Online payroll and human resource software provider Asure (NASDAQ:ASUR) reported results ahead of analyst expectations in the Q1 FY2023 quarter, with revenue up 35.9% year on year to $33.1 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $25.5 million at the midpoint, 6.65% above what analysts were expecting. Asure Software made a GAAP profit of $339 thousand, improving on its loss of $3.02 million, in the same quarter last year.
Asure Software (ASUR) Q1 FY2023 Highlights:
- Revenue: $33.1 million vs analyst estimates of $29.5 million (12.1% beat)
- EPS: $0.02 vs analyst estimates of -$0.05 ($0.07 beat)
- Revenue guidance for Q2 2023 is $25.5 million at the midpoint, above analyst estimates of $23.9 million
- The company lifted revenue guidance for the full year, from $106 million to $112 million at the midpoint, a 5.66% increase
- Free cash flow of $2.7 million, down 58.9% from previous quarter
- Gross Margin (GAAP): 73.8%, up from 63.6% same quarter last year
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).
Human Capital Management (HCM) software is meant to streamline mundane, but vital, business functions like keeping attendance, running payroll, and keeping compliant with shifting Federal and local government taxes and labor laws. For many small and medium sized businesses, these are often handled by their accountant which is an unnecessarily expensive use of resources, or QuickBooks style spreadsheets which don’t have sufficient functionality.
Enter Asure, who offers inexpensive cloud-based subscription software that automates the full spectrum of HR tasks, from handling payroll to managing benefits or submitting leave requests.
The company has a unique go-to-market strategy that focuses on underserved customers, specifically SMBs located outside the Top 10 US metropolitan markets. In addition to a direct sales force, Asure leans heavily on resellers (e.g. regional payroll providers focused on a specific vertical) and referral partners (e.g. regional banks and benefits brokers) who will resell Asure's products under their own brand.
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.
Asure’s main competitors are legacy providers ADP (NASDAQ:ADP) and Paychex (NASDAQ:PAYX), as churn from these two represent a large part of Asure’s new clients annually. Other cloud-first providers of HR solutions for small and medium-sized businesses include Ceridian (NYSE:CDAY), Paycom (NYSE:PAYC), Paycor (NASDAQ:PYCR), Paylocity (NASDAQ:PCTY), and Workday (NASDAQ:WDAY).
Sales Growth
As you can see below, Asure Software's revenue growth has been strong over the last two years, growing from quarterly revenue of $19.8 million in Q1 FY2021, to $33.1 million.
This was a standout quarter for Asure Software, with the quarterly revenue up 35.9% year on year, which is above the trend for the company. But the growth did slow down compared to last quarter, as the revenue increased by just $3.77 million in Q1, compared to $7.39 million in Q4 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Asure Software is expecting revenue to grow 25.6% year on year to $25.5 million, improving on the 18.2% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 3.56% over the next twelve months.
Profitability
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 is left after paying for servers, licenses, technical support and other necessary running expenses was at 73.8% in Q1.
That means that for every $1 in revenue the company had $0.74 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is around the average of what we typically see in SaaS businesses. Gross margin has a major impact on a company’s ability to invest in developing new products and sales & marketing, which may ultimately determine the winner in a competitive market, so it is important to track.
Cash Is King
If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Asure Software's free cash flow came in at $2.7 million in Q1, up 51.6% year on year.
Asure Software has generated $11.6 million in free cash flow over the last twelve months, a solid 11.1% of revenues. This strong FCF margin is a result of Asure Software asset lite business model and provides it plenty of cash to invest in the business.
Key Takeaways from Asure Software's Q1 Results
With a market capitalization of $279.6 million Asure Software is among smaller companies, but its more than $21.4 million in cash and positive free cash flow over the last twelve months give us confidence that Asure Software has the resources it needs to pursue a high growth business strategy.
We were impressed by how strongly Asure Software outperformed analysts’ revenue expectations this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 7.81% on the results and currently trades at $14.49 per share.
Is Now The Time?
When considering Asure Software, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Asure Software we will be cheering from the sidelines. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately its gross margins show its business model is much less lucrative than the best software businesses.
Asure Software's price to sales ratio based on the next twelve months is 2.6x, suggesting that the market does have lower expectations of the business, relative to the high growth tech stocks. While we have no doubt one can find things to like about the company, and the price is not completely unreasonable, we think that at the moment there might be better opportunities in the market.
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