Online payroll and human resource software provider Asure (NASDAQ:ASUR) reported Q2 FY2023 results topping analysts' expectations, with revenue up 49.9% year on year to $30.4 million. On top of that, next quarter's revenue guidance ($26.5 million at the midpoint) was surprisingly good and 3.28% above what analysts were expecting. Asure Software made a GAAP loss of $3.77 million, improving from its loss of $5.86 million in the same quarter last year.
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Asure Software (ASUR) Q2 FY2023 Highlights:
- Revenue: $30.4 million vs analyst estimates of $25.5 million (19.4% beat)
- EPS: -$0.18 vs analyst estimates of -$0.22 (19.6% beat)
- Revenue Guidance for Q3 2023 is $26.5 million at the midpoint, above analyst estimates of $25.7 million
- The company lifted revenue guidance for the full year from $112 million to $119 million at the midpoint, a 6.25% increase
- Free Cash Flow was -$929 thousand, down from $2.7 million in the previous quarter
- Gross Margin (GAAP): 72.4%, up from 60.4% in the same quarter last year
“We delivered a historic performance for our Company in the second quarter with 50% organic growth in revenues and robust gains in operating margins, both of which are the primary result of technology enhancements and targeted sales efforts in our small business HCM and Enterprise Tax businesses,” said Asure Chairman and CEO Pat Goepel.
Created from the merger of two small workforce management companies in 2007, Asure (NASDAQ:ASUR) provides cloud based payroll and HR software for small and medium-sized businesses (SMBs).
HR software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy to use platforms.
As you can see below, Asure Software's revenue growth has been strong over the last two years, growing from $17.2 million in Q2 FY2021 to $30.4 million this quarter.
This was a standout quarter for Asure Software with quarterly revenue up 49.9% year on year, above the company's historical trend. However, the company's revenue actually decreased by $2.64 million in Q2 compared to the $3.77 million increase in Q1 2023. This situation is worth monitoring as Asure Software's sales have historically followed a seasonal pattern but management is guiding for a further revenue drop in the next quarter.
Next quarter's guidance suggests that Asure Software is expecting revenue to grow 21% year on year to $26.5 million, in line with the 21.8% year-on-year increase it recorded in the same quarter last year. Ahead of the earnings results announcement, the analysts covering the company were expecting sales to grow 2.3% over the next 12 months.
While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Asure Software's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 72.4% in Q2.
That means that for every $1 in revenue the company had $0.72 left to spend on developing new products, sales and marketing, and general administrative overhead. Asure Software's gross margin is lower than that of a typical SaaS businesses and its decline over the last year is putting it in an even deeper hole. Gross margin has a major impact on a company’s ability to develop new products and invest in marketing, which may ultimately determine the winner in a competitive market. This makes it a critical metric to track for the long-term investor.
Key Takeaways from Asure Software's Q2 Results
With a market capitalization of $271.8 million, Asure Software is among smaller companies, but its $21.6 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We were impressed by how strongly Asure Software blew past analysts' revenue expectations this quarter. We were also glad it lifted its full-year revenue and EBITDA guidance, beating Wall Street's expectations. On the other hand, its gross margin fell. Zooming out, the company announced a new 401k product and was added to the Russell 3000 Index. We think this was a fantastic quarter that should have shareholders cheering. The stock is flat after reporting and currently trades at $13.4 per share.
Asure Software may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.
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The author has no position in any of the stocks mentioned in this report.