Online payroll and human resource software provider Asure (NASDAQ:ASUR) announced better-than-expected results in Q2 FY2023, 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.
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
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).
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.
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.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Asure Software burned through $929 thousand of cash in Q2 despite being cash flow positive last year.
Asure Software has generated $5.96 million in free cash flow over the last 12 months, a decent 4.16% of revenue. This FCF margin stems from its asset-lite business model and gives it a decent amount of cash to reinvest in its business.
Key Takeaways from Asure Software's Q2 Results
Sporting a market capitalization of $271.8 million, Asure Software is among smaller companies, but its more than $21.6 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
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.
Is Now The Time?
When considering an investment in Asure Software, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. We cheer for everyone who's making the lives of others easier through technology but in case of Asure Software, we'll 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 aren't as good as other tech businesses we look at.
Asure Software's price to sales ratio based on the next 12 months is 2.4x, 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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