Earnings Update: Asure Software (ASUR)
Asure Software (ASUR) reported Q1 results this morning that came in better than expected. Even though the stock ran up 20% in the week leading up to the earnings report, shares blew through their prior all-time high (at 13) following the report. Shares are trading between 10% and 15% higher at mid-day today, which pegs our current gain at 30% to 35%.
Details: Revenue was up 60% to $10.7 million, beating by $740K, while EPS of $0.09 improved from a loss of $0.03 a year ago, and beat by a penny. The all-important cloud revenue component was up 103%, while hardware revenue increased by 57%. Management said we should see growth in cloud revenue throughout the year, both in dollar terms and as a percentage of total revenue. Cloud bookings growth of 69% supports that assertion. The gross margin number was great, growing to 77.3% from 74.3% a year ago. Management was clear to point out that much of the growth was due to the Mangrove acquisition from roughly a year ago and the three smaller acquisitions completed early in 2017. Organic growth would have been around 10%, and that seems like a reasonable organic growth rate going forward.
Sales by product line were Asure Space, up 10% to $4.1 million (38% of total revenue), and Asure Force, up 122% to $6.6 million (62% of total revenue). Asure Force is the Human Capital Management (HCM) solution. Management said it took Proctor & Gamble worldwide, took Merck to a cloud-based solution, and landed Great Lakes Airlines. I don’t know exactly how they quantify the numbers, but the sales pipeline is apparently up 202% quarter-over-quarter and 302% year-over-year. That essentially just means there are a lot of opportunities, but these aren’t closed deals. The company has 40 salespeople now, all of whom sell all products, which helps with cross-selling. Average deal size of roughly $40 million in HCM is an improvement, but I missed the comparison number on the conference call, so I can’t give a percentage increase at the moment.
On analyst asked about Asure Space, which provides a good opportunity for a refresher on this solution. Management said HR people are trying to attract top talent and part of that effort is trying to offer a reasonable work-life balance. It’s not about being in the office every day versus being free to do whatever you want. So Asure Space is a tool that HR can use to professionally manage people that aren’t 100% in the office (which is a lot of people these days). Asure says it has a lot of interest in the solution and thinks it can close some seven-figure deals. We’ll see how it goes.
I’ve mentioned before that the company’s growth strategy is largely reliant on M&A in the near-term, and that it would likely buy up smaller companies that already use its software since these represent relatively easy integrations. Management confirmed this on the call, saying that after the three acquisitions earlier this year, there are about 13 service bureaus left that currently use its software. It sounds like they are all targets. I found it interesting that the company would be so transparent on this—it suggests that they must have spoken with all of these service bureau owners already. Since they are privately held, there isn’t an investment opportunity (other than with Asure), so not much we can do to get ahead of the cart here (which is probably why they quantified the number). The company has prepared itself for acquisitions by increasing borrowing and share issuance capacity.
All in all, this was a good quarter and reaffirmed that the company is on the right track. Management was kind enough to increase guidance and give us an EPS figure as well. They now see 2017 revenue just above consensus in the $45.5 million to $47.5 million range (up 28.2% to 33.8%) and EPS at the high end of expectations in the $0.62 to $0.77 range. Assuming a share price of around 15, the high end of guidance means the stock is trading with a current year P/E multiple of 19.3 and a current year EV/Sales multiple of 3.2. Both represent discounts to many of the cloud software stocks I follow. I think some discount is appropriate given this is still a tiny company with a market cap of just $128 million. But over time, provided it continues to execute, I see room for the valuation to creep up. If we slap a 5.0 EV/Sales multiple on the stock (for comparison, Everbridge, MindBody and Ooma trade with multiples of 6.3, 5.4, and 1.3, respectively), we get roughly 60% upside in shares of Asure right now. I don’t think that’s going to happen overnight. But as the revenue base grows and the company becomes better known, we could easily see the powerful force of multiple expansion on a larger revenue base pull shares higher.
For now, given that the stock is up 40% in six trading sessions and there has been new analyst coverage responsible for part of that rise (Canaccord picked up coverage with a 15 price target on Monday), I think it makes sense to be a little cautious in the near-term. I suspect we’ll see the analysts that cover the stock (Canaccord, Barrington, Wunderlich, Roth, Lake Street) bump up their price targets after this report, and possibly a little follow-on buying tomorrow. But I think we’ve captured most of the near-term upside. Buying more shares in the 14 to 15 range right now seems a little risky. I’m moving to HOLD. Let’s allow the stock to digest this move and go from there. HOLD.