it is coming from the other buckets?

Eric, I think clearly -- probably hardware will be probably half of it, maybe from a step up and then the rest would be -- I don't want to get too precise on it but I would say consistent with our first year-end of Mangrove and what have you -- but I think half of it is hardware.

Okay. And then the pipeline being up, I guess maybe I could use a definition here; when you say the pipeline is up 212%, what does that actually mean? In other words, if you -- are you comparing it to year-over-year like a year ago was $3 million and now this year it is $9 million, is that what we are talking about?

We're actually comparing quarter-over-quarter because we had growth from buying Mangrove and then doing really a cross-sell opportunities and seeing the pipeline grow. So really that bodes to getting Mangrove, starting to get it integrated, let's starting to get the cross-sale opportunities, starting to get all the sales opportunities. And as you know Eric, the fourth quarter typically, especially in HCM is pretty brisk as far as sales because people want to start in January. So that's how we define that metric.

Okay. Now that's very encouraging to see that that kind of sequential expansion in the pipeline.

Yes, no it's very encouraging -- Eric, the only thing I'd point out is this is our first year-end with the acquisition. So I'll be over the moon next year at this time but we are growing off a small base but we're really excited.

Okay. And then last question for me, the gross margin -- it kicked up there, it seems like it might have been driven by being hardware light and licensing heavy. What's the gross margin expectation for Q4?

I think something around -- it's going to remain consistent at 77%, 78% range I think. If you look at it, your right, the mix has some impact but if you look historically we've been in sort of 75% to 78% -- 74% to 78% range and I expect it to be between 77% and 78% in Q4.

Got it. Thanks for taking my questions.

Thanks, Eric.

Thank you. And our next question comes from the line of Mike [ph] from Northland Capital Markets. Your line is open.

Great, thanks. Good morning and great quarter. Just diving into the cross-sell opportunities a little bit, so what you're seeing are -- do the cross-sell opportunities look to be replacing other technologies or do you see a lot greenfield opportunity there -- some of these cross-sell opportunities?

I think most of it is replacing a solution in place but it's a point solution, and what they are excited about is the integration of an enterprise solution to replace a point solution.

Great, okay. And in terms of the pipeline, can you just give a little color on what you're seeing in terms of the cloud opportunity reflected in the pipeline?

Yes, I think the cloud opportunity is strong, specifically for January. We believe -- we're leading with the cloud on every opportunity. If we have a client that's maintenance and support and they are looking at new location, and it's a grandfather client, we'll upgrade them but really all that is cloud driven and at this point, our clients are all wanting to go to the cloud.

Got it. And then you've talked a little bit, couple of times about just converting backlog to revenue, you seemed pleased with that. I guess is that just sort of internal processing is working more efficiently or is that the main factor there?

Yes, I think if you think about last year Mike, and we were big on the whole telling story and we were very fortunate to get a number of enterprise customers booked last year. What I would say is because business hoteling was so new, it took almost in some cases a year to go live. What we're excited about is we got those clients live, now we're also excited that the next wave of these business hoteling clients -- we don't think will take a year, we think now that we have the process fees down -- and kind of more importantly, they have the process fees down in the sense there has been some success in the marketplace. There is a road map and change management that employees and employers can use to be successful quickly which takes that backlog to revenue. So we're counting on that and believe in that and we think we have some good proof points in the second and third quarter of this year from sales that we made last year that reflect that into the revenue and then more importantly, going forward, we think the backlog time won't be nearly as long.

And just last question, congratulations on Apple; what are you selling to Apple?

We have our research scheduler system and we schedule kind of desk and rooms for them, and so we're excited about that. And we think we have some more opportunities down the line.

Okay, thanks a lot. Good luck.

Thank you.

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

Hi Pat, nice quarter. I thought you said last quarter you were targeting now in terms of the cross-sell opportunities, $400 per employee. If I'm right on that, what change that you're now back up to $500?

No, I think Vincent the $500 is maybe a hair aspirational, I think $500 is always our target overtime. I would say early on its probably -- $400 is probably more realistic in a sense that -- but as we're rolling out products and services, and as clients are looking to go more and more international in some cases or up-market there is opportunity to get more professional services in hardware that will take us close to the $500. So $400 as we go -- I think you'll see $500 be probably the longer term number, $400 is shorter term number, and that's just what the stage we are with integrating and acquisition and rolling out some products.

On the space side, I've come across one or two private companies that I wasn't previously aware of. I'm wondering if the landscape changed at all and in terms of -- if your win rates have been steady, what that looks like?

I mean, I think there is some nice private companies that are out in the marketplace on both sides of the pond and it's a competitor marketplace, I don't think we've seen any change in the winds and I think we feel really good about our positioning in the marketplace.

And last question for me, I know you've mentioned service bureau as a potential area of interest to you, but would other areas if you had the -- if you did some acquisitions what will be a particular interest in the HCM side?

I think -- I don't want to go into too much detail there but what I would say is we feel we have the right kind of enterprise suite of products. We might have a tuck-in technology acquisition that could make some sense there, in addition to people that are already using our technology. And so suffice to say if we use some acquisitions, there will be an accretive, we'll be looking at them from a customer base to pile more customers down our base. And we think that there is some opportunity in that area. I don't think you'll see us go to a new market like we do with Mangrove, we think we have plenty of market now, we're looking to get bigger and drive our revenue as well as our drive scale.

Okay, thanks for answering my questions. And again, it's nice to see the progress, good job.

Thanks Vincent, thanks for your support online.

Thank you. [Operator Instructions] Our next question comes from the line of Ryan MacDonald from Wunderlich Securities. Your line is open.

Hi guys, congrats on the nice quarter, in particular as you look at sort of the large customers that you closed during the quarter that you mentioned, the Apple, the Merck's, Procter & Gamble; can you talk about what the -- sort of the competitive landscape was or the dynamics there on those deals?

Most of them, let's see -- Merck and Apple had at least two competitors; they're both private companies, we slugged it out in the case of Merck almost a year. They wanted to understand what we could vis-à-vis our competition, they came back at the end of that process and chose us, and we're very pleased. So that was the win, and as far as Apple, same thing; they probably had a broader scope looking at some different kind of private companies and at the end chose us; and again, we're very pleased. Typically, competitors were two to three, and I'm not privy to all the conversations they have but those are two to three that I know off.

Got it. And then you mentioned sort of in your closing remarks Pat about sort of striving to grow double digits again next year. Would that target -- is that inclusive of any potential M&A or do you think you can just do that from an organic prospective as well?

No, I think our -- we believe that we have some momentum here that we think we can grow double digits organically, and then also have the opportunity to have some tuck-in acquisitions. So our goal is -- ultimately, we want to get to 2020 -- kind of 20% growth and 20% EBITDA plus, and we think that these businesses have a nice balance to them if we can grow somewhere in there. We're not quite there and we don't get there overnight but each quarter and we are heartened by the backlog going up and heartened by the sales, and we believe we're going to get there. So that's what we're trying to drive towards.

Okay, and then just last question from me; can you talk about how you track during the quarter to sort of your plans for investing in additional sales heads in the quarter and how you continue to see that evolving in fourth quarter and then early in 2017?

Typically, we have a January kick-off if you will with sales in some of our key implementation folks, and so we like to hire by that kind of timeframe and have them ready for the kick-off. We're going through the plan with the board right now to finalize on some of the numbers and so we'll articulate that over the next call but suffice to say we'll be growing some sales headcount, so implementation headcount, some product headcount to make sure that we keep ahead of the curve on growth. We are very pleased with our EBITDA but we've said all along that we also want to hire some growth headcount here to accelerate our growth in this space.

Got it, thanks again.

Thank you.

Thank you. And our next question comes from the line of George [ph] from NKH Management. And your line is open.

Great results guys, congratulations.

Thank you, George. How are you.

Very good, thank you. I just have a quick question on the cross-sell Pat, trying to understand what is the most foreign ground for cross-selling; is it selling time into payroll or some other combination of cross-sell?

I think right now George for the employees -- because remember, it's new for all of us, right. I mean some of us have HCM backgrounds in the company but I think right now there is two main tracks that are getting traction and I think the easiest to absorb for our clients as well as our employees and that's payroll and benefits. So you know the area of [indiscernible] FSA, HSA to payroll customers; and then time and payroll, so selling our time to our payroll customers and vice versa. Those points of discrete points are the ones that we're mostly focused on right now.

Okay, great, that's it. Thank you very much.

Thank you, George.

Thank you. And at this time I'm showing no further questions. I'd like to turn the call back over to Mr. Pat Goepel, CEO, for closing remarks.

No, I'd like to thank everybody for joining the call today and third quarter was an important quarter for Asure in 2016 and beyond, again, we're excited about the progress but we know we have a lot of work to do. We thank you for your support and listening to the call. And we want to make 2017 another strong year for us, we think 2016 -- when the history books are written will be a transformative year and a great year for Asure and we hope to deliver on that promise. And in 2017 we want it to be another strong year and a launching pad for growth in all areas of the business. So thanks again for your support and we'll see you next time.

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