Asure Software Inc

Good afternoon and welcome to ASUR's third quarter 2020 earnings conference call. Joining us today for today's call are ASUR's CEO, Pat Goepel, CFO, John Pence, Vice President of HR, Cheryl Trebla, and Jay Powers. After the speaker's remarks, there will be a question and answer session. I now would like to turn the call over to Cheryl for introductory remarks. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining Assure's third quarter 2020 earnings call. After the market closed, we released our financial results. The earnings materials are available on the SEC's website and our investor relations website at investor.assuresoftware.com, where you will also find the investor presentation. This teleconference is also being broadcast over the internet and will be archived and available on our IR website. During our call today we will reference non-GAAP financial measures which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items along with a reconciliation of non-GAAP measures to the most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and as such involve some risk. We encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. Finally, I would like to remind everyone that this call will be recorded and will be made available for replay via a link available in the investor relations section of our website. With that, I would now like to turn the call over to Pat Goepel, CEO, PATH.

Thank you, Cheryl, and thank you for all of you being on the call today. We'd like to welcome everybody to our third quarter earnings 2020 call. I appreciate your interest, whether you're an employee, a client, investor, analyst, or other interested third party. I will start today's call with an update on some key metrics and our response to COVID-19 before reviewing business highlights for the third quarter and recent changes to our senior leadership team. Next, I'll review our financial results, and then I'll take questions. In the third quarter, small business new bookings grew by over 100% year over year. Revenue was also better than expected, and we generated positive free cash flow. Our key metrics benefited from a backdrop of gradually improving economic conditions, including higher employment levels and increased business activity. We also onboarded many high quality caliber sales reps. Our number of sales reps increased. 264 from 33 at the beginning of the year. We're delighted how quickly these new reps have become productive. While hiring these terrific reps sooner than expected led to higher sales expenses in the quarter, non-GAAP EBITDA was still at or above expectations. We view the early hiring of extraordinary sales reps as a very attractive trade-off that we expect to benefit organic growth in 2020 Second Half 2021 and beyond. In May and August, we provided updates to our business as we were responding to the impacts of COVID-19. We also talked about the headwinds in our key metrics at that time. While the pandemic continues to impact our top line, resulting in unfavorable year-over-year comparisons, we have experienced a steady increase in paid as well as an increase in sales leads and sales productivity in the quarter. We usually do not provide detailed monthly metrics, but this year to help our investors to understand the impact of COVID and how they've been trending as the economy recovers. First of all, the pandemic has impacted our key metrics in three ways. If we take number one, looking at our 10,000 customers, approximately 1,050 paused in March. And since that time, over 600 returned at the end of June and about 900 at the end of August. And we've retained that level through October. So essentially, about one and a half of our base or 150 clients continue to be paused. Over 50,000 indirect customers that Assure serves through resellers have experienced similar trends. Second, on our pays per control, or what we call same-store sales, which really tracks national unemployment rates, it was down 14% year-over-year in Q2, but we've improved to about down 9% in Q3. To provide a sense of the headwinds this presents, in normal times, pace per control is usually a tailwind, increasing about 2-3% year over year. Lastly, new sales bookings were pressured as many small businesses are focused on surviving and adjusting their business models accordingly instead of changing payroll providers even if it's a pain point. But this pressure has been offset by our investments in sales and products. Demonstrating this point, We began 2020 with 33 sales reps, and we now have 64. Most of those new hires are very experienced, bringing strong referral relationships, and they've ramped and hit quota quickly. Small business bookings, where most of these reps focus, increased more than 100% year over year in the third quarter. Pointing to higher product adoption, over 95% of new customers bundle human capital management products with payroll. Also, new sales units and starts are exceeding losses every month since July. We expect this to drive organic growth as national employment levels gradually return to pre-COVID levels. It is important to note that we also hired human capital management developers and client service people to meet the changing requirements for small business. Some of the new products that we recently rolled out include simple payroll entry and essential HR. Adopting new COVID compliance requirements has also been a major initiative in 2020. I've been in this industry a long time. There have been more payroll changes and tax filing changes in the last six months than the past decade. to navigate complicated changes in legislation. Our solutions were invaluable to clients in adapting to the new environment of a remote workforce as they begin to reopen and get back to business. Our COVID-19 Resource Center and webinars in particular have benefited tens of thousands of small business attendees since the launch in the first and second quarter. Also, during the third quarter, we hosted our annual reseller conference. This well-attended virtual event featured more than 25 training sessions over two days. Representatives from many of our existing 200-plus resellers participated as well as prospects and new prospects of resellers. We're extremely proud of our employees' level of commitment to our customers and their excellent execution during these unprecedented times. I can't thank them enough for rising to the challenge. Approximately 90% of our workforce continues to work remotely as we're committed to ensuring our employees' safety. Our investments in back office technology over the past couple of years has made this transition possible. While small businesses have experienced unprecedented economic headwinds due to COVID-19 pandemic, We will never stop providing our clients with the service, technology, and support they need to survive the crisis and thrive when it's over. As such, we continue to make progress on strategic initiatives, including product innovation, go-to-market investments while controlling expenses. These go-to-market investments resulted in strong new business bookings in the second and third quarter. Still, as expected, the heightened unemployment rate and 150 basis point cut-in rates continue to adversely impact Assure's results in the third quarter, a bit to a lesser extent than the second quarter. As an essential small business, Assure remains committed to helping our 60,000 small business clients grow in this challenging environment. and we remain optimistic about our long-term strategy and expect to be well positioned once the macro environment and our client's operations normalize. Shifting to a couple of leadership and board changes. We announced in the earnings release that John Pence has been appointed CFO replacing Jay Powers. John has 28 years of leadership experience in accounting, finance, and operations at a variety of both publicly traded and privately held technology companies that have served both large and small businesses. Most recently, he served as CFO of a leading HR benefits provider and helped them direct a successful exit for the company's investors. We also announced that Jay Powers resigned as CFO due to family health matters. Jay will leave after a transition to John in the next couple of weeks. Also, independent board member Charlie Lathrop is resigning due to health reasons, effective December 31st. We're delighted to welcome John to the Assurance Leadership Team. John brings a strong track record of success leading high-performing finance organizations at technology companies. At the same time, while we're disappointed about Jay and Charlie's departure from Assure, because of their outstanding backgrounds and valuable contributions, our thoughts and prayers are both with Jay and Charlie and their families during this difficult time. Next, I'll cover the financial results, then Jay and John will say a few words before turning over to Q&A. Turning over to our third quarter highlights, For comparison purposes, we provided recapped 2019 revenue numbers that exclude the workspace business as well as non-strategic customer clients and non-core HCM businesses we exited in December 2019. As usual, all non-revenue financial figures discussed today are non-GAAP unless I state them as a GAAP measure. And you will find a reconciliation from GAAP Two non-GAAP results and recapped revenue numbers in today's press release. During the quarter, small business bookings increased more than 100%. We increased our sales representatives to 64% at the end of October, up 94% from a 33% increase we began the year with. They will be impactful in the fourth quarter of 2020 and into 2021. We are encouraged by the strong momentum with new business bookings and continue to manage costs prudently demonstrated by positive free cash flow this quarter. Although revenue, gross profit, and adjusted EBITDA year over year, declines are still being driven by the pandemic. related lower check volumes. These declines have improved substantially over the last two quarters. We remain confident about our financial and competitive position and look forward to a gradual return to a more normal operating condition. Revenue for the third quarter decreased 10% to $16 million from an adjusted $17.9 in Q3 of last year. Reoccurring revenue represented 95% of total revenue in Q3 compared to an adjusted 96% in Q3 of 2019. Next, I'll discuss our profitability metrics. Q3 non-GAAP gross profit was $10.3 million, equating to a non-GAAP gross margin of 64.3%. This compares to $11.6 million of gross margin of 65.2% in Q3 of 2019. We continue to be laser focused on gross margin. We're taking actions to drive improvement. Interest on client funds exceeded $190,000 in the third quarter, down from $460,000 in the third quarter of 2019. We expect 2020 level of interest on client funds to be between $900,000 and $1 million. Q3 non-GAAP EBITDA was $1 million, down from $3 million in the third quarter of 2019. In the third quarter of 2020, our non-GAAP effective tax rate guidance is still at 0%, as we feel this more accurately measures our expectation for actual performance. That operating loss carried forward stands at $34 million. We generated $2.4 million of cash from operations, less $1 million of property, plant, and equipment and software capitalization, resulting in $1.4 million of free cash flow for the quarter. Shifting gears to our balance sheet, Cash and cash equivalents were $12.9 million at quarter end. At September 30, 2020, we had $23.7 million in gross debt, which are the amounts payable for our term loan and our seller notes. This is down $10.2 million from $33.9 at the end of Q2 2020. The PPP loan represents $8.9 million in gross debt. While we expect this to be forgiven, we expect the Small Business Administration to grant that decision sometime in the second quarter of 2021. Our total deferred revenue on the balance sheet at September 30th, including both short-term and long-term combined, was $3.7 million, down from $4 million in the second quarter of 2020, Our DSO or day sales outstanding in Q3 was 29 days, up from 23 days in the year-ago quarter. As for forward guidance, although we expect the tailwinds on reoccurring revenue to keep improving, we think it's prudent to wait for John to be on board before revisiting a return to providing guidance. And given the economic uncertainty with the election stimulus, COVID, you know, we just think that makes a lot of sense for us. To provide a sense of forward revenue growth trajectory, on slide 19 of the investor deck, we show how after adjusting for non-strategic customer contracts exited in 2019, second quarter 2020 trot, at a negative 13% year-over-year decline in revenue, primarily due to COVID, and improved to a 5% decline in the third quarter. In the fourth quarter and into 2021, we expect this trajectory of revenue growth improvement to continue because, number one, new customer starts are outpacing customer losses. Two, our new sales reps continue to ramp the full quota, Three, U.S. employment continues to improve, and four, easy year-over-year comparisons begin in 2021. Before turning our call over to Q&A, Jay and John would like to say a few words. Jay, perhaps you can go first.