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Asure Software (NASDAQ:ASUR) Q3 Sales Beat Estimates, Stock Soars


Full Report / November 07, 2022
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Online payroll and human resource software provider Asure (NASDAQ:ASUR) reported results ahead of analyst expectations in the Q3 FY2022 quarter, with revenue up 21.8% year on year to $21.9 million. Guidance for next quarter's revenue was $23.7 million at the midpoint, which is 1.78% above the analyst consensus. Asure Software made a GAAP loss of $4.53 million, down on its profit of $5.32 million, in the same quarter last year.

Asure Software (ASUR) Q3 FY2022 Highlights:

  • Revenue: $21.9 million vs analyst estimates of $21.2 million (3.25% beat)
  • EPS (non-GAAP): -$0.01 vs analyst estimates of -$0.04
  • Revenue guidance for Q4 2022 is $23.7 million at the midpoint, above analyst estimates of $23.3 million
  • Free cash flow was negative $3.82 million, down from positive free cash flow of $4.7 million in previous quarter
  • Gross Margin (GAAP): 62.3%, up from 60.4% 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 mediocre over the last two years, growing from quarterly revenue of $16 million in Q3 FY2020, to $21.9 million.

Asure Software Total Revenue

This quarter, Asure Software's quarterly revenue was up a very solid 21.8% year on year, which is above the trend for the company. On top of that, revenue increased $1.6 million quarter on quarter, a strong improvement on the $4.03 million decrease in Q2 2022, and a sign of acceleration of growth, which is very nice to see indeed.

Guidance for the next quarter indicates Asure Software is expecting revenue to grow 12.4% year on year to $23.7 million, slowing down from the 28.5% 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 8.01% 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 62.3% in Q3.

Asure Software Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.62 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.

Cash Is King

If you follow 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 burned through $3.82 million in Q3, with cash flow turning negative year on year.

Asure Software Free Cash Flow

Asure Software has generated $5.15 million in free cash flow over the last twelve months, a decent 5.87% of revenues. This FCF margin is a result of Asure Software asset lite business model, and provides it with optionality and decent amount of cash to invest in the business.

Key Takeaways from Asure Software's Q3 Results

With a market capitalization of $133.9 million Asure Software is among smaller companies, but its more than $10.8 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 enjoyed seeing Asure Software’s improve their gross margin materially this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 6.41% on the results and currently trades at $6.97 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 weak, and analysts expect growth rates to deteriorate from there. And while its very efficient customer acquisition hints at the potential for strong profitability, unfortunately 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 1.4x, 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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