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Asure Software (NASDAQ:ASUR) Reports Strong Q3, Provides Optimistic Guidance For Next Quarter


Full Report / November 08, 2021
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Online payroll and human resource software provider Asure (NASDAQ:ASUR) reported Q3 FY2021 results that beat analyst expectations, with revenue up 12.2% year on year to $17.9 million. Guidance for next quarter's revenue was surprisingly good, being $20.7 million at the midpoint, 15.5% above what analysts were expecting. Asure Software made a GAAP profit of $5.32 million, improving on its loss of $4.75 million, in the same quarter last year.

Asure Software (ASUR) Q3 FY2021 Highlights:

  • Revenue: $17.9 million vs analyst estimates of $17.2 million (4.24% beat)
  • EPS (non-GAAP): -$0.01 vs analyst estimates of -$0.02 ($0.01 beat)
  • Revenue guidance for Q4 2021 is $20.7 million at the midpoint, above analyst estimates of $17.9 million
  • Free cash flow was negative $0.1 million, compared to free cash flow of negative $0.7 million in previous quarter
  • Gross Margin (GAAP): 60.4%, up from 56.6% 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.

Asure benefits from 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.

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 slow over the last year, growing from quarterly revenue of $16 million, to $17.9 million.

Asure Software Total Revenue

This quarter, Asure Software's quarterly revenue was up 12.2% year on year, which is above average for the company. On top of that, revenue increased $813 thousand quarter on quarter, a strong improvement on the $2.63 million decrease in Q2 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 5.87% over the next twelve months, although estimates are likely to change post earnings.

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 60.4% in Q3.

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. 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.

Key Takeaways from Asure Software's Q3 Results

With a market capitalization of $190.3 million Asure Software is among smaller companies, but its more than $11.5 million in cash and the fact it is operating close to free cash flow break-even put it in a robust financial position to invest in growth.

We were impressed by the very optimistic revenue guidance Asure Software provided for the next quarter. And we were also glad that the revenue guidance for the rest of the year exceeded expectations. On the other hand, revenue growth is overall a bit slower these days. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is flat on the results and currently trades at $9.72 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 very weak. 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 2.5x, 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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