Asure Software (NASDAQ:ASUR) Q2 2020 Earnings Call

0:01 Good afternoon and welcome to Azure's second quarter 2020 earnings conference call. Joining us for today's call are Azure's CEO, Pat Goepel, CFO Kelly Brennan, and Vice President of HR, Cheryl Trombola. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Cheryl for introductory remarks. Please go ahead.

0:28 Thank you, operator. Good afternoon, everyone, and thank you for joining Assure's second 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 their most comparable GAAP measure can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and as such involve some risks. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. Finally, I would like to remind everyone that this call will be recorded and it will be made available for replay via a link available in the investor relations section of our website.

1:36 With that, I would now like to turn the call over to our CEO, Pat Goepel. Pat?

1:41 Thank you, Cheryl, and thank you all for being on the call today. Thank you so much for joining us. Thank you for joining us. We provided an update on our business as we're responding to the impacts of COVID-19.

2:47 We also talked about the headwinds in our key metrics. Since that time, and especially beginning in late May, our key metrics began to improve and continued improving throughout the quarter as businesses started reopening and employees began returning to work. We experienced a steady increase in paid employees as well as an increase in sales leads, and sales productivity in the quarter. We usually do not provide detailed metrics on a monthly basis, but we think it's important to our investors to understand how they've been trending as the economy recovers. On our April call, we mentioned that we had a little over 1,000 of our 10,000 direct customers delayed because of COVID and 160 had returned.

3:38 Thank you for joining us. though July had a slight tick down from June as some of the states reinstated closures. Still, we're pleased that new sales units exceeded losses in both June and July. Starts in July also exceeded losses.

4:29 We view this as an encouraging and important milestone on our path to double-digit growth. Thank you for joining us. Thank you for joining us. More than 10,000 small business attendees since launch.

5:35 Our webinars led by Mike Vannoy are at an all-time high. We could not deliver this excellence to our customers without the dedication of our employees who continue to excel in this ever-changing environment. I want to thank them for rising to the challenge and delivering exceptional service to our small business clients. Thank you for joining us today. As such, we continue to make progress on our strategic initiatives, including product innovation and go-to-market investments, while also controlling expenses.

6:40 These go-to-market investments resulted in strong new business bookings in the second quarter. Still, as expected, the heightened unemployment rate and 150 basis point cuts in rates in March adversely impacted Assure's second quarter financial performance. Nevertheless, as an essential small business, Assure remains committed to helping our 50,000 indirect and 10,000 direct small business customers grow in this challenging environment. We remain optimistic about our long-term strategy and expect to be well-positioned once the macro environment and our clients' operations normalize.

7:25 turning to the second quarter financial highlights. Revenue was 14.1. Non-GAAP EPFs was 3 cents. Both exceeded Wall Street expectations. New bookings in the second quarter grew 21% year over year, demonstrating success in our initiatives. Our human capital management quota carrying reps now stand at 55, up significantly from the 33 we began the year with. in addition to salespeople, we also hired human capital management developers and client service people to meet the changing requirements for small businesses. Shifting to the board of directors and senior leadership changes that we announced today.

8:10 We launched our human capital management only strategy in December with the sale of the workspace business. We completed the transition services in June. Thank you for joining us. To CEO, I am truly honored to assume the important role of chairman of Assure and want to thank my fellow directors for the trust they have placed in me and our leadership team. Furthermore, the board of directors have elected current board member Dan Gill as the lead independent director. We look forward to working together with Dan in his expanded role as he's been a valuable leader and a source of knowledge for Assure for several years now. Eyal Goldstein has been promoted to President and Chief Revenue Officer. Eyal's made some outstanding contributions to Assured's growth and success. While he takes on additional management responsibilities of overseeing some certain operations, I will be able to concentrate on some strategic focus with a focus on growth and creating greater shareholder value.

9:42 Jay Powers has been appointed as Chief Financial Officer, succeeding Kellen Brannan, who will consult through the end of the year. Jay has more than 30 years of leadership experience in accounting and finance at publicly traded technology companies and resides in Austin, Texas, where the majority of Assure's finance team works. I'd like to welcome Jay and also very much want to thank Kellen for Thank you for joining us. brings over a dozen years of human resources and diversity experience to Assure's board, and Ben Allen brings a wealth of experience as CEO and president of multiple industry-leading companies, and we'd like to welcome Grace and Ben and look forward to their expertise and immense contributions.

10:59 With that, before we go any further, I'd like Kellan to talk about the detailed financial results. Kellan?

11:06 Thank you, Pat, and good afternoon, everyone. For comparison purposes, we have provided restated 2019 revenue numbers that exclude non-strategic customer contracts and non-core HCM businesses we exited in December of 2019. As usual, all non-revenue financial figures I will discuss today are non-GAAP unless I state them as a GAAP measure. And you'll find a reconciliation from GAAP to non-GAAP results and restated revenue numbers in today's press release. During the quarter, bookings increased 21%. We increased our sales representatives to 55 at the end of July, up 67% from 33 we began the year with. They will be impactful in the second half of this year and into 2021 and further.

11:55 We experienced year-over-year declines in revenue, gross profit, and adjusted EBITDA, primarily driven by lower check volumes due to fewer customers processing payrolls as well as fewer employees paid as a result of COVID related shutdowns. Still, we remain confident about our financial and competitive position and look forward to a gradual return to more normal operating conditions. Revenue for the second quarter decreased 18.5% to 14.1 million from an adjusted 17.3 million in Q2 of last year. Recurring revenue represented 97% of total revenue in Q2 compared with an adjusted 98% in Q2 of 2019.

12:40 Next, I'll discuss our profitability metrics. Q2 non-GAAP gross profit was $9.1 million equating to a non-GAAP gross margin of 64.7%. This compares to $11.1 million or a gross margin of 64.1% in Q2 of 2019. We continue to be laser focused on gross margin and we are taking actions to drive improvement. Interest on client funds exceeded 140,000 in the second quarter, down from 350,000 in the second quarter of 2019. We still expect 2020 level of interest on client funds to be between $850,000 and $925,000 for the year. Q2 non-GAAP EBITDA was 1.4 million, down from 3.6 million in the second quarter of 2019. In the second quarter of 2020, our non-GAAP effective tax rate guidance still remains at 0% as we feel this more accurately measures our expectations for actual performance.

13:44 Net operating loss carry forwards currently stand at $34 million. Shifting gears to our balance sheet, cash and cash equivalents was $29.3 million at quarter end. At June 30, 2020, we had $33.6 million in gross debt, which are the amounts payable for our term loan and for the seller notes. This is up $8 million from $25.6 million at the end of Q1 2020. Total deferred revenue on the balance sheet as of June 30, 2020, including both short-term and long-term combined, was $4 million, up from $1.5 million in the first quarter of 2020. DSO in Q2 was 35 days, up from 24 days in the year-ago quarter. Overall headcount remained at 411, unchanged from Q1. During the second quarter, cash generated from operations was a negative $700,000. Now I'll turn the call back over to Pat.

14:41 Pat?

14:42 Thanks, Kellen. Our large market opportunity and reoccurring business, combined with the value proposition of our solution, is strong, and we continue to experience success in our sales efforts. Before turning to Q&A today, I'd like Jay to say a few words. Jay?

14:59 Thanks, Pat. It's a great privilege for me to accept the CFO role. I look forward to working closely with the rest of Assure's excellent management team, the board, and our dedicated employees to drive growth, profitability, and value creation for Assure shareholders.

15:15 With that, we'll open it to questions. Operator? Ladies and gentlemen, if you have a question at this time, Please press star, then the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question is from Ryan McDonald. Your line is open.

15:41 Yes, good afternoon, everyone. I guess first off, Calum, best of luck in the future and welcome, Jay. Thanks for taking my questions. Pat, you talked about that we're seeing some nice trends here into June and July, albeit July may be slightly lower than June. Can you talk about the mix there of what maybe saw that fall off slightly in July? Was it more as things closed off again that you saw maybe fewer payrolls, or was it just some new booking slowing down? One more commentary on those things.

16:12 Yeah, no, I appreciate it, Ryan. Yeah, what I'm signaling here, you know, from a sales perspective, we're getting increasing momentum in sales and starts and fewer losses. So that's a really positive development. What I would say is starting right around Memorial Day through the end of June, we saw clients kick up a bit on the same store sales or the people that they pay. What I would say in July, it went down about a percent or a percent and a half. I think anecdotally some of the PPP money. But the metrics that we can really drive around bringing companies on our system and keeping customers on our system were really encouraging. And then I would say from a company's process, we had a little over 1,000 pause. A little over 600 now have gone back. and what I've seen is the companies are staying open. It's really maybe a person or two left as PPP money goes away or there's some uncertainty around hours, etc.

17:24 That's how I'm interpreting it based on the feedback.

17:30 Excellent. That's really helpful. And then I guess another follow-up. I think in about mid-July, you announced an acquisition, a small acquisition, I'm assuming of a reseller company. Can you talk about, as you're looking into the back half here, how you're thinking about the mix of organic versus inorganic, if that's changed at all since first quarter? Thanks.

17:48 Yeah, I think with COVID, you know, our big focus with our employees and our clients, et cetera, is we will continue to look for strategic acquisitions. And, you know, we define them as companies we know really well. And in our kind of network, I don't think you'll see us go outside the HCM space or or go too far afield and we'll look at the reseller network. What I would say is we're really focused on getting organic growth, bringing more customers than we lose on each month. We're having a great line of success in doing that. And then as COVID and the tailwinds start to come back where people start hiring again, et cetera, that'll only add to the certainty of the organic growth. So that'll be a positive development.

18:37 And then as far as I don't think we'll be too active on the acquisition front, but we will be opportunistic, especially in this environment.

18:48 Excellent. I'll jump back in the queue. Thanks again.

18:50 Thank you, Ryan. Thank you. The next question is from Derek Hood from Cohen. Your line is open, sir.

18:59 Great, thanks for taking my questions. Nice job on the quarter, and Kellen, it was great to work with you. Good luck in your new endeavors, and welcome, Jay. Pat, when you look at that 21% growth in new bookings year on year, that certainly seems quite good in this environment. I mean, what would you say were key contributors in improving growth? And I'm curious if the COVID pandemic 19 Response Center that you've set up. That's been kind of a new vehicle for new customer generation.

19:31 Yeah, you know, our Coda Market team, Mike Vannoy in marketing, Lucas Eralie, Eyal Goldstein is the chief revenue officer. I think they've done just an outstanding job of really helping small businesses where they need it the most. And, you know, in that, call it March 15th to Memorial Day, Thank you for having me. I think that was a very, you know, a good move and then what I would say is, you know, we have hired some people and hired some really good people.

20:25 You know, we're now at 55 salespeople up from 33 and then finally, you know, the marketplace doesn't stay stagnant and, you know, there have been some acquisitions in the market space and we've been able to get and other talented employees as a result of those. And then we had some clients that maybe had problems with their current providers. We could not only help them at a higher level, stay in business, get PPP funds, et cetera, but then also they rewarded us with their business. And so it's a combination of focus, good people, and just it was our time. And what I feel good about is I think we're set up for success for a long time here.

21:14 Thanks for the color. And I guess you're not reinstating guidance, so I was hoping to get a little bit of color on what you're thinking about the rest of the quarter. And, you know, we have seen certain areas of the country kind of reverse a bit over the last four weeks, and I think there's some up in the air about what PPP is going to do from here. So I'm just curious how you think dollar retention should trend or what you're thinking about through the rest of the quarter.

21:43 Yeah, no, I appreciate it. When I drill in, that's why we went into some of what we've seen in June and July. We saw a good increase. From a sales perspective, I think we're going to keep driving sales, and I think we're going to have some success. I think from a client loss perspective, I think clients, if you do a good job servicing them, you're going to keep them because They're focused on bigger things with the pandemic. So I think our retention will be strong. Where the issue is, and you mentioned it with the pandemic, I think is the same store sales or the hiring. What I think you'll see is some companies will be reluctant to invest in new hires because they don't want to bring somebody on and then pause them. So what they'll do is they'll work them a little bit more from an overtime perspective if they need to get business and they'll be a little cautious in hiring. Now, I've got to be a lot smarter as an individual if I can predict the economy in the second half of the year, whether it's going to be a V, a W, etc. What we've kind of modeled is slight to steady improvement, and that's kind of what we're banking on from here.

23:03 And then that same store sales improvement will be a nice tailwind to us. And if we don't get it, it's kind of what we modeled. Now, if it's another closure or what have you, we haven't modeled that. What I would say in our daily call downs from a pause perspective, we're really encouraged that of our little over 1,000 companies that paused, little over 600 have paused. started with us. We're not seeing many completely shut off payrolls, so that's encouraging. And then of that, another 200 or so have given us a restart date. Now it remains to be seen whether the restart date gets slid back a little bit based on, you know, further pandemic decisions.

23:54 But that's kind of as much color as I can give you right now.

23:59 Great. I will get back to you too. Thanks. Thank you. Thanks, Derek. Again, as a reminder, if you would like to ask a question, please press 5, then the number 1 on your telephone keypad. The next question is from Eric Martin-Newby from Lake Street. Your line is open. And it seems that we have lost Martin's line. The next question is from Richard Baldry from Rock Capital. Your line is open.

24:32 Thanks. I broke up for a second, so I'm not sure if you covered this, but can you talk a bit about the pattern of 2Q bookings, how heavily back-end loaded that might have been? 21% seems pretty good. I'm sort of curious if, you know, April, May were almost dead stops, and so June had to be pretty strong, or, you know, somehow were you able to book throughout the quarter?

24:54 Yeah, bookings accelerated through the quarter, and I would think, you know, really since that Memorial Day timeframe to July 1st was good, and we're seeing continued momentum.

25:07 Okay. And then on the hiring side, can you talk about, you know, where these people come from? It seems to me that a lot of people are reticent to make any moves right now, so were these – Will they be in-house developed salespeople, or are they veterans who are actually able to lure away from another entity?

25:27 There were a couple acquisitions in the marketplace, and one of them I'll just mention because we have some board members from CopyPay, but the Benefit Mall decided to exit the payroll business and sold to ADP and sold really those were customer acquisitions they didn't take the people so you know we did benefit in some cases from sales sales people that you know were pretty experienced but you know chose to make a change and and that was a you know I think a rewarding experience for us and there were some other industry veterans that saw the opportunity where you know instead of getting Thank you for joining us.

26:43 Instead of partnering with benefit folks for payroll sales, they found themselves in competition. They really like the model where they can partner with benefit people for additional payroll sales. So the people we're picking up are experienced, productive, in many cases a known quantity, and they can hit the ground running right away. So we're excited about that opportunity.

27:08 Maybe the last thing, to the extent you can think about it, Well, acquisitions may be sort of slower in pace short term for obvious reasons. Can you talk about what you're seeing in terms of maybe the earliest stage of that pipeline of people? Are there more willing to talk to you because of fears around trying to stay independent or any change to the expectation in terms of valuations, mix of consideration for us to think about when that pace starts to pick back up? Thanks.

27:40 Thanks, Rich. What I would say between February 15th and April 30th, I think a lot of people were talking. I'm not sure they wanted to execute. They just wanted to understand their options because the pandemic hit them right in the face and they didn't know what this means. I think people are getting their sea legs and kind of understanding a little bit what the new normal could look like. Now, that being said, there's still Thank you very much. Thank you very much.

29:04 Thank you. Thank you. Again, that is star one to ask a question. Your next question is from Vincent Coliscio from Barrington Research. Your line is open.

29:45 Yeah, Pat, I'm curious. Where are you in the cycle in terms of negotiating better financial terms with certain clients, or is that mostly past us?

29:55 You know, Vince, that's a good question. I really think early on, Thank you for joining us. have they worked out and do they have the right partners you know pricing concessions or some of that especially in the payroll area where we can provide a lot of value you know we're just not seeing that much frankly it's more about you know hey can you help them through what they're going through and can you help them get to certainty in an uncertain world and if we focus on that I'm confident value will continue

31:00 and in the competitive landscape, is there any particularly aggressive behavior from competitors?

31:08 No, I think everybody's trying to provide value to their clients. I think they're trying to understand the business model. I think some of them are focused in. I think inward to make sure they understand the post-COVID world a little bit. I do think people want to play offense too and then there's some folks that maybe have to really look at their business models so there'll be opportunities that exist but I think what we're seeing is people are probably a little more focused on helping their clients which is a great thing for the clients and then helping to get market share and look at offense. I think with our strategic plan heading into the year that we were going to grow organically and we were going to hire sales people have provided clarity for our folks. They know what they want to do.

32:02 They know they've got to get organic growth. They know they need to bring on new customers and keep customers. We're focused on one business. Callen did a great job of transitioning Workspace off, so our organization can just focus on growth. And I think that's honestly been a good recipe for the beginnings of our success here.

32:25 Nice job in the quarter. Thank you.

32:27 Thank you. Again, as a reminder, that is star one in order to ask a question. Your next question is from Jeff Barnhee from Crave Harlem. Your line is open.

32:41 Great. Thank you. Pat, a lot of personnel changes here. Just talk to me about the timing. Obviously, board, calendar, I mean, a lot of moving seats here. Why now? Why is this the right time? Why did these all happen at this point?

32:56 Yeah, you know, as we announced early, you know, in December and January, you know, we're becoming a human capital management company. You know, so, you know, we talked about board members leaving. I think we singled that. We've talked about, you know, how do we reshape the company, you know, into a human capital management company. And then, you know, we're not a global multi-product. You know, we're a company now that's HCM for small businesses. So I think a lot of it, you know, June the TSA ended, you know, I think the COVID hit, you know, so to me it's all timing and a plan coming together and, you know, now's the time. And from a board member perspective, you know, David's done an outstanding job and been here 12 years, but he had signaled, you know, he was ready to go and ready to leave.

33:49 You can see by the people recruited, whether it's Ben Allen or Grace Lee or even prior, Carl Drew and Bjorn Reynolds, they have decades of human capital management experience and they've been operators or specialists in what they've done. So I think all of it kind of makes sense. And then from a management team, Eyal's done a really nice job of growing the company. He's been with us here for years. That's exactly right.

34:47 That's helpful. Two others then, Pat, obviously we're adding a lot of sales capacity. Does the pipeline at this point, assuming COVID doesn't get better or get worse, we sort of trend at whatever levels we're at now, does the pipeline in the year-over-year compare suggest the ability to sustain 20% plus bookings growth?

35:08 Yeah, I think from our perspective, we're not going to give guidance because we said we won't, but Thank you very much. It remains to be seen with COVID and all that, you know, when that will shake out, but the mission hasn't changed, and we're going to continue to drive that.

35:50 Thank you. And last, then, on the expense front, anything about Q2, you know, cost-wise that makes this not a good baseline to build off of sequentially?

36:04 No, not really. If you kind of look at our gross margin or our COGS that are there, as revenue came down because of lower check counts and number of employees being processed. We still needed to keep all of our customer-facing CRS, customer service folks, and so therefore with that dip in revenue but still keeping those costs in place and AWS runs as AWS does, but I would feel very comfortable building off of what you see in Q2. There was nothing unusual from an expense perspective.

36:41 Yeah, and the only thing I'd add to that perhaps is we have been making sure that we're making investments in our sales people and our developers and some of the market acquisitions that we talked about are getting us some talent a little bit early. So I think we're We originally were at a goal of 55 to 60 sales reps by the end of the year. We're fortunate to be at 55 now. We're starting to bring some of those costs in a little bit early where we need them, but then we're also trying to drive efficiency and we have some pretty good efficiency programs in place for the second half.

37:24 If I was thinking about anything like modeling the thing that could have the biggest change in Q3 and Q4... Remember, we started the year with 33 QBSs. We ended Q1 with about 45 QBSs. Q2 at June 30th was 47, and we're now at 55. So you will see an uplift. And if you're modeling off Q2, kind of all the total comp and benefits, you'll see a sequential increase as we continue to hire, you know, primarily around the QBSs, but also in our development organization.

38:00 Great. Thanks for taking my questions and best wishes there, Kellan.

38:03 Thank you.

38:05 Thanks, Jeff. Again, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question is from Eric Martin-Newby from Lake Street. Your line is open.

38:21 Thanks. Not sure what happened on my first go-round. I wanted to come at the outlook from a little bit different perspective. Given the good bookings in Q2, is it safe to assume that we're sequentially up on revenue

38:33 in Q3? Yeah, I think, you know, I appreciate, Eric, the question. I think from our perspective, you know, we're not ready to institute guidance. But what I would say is we have some in that area. But when you look at theme store sales, we also outlined that. And July took a percent to percent and a half. Thank you very much.

39:22 As of July 1st, that was the payroll tax management, I think. What's the contribution anticipated there, either from a, if you could give us an LTM revenue or maybe a remainder of the year expectation?

39:38 You know, we're in the midst of absorbing right now the PTM business. This was an asset transaction, which means that there is going to be a repapering. They're primarily indirect and just does the tax processing piece of it, not necessarily the payroll. So there's a lot of things going on with that customer base, with new power of attorneys, with getting the new paperwork in and working with them. And so right now we'd rather just wait and see how we work through this process through their TSA, which is between three and six months. Pat, I don't know if you want to add to that or not.

40:18 Yeah, I think we'll be ready to comment on that as we comment on guidance going forward.

40:27 Okay. All right, and then lastly, I know you guys have been targeting, ever since you had the workspace sale, that was the oldest share was, you know, I think I could safely describe it as much more levered than maybe the board and management was comfortable with. You've been targeting kind of a three-to-one Thank you very much.

41:09 We're not looking to be highly levered. We're looking to grow the business in a much tighter way with human capital management being the sole focus. I think it's safe to assume that we're not going to have a 5-to-1 or 6-to-1 debt level. What the actual number is, whether it's 3-to-1 or 2-and-a-half-to-1 or whatever, I think we'll provide as we get to some normalcy coming out of COVID, but I don't think you'll see us highly levered at all.

41:46 Okay. Thanks for taking my questions. Thank you. Again, as a reminder, if you would like to ask a question, please press Start 1 on your phone. All right. And I'm showing no further questions at this time. I would like to turn the conference back to CEO Pat Goepel for closing or additional remarks.

42:11 Yeah, I just want to, just personally, I want to salute Kellen. She's done an outstanding job in three years and very appreciative of her efforts and has moved the business forward as the Chief Financial Officer. I also want to thank David Sandberg. He served 12 years here and really there's no company without him. He's done an outstanding job, and I appreciate his efforts. And then I want to welcome all the people playing different roles. Dan Gill has done a nice job since joining the board and to be the lead independent director. I'm thankful. I want to welcome Jay Powers. I want to salute Eyal Goldstein. He's done a nice job. And I want to welcome Grace and Ben, and I think they're going to contribute very much into Assure. From an investor perspective, I think COVID has brought some uncertain times.

43:05 I don't think we can predict whether it's a V, a W, a swoosh, or what the issue of the day is. All we can count on is we do a great job day-to-day. We really understand our business. We get to the level of detail, and we have some success. I'm confident that we're really getting to a point here we can bring more clients on than we lose each month. If we keep doing that, good things are going to happen. And then as same-store sales or people start hiring, there will be a nice wind on our back. There's no question there's heavy lifting to do, but the second quarter, an early part in the third, you know, I think signals the trough. And, you know, with some luck here, we're going to do really, really well.

43:54 And we appreciate your patience and, you know, getting to this point. And we look forward to talking to you soon. Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day.