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Asure Software's (NASDAQ:ASUR) Q2 Earnings Results: Revenue In Line With Expectations But Full Year Guidance Underwhelms


Full Report / August 08, 2022
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Online payroll and human resource software provider Asure (NASDAQ:ASUR) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 18.2% year on year to $20.3 million. However, guidance for the next quarter was less impressive, coming in at $21.2 million at the midpoint, being 0.02% below analyst estimates. Asure Software made a GAAP loss of $5.86 million, down on its profit of $3.76 million, in the same quarter last year.

Asure Software (ASUR) Q2 FY2022 Highlights:

  • Revenue: $20.3 million vs analyst estimates of $20.2 million (small beat)
  • EPS (non-GAAP): -$0.04 vs analyst estimates of -$0.07 (42.8% beat)
  • Revenue guidance for Q3 2022 is $21.2 million at the midpoint, roughly in line with what analysts were expecting
  • The company reconfirmed revenue guidance for the full year, at $89 million at the midpoint
  • Free cash flow of $3.58 million, up 101% from previous quarter
  • Gross Margin (GAAP): 60.3%, up from 57.9% 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 year, growing from quarterly revenue of $17.1 million, to $20.3 million.

Asure Software Total Revenue

This quarter, Asure Software's quarterly revenue was once again up 18.2% year on year. But the revenue actually decreased by $4.03 million in Q2, compared to $3.22 million increase in Q1 2022.However, Asure Software's sales do seem to have a seasonal pattern to them, and since management is guiding for revenue to rebound in the coming quarter we wouldn't be too concerned.

Guidance for the next quarter indicates Asure Software is expecting revenue to grow 18.1% year on year to $21.2 million, improving on the 12.2% 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 11.2% 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 60.3% in Q2.

Asure Software Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.60 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and it has dropped significantly from the previous quarter, which is probably the opposite of what shareholders would like it to do.

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's free cash flow came in at $3.58 million in Q2, turning positive year on year.

Asure Software Free Cash Flow

Asure Software has generated $6.76 million in free cash flow over the last twelve months, a decent 8.08% 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 Q2 Results

With a market capitalization of $103.7 million Asure Software is among smaller companies, but its more than $14.5 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 struggled to find many strong positives in these results. On the other hand, it was less good to see the pretty significant deterioration in gross margin and the revenue guidance for the full year missed expectations. Overall, this quarter's results were not the best we've seen from Asure Software. The company is flat on the results and currently trades at $5.18 per share.

Is Now The Time?

Asure Software may have had a bad quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 1.1x, 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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