The market is looking a little wobbly here, but we’re not making any major moves. Most of our stocks are still trading within comfortable trading ranges and we haven’t seen any total breakdowns.
One stock I’m watching closely is our newest position, Asure Software (ASUR), which recently reported results and is now trading right around the 9.5 to 10 level. That’s the level it broke out above back in early January. The current trading range should represent a nice entry point to add to existing positions, but we’ll need a little support from the broad market to prevent a drop into the low 9s. I’m maintaining at Buy. Here are details from the earnings report.
Asure Software (ASUR) Asure reported Q4 results that were about as expected. Revenue growth of 44% (to $9.7 million) was a little lighter than the $10 million expected, and GAAP EPS of $0.09 (up from a loss of $0.08 in Q4 2015) missed by a penny. For the full-year 2016, revenue was up 32% to $35.5 million and EPS of $0.24 was a big improvement over a loss of $0.17. The three main themes with Asure continue to be: growth through acquisition, cross-selling opportunities (helped by acquisitions) and moving to the cloud. These disparate themes create a little funkiness when trying to analyze the earnings report. But it’s a small company so if we talk about each one individually, it’s not too complicated.
On the acquisition front, we already know that Mangrove (Human Capital Management) was a big part of the recent growth spurt. It looks like organic growth was around 10% (and should continue to be in the future). Last year, Mangrove contributed $6.9 million of the $8.6 million in revenue growth (roughly 78% of growth). Recall the acquisition occurred in March (i.e., just under nine months of contribution), so clearly this was a major acquisition. Management said that in Q4, cross-selling opportunities were up 46%, the sales pipeline grew by 32% and the number of sales people is now up to 40 (from around 35). Those opportunities and pipeline numbers aren’t anything to hang your hat on—they don’t reflect signed contracts—but 50% growth in HCM bookings is real, and directly attributable to Mangrove. We want to see cross-selling opportunities turn into contracts in 2017, and we should in the areas of time, benefits and payroll.
In 2016, cloud revenue was up 51% to $20.6 million and now represents 58% of total revenue. Hardware revenue was up by 15% to $3.8 million. On-premise software, maintenance and support, and professional services revenue were collectively up 12%, mainly because of a jump in on-premise software licenses. Moving forward, Asure is not pushing on-premise software, so we should expect to see this line (as well as maintenance and support) drop, but be offset by growth in cloud (we hope). AsureSpace was up 7.6% to $17.2 million in 2016, and AsureForce was up 98% to $18.3 million (these two items add up to 100% of revenue, but I’m not going to break out cloud, on premise, etc. for each product category).
Overall, the quarter was OK, but not a blowout by any stretch. There is a lot going on behind the scenes on the sales, engineering and new staff integration fronts. They should all get a little breathing room now as the first quarter or two of the new year is typically slower than the second half for this type of business. Management did pay down around $5 million in debt and consolidated the remaining debt with Wells Fargo at around 5% interest, so Asure has a cleaner balance sheet now. It also said it plans to file a shelf offering so that it can use its stock to raise funds for future acquisitions. These are most likely going to be existing partners that resell Asure’s solutions, which should mean integration is a snap (these partners are already on an Asure license) and there is relatively little execution risk. I don’t like not knowing how dilutive these potential acquisitions could be, but I would hope accretive EPS would overshadow any dilution.
Management guided for 2017 revenue growth of 27% to 32% ($45 to $47 million) and non-GAAP EPS of $0.60 to $0.75. Those represent good growth figures and suggest the stock trades on a 2.3 enterprise value/current-year revenue basis. That’s cheap. The stock was whacked after reporting, partially because of a decimal place/rounding error in the original press release (related to EPS), partially due to mention of a potential secondary offering to fund future acquisitions (on the conference call), and partially because the broader market has just been rolling over a little. The bottom line here is that Asure has put together the pieces to become a much more valuable company than its current $85 million market cap. It just needs to execute now. This year will be hugely important. Continue to average in. BUY.