Asure Software Inc

Good afternoon and welcome to Assure's fourth quarter and full year 2020 earnings conference call. Joining us for today's call are Assure's Chairman and CEO, Pat Gopal, CFO John Pence, and Vice President of HR, Sheryl Chibula. After the speaker's remarks, there will be a question and answer session. I would like to turn the call over to Sheryl for introductory remarks. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Assure's fourth quarter and full year 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 can 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 their most comparable GAAP measure can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and as such involves 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 it 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 Goeppel, Chairman and CEO. Pat?

Thank you, Cheryl. Hey, I'd like to welcome everybody to our fourth quarter and our full year 2020 earnings call. I sure appreciate your interest, whether you're an employee, a client, an investor, analyst, or other interested third party. I will start today's call with an update on some key metrics before reviewing business highlights for the fourth quarter. Then Jon Patz, who will review our financial results. and then he'll turn it back over to me. We'll update a little bit on our strategy and then we'll take questions. Our increased focus on small business is really paying off as new customer additions exceeded losses with broader adoption of multiple solutions. We performed well despite a choppy economy. The high-caliber sales representatives that we've added in the second half of 2020 also played a major role in contributing to fourth quarter's positive results. Compared with the third quarter revenue, non-GAAP EBITDA and non-GAAP EPS were all up sequentially. Small business bookings, where most of the reps focused, increased more than 100% year-over-year for the second consecutive quarter, and more than 60% of new sales continue to adopt multiple solutions. We also continue to add reseller partners, and our total bookings year-over-year growth was 13%. We believe that momentum changes. with our business metrics will continue and that economic conditions will improve as national employment levels gradually return to pre-COVID levels. As a result, we hope to generate positive organic growth in 2021. Our strategic goal is 10% organic growth, 10% growth generated through accretive acquisitions, and 20% EBITDA. As for acquisitions, in late December, we purchased a small reseller based in the Northeast marketplace. This is in line with our partners for life strategy, where our partners can provide referrals, white label, and resell our solutions, and then join the Assure family. We don't have any acquisitions pending yet. but we do expect to be opportunistic in rolling up our reseller partners and white label solutions. The COVID-19 pandemic is still ahead with, primarily putting pressure on same-store sales related to the sustained level of lower client employees on our platform and continues to impact our top line, resulting in unfavorable year-over-year comparisons. Drilling down into the COVID impact, On a monthly basis, of the 1,050 of our 10,000 direct customers that paused last March, approximately 900 have returned through December, resulting in about a 1% churn in our customers. or what we call same-store sales, which roughly tracks national unemployment rates, was down 14% year over year in Q2 of 2020. It improved to down 9% in the third quarter. and it remained at about the same level in fourth quarter 2020. This has presented a headwind because in normal times, pays per control typically increase about 2% year over year. However, since we've been adding more clients than we're losing, as same-store sales normalize over time, this will translate into increased revenue. Lastly, new sales bookings on a dollar basis were pressured as many small businesses are still focused on surviving, adjusting their business models accordingly instead of changing payroll providers, even if they're willing to do so. However, we're pleased that the number of new clients booked is increasing and with the broad adoption of multiple solutions to boot. Our investments in sales reps is also bearing fruit. As a reminder, we began 2020 as the transition year with 33 sales reps, and we now have 65. As most of these new hires that are very experienced bring strong referral relationships. Still, as an essential small business, Assure remains committed to helping more than 70,000 indirect and 10,000 direct small business clients grow in a challenging environment. Our COVID-19 resource center webinars, for example, continue to help thousands of small businesses. Our product and operations teams quickly mobilized in December to react to stimulus and its impact on our clients. In addition to changing legislative environment, the fourth quarter is also a very busy time of the year for our operation teams, as they work closely with clients on year-end processing of payroll, W-2s, 1095, and annual tax form filings for federal, state, and local agencies. Throw in COVID and the changes in the tax laws, we've had more activity this year than perhaps the last 10 years. We're extremely proud of our employees' level of commitment to our clients during this very busy time of the year and during these unprecedented times. While small businesses have experienced unprecedented economic headwinds due to COVID, we will continue to provide our clients with the service, technology, and support they need to survive this and thrive when it's over. Before handing off to John to discuss our financial results in more detail, I would like to take a moment to mention that it is with a heavy heart that we learned about the recent passing of former board member and friend, Charlie Lathrop. Our thoughts and our prayers are with Charlie's family. John?

Thanks, Pat. As Cheryl mentioned at the beginning of this call, a number of the financial figures discussed today are non-GAAP and you will find a reconciliation from GAAP to non-GAAP results as part of the earnings release made available earlier today and also included in our most recent investor presentation posted in the investor relations section of our website at AssuredSoftware.com. Consistent with prior presentations, this table also presents our 2019 revenue excluding the workspace business as well as non-strategic customer clients and non-core HCM businesses that exited in December 2019. We believe that with a year behind us as a pure play HCM software provider, following the separation of the workspace business is a good time to revisit the metrics we used to explain our business performance. Our goal is to simplify and add clarity to our reporting. with the goal of making our progress of executing our strategy easier to follow. We believe this ultimately will require fewer GAAP to non-GAAP reconciling items to deliver that message. More to come. Our comparisons are down here every year, as would be expected because of the comparison of post-COVID results with pre-COVID results. While these declines have improved substantially over the last three quarters, we think that sequential quarter-over-quarter comparisons are a more appropriate measure of our current business performance and indicator to near-term future results. Revenue for the fourth quarter increased 3% to $16.4 million from $16 million in Q3, despite a significant spike in COVID infections and resulting business uncertainties. recurring revenue continues to represent 97% of our total revenue in Q4, which was in line with Q3. Interest on client funds was approximately $300,000 in the fourth quarter, up from approximately $200,000 in the third quarter. The increase was primarily due to a change in the average balance of funds held on behalf of our clients, increasing from approximately $100 million in the third quarter to approximately $185 million in the fourth quarter. Next, I'll discuss our profitability metrics. We were able to achieve sequential gross profit expansion in the fourth quarter of between 8% and 6%, depending on whether you use GAAP or non-GAAP gross profit as a performance metric. Q4 non-GAAP EBITDA was up 13% sequentially to $1.1 million, representing a 7% margin. As I will discuss in a little more detail later, we continue to be very mindful of all of our operating expenses as we begin to emerge from the cloud of COVID. Shifting gears to the balance sheet, cash and cash of equivalents were 28.6 million at quarter end, up from 12.9 million at the end of the third quarter. The increase is primarily the result of our successfully received secondary public offering of common stock in December. We received gross proceeds of approximately 21.7 million before deducting underwriting discounts and offering expenses from the sale of approximately 3 million shares of common stock. At December 31st, 2020, we had $24.5 million of debt which is comprised of $10 million term loan and $9 million PPP loan with the balance made up of seller notes from acquisitions. We have applied for forgiveness of the PPP loan and would expect to receive a decision from the Small Business Administration sometime in the second quarter of 2021. Concurrent with today's earnings release, we filed a Form S3 and Form S4 registration statement with the SEC. While we have no immediate plans to raise capital under the universal shelf or to utilize the acquisition shelf for any particular transaction, these registration statements, once effective, will benefit the company and our stockholders, giving us the flexibility to quickly and opportunistically consummate strategic acquisitions with various perk structures. As a reminder, These registration statements are not effective and we cannot sell securities or accept offers to buy securities prior to their effectiveness. At this time, we are still not providing specific forward guidance. We do expect to generate positive growth in 2021 and although we are cautiously optimistic, the potential tailwind of the improving economy Given the uncertainty surrounding COVID vaccine rollout and when there will be a return to normalcy and what that new normalcy will look like, we want to be prudent with how we are running the business and describing our future prospects. To get a little more color around this point, as a result of the pressures placed on our 2020 revenue by COVID, we implemented salary and benefit reductions across the entire company. We reinstated pay rates back to normal levels effective January 1st of this year. and we have told our team that we hope to reinstate all previously provided benefits in the second half of this year. First, I want to thank our team for the sacrifices they made to help assure through this difficult operating environment. And second, I want to highlight that we are applying the same prudence not only to giving investors word and guidance, but also around how we are running the business. To provide a sense of how revenue was impacted by COVID, and its resulting impact on employment, we have included in our investor presentation slide 24. And again, it's located on our website in the investor relations section. Finally, as a reminder about our seasonality, the first quarter of each calendar year is seasonally strong for revenue and profitability as annual W-2 and ACA fees are recognized in this quarter. The seasonal boost does not exist in the second and third and fourth quarters. Now I'd like to turn it back over to Pat.

Thanks, John. And I want to highlight John Pat's – he and the accounting team have done a great job. John has brought a level of discipline, and he's resolute in – in his work and has had a real impact on us, sure. So thank you, John. I also want to piggyback on some things that John has stated. First of all, we view the business as four, we have four constituents, and we really make decisions based on those four constituents. Shareholders are one, and we take our shareholder trust very seriously. The employees that serve us and the care of not only the employees but their families is something that I try to look through in every decision. From a client perspective, our clients are the reason we're in business, and we want to do right by them. And then finally, the communities we serve. These are unprecedented times. We think they're going to return to normalcy, but when we make these decisions, it's with those constituents in mind. I want to talk a little bit and get away from the metrics for a second, but talk about our strategy and, as an investor, why I think we're very well positioned as the macro environment and our client operations normalize. First of all, if I think about 2020, when we started the year, we didn't know about COVID. But we said it was going to be a transition year. If you recall, we sold the space business for $121 million in December. We had completed in June a transition services agreement. So really the second half of the year we were normalized. We also had some discontinued businesses so we could focus on human capital management only. We now have a board of directors with deep domain human capital management expertise. They're real deal executives that have run these type of businesses or played key roles. They've had very successful outcomes. Having good board members has always been a hallmark of Assure, and now we have really good board members that have deep domain human capital management expertise. We brought on now in the fourth quarter, in addition to John, Todd Woletski, who's our chief of staff, and Todd was the former president of CompuPay, which was a division of Benefit Mall. Yasmeen Rodriguez is a senior VP of tax and compliance, and Yasmeen has done an outstanding job as well. What we put in place with John talking about the S3 and the S4, we're putting a capital structure now to allow us to grow and match our ambition. We're investing in the infrastructure in the business, including our employees, that will help us grow as we come out of COVID. We're building a sales team where we doubled the sales team in 2020 to focus on organic growth. And to be able to have that kind of success in the midst of COVID, you know, we feel very fortunate. Our product and technology team is strengthening our solution. You know, appointing Mike Benoit, an industry veteran who's worked with me at Ceridian and and in other places, and Brian Worley, formerly of GE. I feel like we really have a team that's focused on bringing the right human capital management systems to market and delivering. And we have a unique acquisition roll-up strategy of our resellers where we already have the technology. We can penetrate markets with the reseller. We can help grow those resellers. We can grow relationships through our affinity sources, the banks. the brokers, the CPAs, and then they can join the Assure family. And when they join, they're profitable. And a recent example was the acquisition we did in the Northeast. And finally, we're well positioned for success. We're positioned well for the nation opening back up. It's not a question of if. It's a question of when. And when we do open back up and open back up for guidance and with all constituents developing and share the results of that strategy on a go-forward basis, I do feel, and I've been here 12 years, we're absolutely on the right path. With that, we'll open it up for questions. Operator?

Thank you. Ladies and gentlemen, if you have a question at this time, please press start, then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Ryan McDonald from Needham. Your line is open.

Hi. Thanks for taking my questions. Pat, you know, just first one for you. Obviously, we're not going back to specific guidance yet, but you obviously have sort of a goal of returning to positive organic growth in 21. Can you give us a sense of sort of how you see that playing out as we progress through the year? And I guess specifically in Q1 on seasonality, Are you seeing any impact from fewer tax form filings? We've seen that, I think, phenomenon with a few other payroll vendors recently as well. Thanks.

Yeah, Ryan, I think a couple things. One, I think the big thing on organic growth You know, is we keep – what can we control? And we can start – sell and start more customers than we're losing. And we're doing that since July. So I think that bodes well as increasing our performance throughout the year in 2021. And then secondly, you know, as far as COVID reopening, you know, is it going to happen quickly or is it going to happen slowly? You know, I've seen macro forecasts that says we'll return to normal in 2024, and I've seen forecasts that we're going to return to normal in second quarter. You know, I think the truth is probably somewhere in between, but I will tell you that that as same-store sales or national unemployment starts to return to normal, that's only really good news for us. I think as a small, medium-sized business provider, we've been hit hard with COVID. By the same token, as the economy snaps back and stimulus and some of the programs that they're doing for small businesses, you know, we should do well when those headwinds become tailwinds. So we're focused on what we can control, which is starting more than we're losing. The second point of that question, I'm sorry, there was organic growth and there was something else, Ryan.

As we look into the seasonality for Q1, typically that's a bit of a stronger quarter given the tax form filing. We've seen a bit of a phenomenon that in verticals that have heavier churn in 2020 since there was less hiring, that maybe that's had an impact on the number of forms you might file, W-2s,

if you want. Yeah, Ryan, I apologize. I should have had that. I was focused on your first question. But what I would tell you is, what I would tell you from a company-level perspective, you know, I think we're filing more tax returns than we did last year, for example, because we're processing for more companies. But there's no question that there's less employees because there was less employment throughout the year. Second quarter was something like 14% less employees. employment in our same store of sales. It improves somewhat through the year, but there's no question our employment levels are down. But, you know, I think that's partially offset by the companies because we are processing for more companies than we did last year.

Excellent. And then my last question I'll have back in the queue is around sales productivity. Obviously, you've hired some additional reps this year and made good progress there. Just curious what you're seeing in terms of improving productivity with those new reps, particularly since you mentioned you've been adding more new customers than you've been churning since mid-2020. I'd just love to know how you're feeling about that going into 21 and maybe plans for incremental hiring in 21. Thanks.

Yeah, right. First of all, I think the new sales reps got off to a good start. I think they're experienced enough where they can sell face-to-face and they can sell digitally because they have good relationships. What I would say, the second wave of COVID probably muted the sales performance a bit in the fourth quarter as we had the election and then Now we are starting to see, hopefully, some signs that we're getting vaccines, the stimulus, we're starting to open up, but it's too early to tell there. But I wouldn't say on a whole. You asked me, again, if I would double the sales force in a year with COVID, and I would double down and say, yes, we would. We've been able to get the right reps at the right time to take advantage of this. What I would say from a productivity perspective, we had a strong third quarter. I think fourth quarter was okay. The only reservation or muting was some areas, specifically the West Coast and even in New York, were somewhat muted with the second wave of COVID. and that probably delayed some sales, you know, where we potentially were hoping to be. And then as far as, you know, going forward, you know, we're at, call it 65, 66 reps now. I think you'll see us, you know, average somewhere around 75. I'd like to end the year over 80 sales reps because we continue to see success and believe we will on an ongoing basis.

Excellent. Thank you.

And Ryan, thanks for your questions. I appreciate your coverage.

Thank you. And your next question comes from the line of Derek Wood from Calvin. Your line is open.

Great. Yeah, thanks. This is actually Nick Altman on for Derek. Thanks for taking our questions. Maybe for starters, can you guys just talk a little bit about the bookings mix just in terms of bookings from channel partners versus direct sales. I know the channel side of the equation has been a bigger focus as of late. And just kind of following up on the last question, can you just maybe parse out the bookings mix there versus channel versus direct?

Yeah, we're not going to go too granular on this, but what I would tell you is our focus has been on small business and really selling through the channel, so the brokers, the bankers, the CPAs, in addition to the client base and direct sales. What I would say is going up over 100%, we were really pleased with. As far as the reseller model, first of all, we had an outstanding 18% and 19 in sales of resellers. Some of those we're getting in live in 2020. I would say from a new sales perspective, we're probably behind where we want to be. But that being said, we view it as a function of COVID. When you're providing essential services of payroll and HR, for other small businesses, it's all you're going to do to make sure you take care of them and take care of their needs before you switch a book of business to another provider. So our retention is benefited from it, but I would say from our sales perspective, we spent more time nurturing, getting those customers stabilized, reacting to, for example, tax law changes and and helping them really take care of their clients during this tough time. I do think you'll see as 2021 unfolds and we return to normal, I think you'll see some of the bookings around the indirect or the reseller channel, uh, continue to grow. But I would say that that part of the business right now from a new sales perspective is probably the most heavily impacted by COVID.

Okay. I got it. Yeah. That makes sense. Um, And then I guess you guys mentioned winning back some customers who had churned in your prepared remarks. And you guys also mentioned that last quarter. So I guess I'm curious, just looking into this next year, how meaningful of a growth driver do you guys think that could be, just winning back some of those customers that had previously churned?

Yeah. And first of all, there's a difference between churn and pause. Churn means that they've gone to either another provider, they've taken payroll in-house, or potentially they've gone out of business for good. The ones that we're talking about are businesses that have paused. Maybe that restaurant that, instead of going to a 25% opening, paused business until there was some normalcy, and now they're coming back. I think the key metric won't be the companies that paused. We did have probably a 1%. churn. We may call that a day. Maybe we'll get a little bit extra companies coming back as COVID normalizes, but I think most of them now have dealt with opening. What I think the real benefit here is we were down 14% from an employee count. The restaurant that's open 25%, maybe they have six people. In a normal environment, they'll have 20%. So what we're anxious to see is at normal time, does that six-employee company go to 20? You know, does the barber... who has four barbers and they used to have 12, do they go to eight? You know, when do they feel comfortable hiring? When do the workers feel that they're either vaccinated or feel safe to work? When do the clients now return to normal? Those I think are, be the metrics that we'll start to focus on in 2021. And, you know, we'll give you kind of what we see and hopefully we'll give you guidance as we return to normal.

Got it. Thank you.

Thank you. And tell your compadre I say hi.

Eric? Moving on, your next question comes from the line of Eric Martinucci from Blake Streets. Your line is open.

Yeah, I wanted to dive into the pace per control color that you gave us. Pat, you talked about the dark days of Q2 at the minus 14th. and then a recovery in Q3 at minus nine, minus nine again in Q4. And I think you laid out a good explanation as to why the recovery sort of stalled a bit. We got that second wave in the November, December timeframe, and that really impacted Q4. But I'm just wondering, as we stand here close to the second week of March here in 2021, Do you have any indications that there was relief in January or February versus Q4?

Yeah, Eric, I don't want to put too fine a point on it. What I would tell you is, you know, I think if you think about it, we're, you know, finally talking about completing a stimulus, a big-time stimulus right now. I think over time that will help, but the reality is that's March, you know, 12th or what have you if you also think about kind of these reopening kind of mandates and you know whether and i'm politically neutral in this comment but when you think about it you know if you do hire a couple people as a payroll company we see some of that benefit two three four weeks later because sometimes there's a delay in paperwork or delay in you know, a lag in getting a cycle. Maybe they pay every two weeks with a weak lag, stuff like that. So, you know, I think we're hopeful, but, you know, really didn't see a mass improvement. I think, you know, a couple of things. First of all, stimulus is coming right now. The vaccines are starting to get mainstream, but we're probably a little bit early. So I wouldn't I wouldn't go crazy in modeling a lot of improvement quite yet. I think, you know, the best stances were hopeful. And, you know, if we beat that, great. But, you know, we're still cautiously optimistic.

Okay. And I've got my own model, obviously, that I'll be working with after this call. But you talked about the you know, hoping to generate organic growth. Is that, you know, is it safe to model that for just stick with kind of a Q4 for the bulk of that growth or is there a sense that we could see something maybe as soon as Q3?

John, you know, what I would say, you know, I'll let John jump in here, too, because he's done a lot of good work here. I think the biggest thing for us, and I know, you know, as far as guidance, we're just – the biggest thing is what we can't control. And these pays-per-control or same-store sales, you know, it's a big difference if America reopens and normalizes or gets a big improvement. You know, do you model a J, a V, or a U, or what have you? What I would say for us, we're just focused on starting more customers than we're losing, and we think good things will happen. I personally think payroll is a little bit of a lagging opening in the sense that you pay, you know, first – Small businesses will pay overtime before they commit to hiring. And then when they do hire, you know, usually there's a two-, three-, four-week lag. You know, to me, it's probably, you know, the sure compares, right, of second quarter being such a shock to the system, you know, would lend itself to second quarter or third quarter. But the big driver here is that same sort of sales and the improvement.

John, I don't know if you have anything to add. Yeah, sure. Eric, obviously I'm still relatively new to the company, and I've been trying to educate myself on kind of the macro trends and kind of the key drivers to help make decisions. And so when I look at it, I mean, it'll sound very similar to what Pat said, but when I look at the business, there are a lot more customers than there were last year. But I can tell you that we're serving less employees. Okay, so there's probably two things that are going on. Maybe we're adding customers that are smaller than typical. But I really do think stories in the fact that there are less employed at those customers. So what does that mean? Good news, bad news. I think our customer base probably got disproportionately hurt more by COVID than large employers. Large multinationals were able to weather this. They had the same power. Small businesses had to really shrink or survive. So good news, bad news is our customers are surviving And hopefully, when we get back to normalcy, we'll see even stronger tailwinds. But again, back to some of our earlier comments and my past comments, it's just hard to predict when that comes about and then what does it really look like when it does come about. So that's why we're cautious. But again, I think from a macro level, we've offset those lower employee counts with having more customers. So again, that portends well for the future. So that's my perspective on where we're headed. But again, predicting Hopefully the stimulus helps.

Okay. And then Pat's goal regarding the 80 reps by the end of 21, should we expect that to be kind of a byproduct of the top line recovering, or is that kind of straight-lined from here to December?

I think, again, it's not a function of either. It's when we can find the right people. I don't think we have a set determined, we have to get this many people in by this date, or we can't tire on this metric. So it's really when we're in the market looking for people all the time. And when we get them, if we find the right people, we'll go quicker. And if we can't find them, we'll go slower. It's not prescriptive in that we have to have it on a certain date. We're more after quality than quantity.

I understand. Thanks for taking my questions.

Thank you.

Thank you. And your next question comes from the line of Richard Baldry from Roth Capital. Your line is open.

Thanks. I'm sort of curious from a very high level in any of the discussions or even broad discussions about acquisitions. Has there been any change in sort of expectations, terms with the people, their willingness to evaluate in a post-COVID world? I think what traditionally would have been viewed as a pretty stable industry saw some pretty heavy volatility. So I'm just wondering how that impacted some of the companies that you've worked with as resellers and whether that has a chance to increase your acquisition pace in 2021 and beyond.

Yeah, no, I appreciate the question, Rich. And I would say, you know, the second, third quarter as COVID hit, as we all know, COVID was a shock to the system. And I think, you know, what I saw was a lot of activity in the second and third quarter. But I would say I don't think there was a lot of conviction. So the question would be, some people were in denial, some people were saying, oh my gosh, I need funding, or I've got to find a favorite uncle, I've got to find a bank, but maybe there's not a bank that's willing to lend me. So I think there was a lot of, almost like kindergarteners running around at recess, there was a lot of activity, but I'm not sure a lot of purpose. And what I would tell you is I think people now are getting their arms around, okay, here's how we are going to start to operate in a post-COVID world. And now, boy, did I want to go through this shock again? Or as I look at my new normal, what do I want to do? So I do think you will have the opportunity and we will have the opportunity to have and have had some very meaningful conversations. You know, we are selective about what we want to do. There's a sequencing here. You know, we're building a business for scale. We're building a national business. We spent some time building out infrastructure across the country, and now there's areas that are desirable for us going forward. I wouldn't anticipate us being too aggressive the first half of the year. I think we'll be opportunistic, and I think the resellers that – you know, have come to conclusion. And, you know, I would say expectations have been come in a bit, you know, but by the same token, you know, for us, it's more a question of sequencing and doing it right. I think we're going to have some at-bats. And then if you think about what we're doing from a filing perspective, we're really setting up a capital structure that to have an appetite that matches, you know, kind of our ambition. But it is a thoughtful sequencing through multiple years, and, you know, we feel we have a huge opportunity to deliver on. We're putting that structure in place. We think coming out of COVID there will be some good opportunities, but we want to make sure they're predictable and they're beneficial to the shareholders and our company.

We've talked a lot about the sales headcount, which has come up a lot. Can you maybe, again, whether it's qualitative or not, talk about what you see at the top of the funnel at the marketing side, whether that's web traffic, leads generated. How has that changed sort of first half 20 versus second half 20? And do you think that that – is that one of the reasons you feel confident adding more heads as 2021 rolls out?

Yeah, first half 2020, you know, it was COVID and like we talked about, it was people scrambling, right? First of all, what is COVID? You know, is it the flu? Is it, you know, whatever it is, is there even COVID? Was it a conspiracy? There were a lot of questions, right, depending on where you had your point of view. And then in some small business that says, wait a second, I got to, you know, I got to shut down. What does that mean for the business? Am I shutting down permanently, et cetera? So sales pipe and all that. you know, was really low in the second quarter. It started to improve third quarter with stimulus, but by the same token, there was no vaccine. So, you know, it's definitely gone a little bit more the acceleration of digital, so the digital leads, et cetera. If you have good relationships, and that's why we focus on salespeople that have good relationships with trusted advisors like brokers, banks, and CPAs, whether it's digital, whether it's over the phone, whether it's a Zoom call, whether it's email. Those relationships are, you know, gold in this type of environment because people still have to do business. Now, the willingness to change providers at a time when there's a lot of other areas to focus on and, quite honestly, probably some higher-level areas – is tougher. What I would say is the pipeline is steadily kind of growing. I think the fourth quarter, probably with the lack of stimulus and the second wave, it probably was muted a little bit. Now, the key thing to watch here is I think you'll see a digital pipeline increase where We have webinars where we talk about the opening of the economy, getting money to small businesses, working through the stimulus applications, et cetera. Our webinar traffic has never been higher, so that's a real positive development for us. The ability to refer business from our trusted advisors has been high. I've seen some data around the U.S. Chamber of Commerce that new business formation is starting to get in place. So the businesses that did close, they're starting to get a second wave of either a person reopening a business or going into, you know, a building that was not there. So how you sell is differently, but it comes down to compliance. It comes down to compliance. attentiveness. It comes down to relationships. And then it comes down to how do you get to the prospect, whether it's a trusted advisor or digital. So I think our best people always adapt. I've been very happy with some of the tenor of the people that we've hired. And and their relationships, and we'll continue to invest in quality, and we think we're in a part of a pretty good cycle as we have a footprint now of a national business that we can serve all 50 United States of America.

Great. Thanks.

Thank you. Your next question comes from the line of Jeff Van Re from Craig Helen. Your line is open.

Great, thanks for taking my questions. A couple model questions maybe to start. Given we're a good chunk through March at this point, I know you won't give the guide, but at least maybe you can help us in terms of the sequential behavior, the numbers, what kind of uplift you think you'll see from ACA, you know, W2s, that kind of thing. And then along those lines, the acquisition in Q4, what's the trailing revenue and what's the expected revenue from that for 21?

I think, you know, we expect approximately $3 million contribution from that acquisition throughout the year. Obviously, it's going to probably be weighted a little bit heavier into the first quarter. The street, you know, we're not giving guidance, but, you know, I think the street has kind of modeled the sequential nature of the business already and kind of, I think, probably accurately reflects that kind of deviation quarter to quarter. So, if that's helpful.

So the street, just to be clear, the acquisition is new news. So you think the acquisition brings $3 million for the year but heavy in Q1. So the street was correctly adjusted prior to that acquisition, just to be clear.

Yeah, I think that's right. I think it's fair. Again, we're not given specific guidance, but you weren't directionally off.

Okay. And then from a cost standpoint, operating expenses in particular – Obviously, you took some costs out, whether you go off of GAAP or non-GAAP. How do you think about, maybe you can just put a little finer point on what we should be thinking about sequentially for, I don't know, you pick it up, GAAP or non-GAAP from the baseline of Q4?

Yeah, I think it's tough from the standpoint of it really is not going to trend appropriately because, as I mentioned in some of my prepared remarks, the company held back some of the pay and benefits to the rank and file, actually all 10% in the company. So we put back in place on January 1st regular pay. So the transitions are going to be a little heavy, even though the employee counts kind of probably stay relatively flat. But we will have some negative impact because of that reinstatement of the pay rates. So I would think you could go back and look at kind of some of the transitions from first quarter to second quarter of last year there you see some of the transition in terms of the reduction. So you'll kind of see the opposite effect kind of coming in this year in terms of a transition.

Okay, helpful. And then one maybe higher level question then as it relates to the cross-sell. It sounded like you were calling out a bit better cross-selling of the additional solutions, particularly the HR and maybe time and attendance. Maybe just talk about the improved attach rates of things beyond just payroll? Specifically, what are you attaching? When are you seeing that attached, and what's it doing to the ARPU?

Let me tell you, I'll give you a real quick perspective on mine, and I'll let Pat kind of give more color. But in general, I think most of the new sales are having, you know, a multiple product bundle being sold with it. I would say that the kind of going back into the install phase, that we're still kind of in the nascent stage of that side of the cross-sell business. And I'll give Pat a little more time to get the car in there.

No, I think John's exactly right. Our president, Al Goldstein, is really working on a strategy where we have programmatic kind of cross-sell, so that kind of automated bundle, make it technology easy to use and bundle appropriately. I think you'll see us with a simplified set of metrics around kind of this and cross-sell in 2021 and, you know, in line with the first quarter call. But what I would say, we're really – We've made a difference here on the new sales with the bundle. What we want to make sure is as we have some small businesses, we want to make sure they all adopt as opposed to we sell one at a time. So what I think you're going to see us do is highlight some of the efforts around time and attendance, around kind of the HR consulting tier one, tier two, tier three, which is basically automating a web delivery tool with, you know, employee handbook, et cetera. And then I think our HR, whether it's HR Essentials and our SureCloud, I think you'll see more to come. So we'll highlight that in the first quarter call, and I think you'll have some metrics that you can kind of chew on or aspirationally we'll talk through. But the base is less about this one-by-one but more of a programming cross-sell and bundling approach.

And, Jeff, one other thing, since you were asking about modeling, I think I'll just make a point that I think you probably picked up on, but obviously with the equity raise in December, you need to adjust the denominator in terms of EPS calculations and models as well.

Got it. Okay, thank you.

Thanks, Jeff.

Thank you. Your next question comes from the line of Vincent Colicchio from Barrington Research. Your line is open.

Yeah, most of mine were asked, Pat. Last year, you did a nice job expanding the sales force with some experienced people. You benefited from the Paycom situation. Just curious, what does your pipeline look like? Is it getting any more difficult to find these types of people?

I think actually success breeds success. I think we now have a management team with a lot of deep domain HCM or human capital management expertise. We have people that have done it before. You know, we're strengthening the management team, et cetera. And when you have good people and you have good results, it attracts other good people. So while we don't have, you know, a event like the CompuPay event, you know, acquisition in the second quarter where we're able to get up, we'll get some pretty good sales reps. What I would tell you is I think where it's getting out that they can be successful and make some money and really build their own legacy. And then as far as, you know, leaving footprints in the sand, when you have a chance to build a company like this in a marketplace that's evolving and pretty exciting, and then you can partner with, brokers and bankers and CPAs where the competition is competing with them. You know, you have, you know, kind of a once-in-a-lifetime opportunity. So we think attracting really good salespeople, and if you're a salesperson and you're on this call and you're successful, you know, come see us. But we think we can do that through this year. We might not have the big bang approach of what we did in the second quarter, but we're pretty confident that we can attract the right people.

And anecdotally, again, just to stop picking this up, from my perspective, Really good sales people are waiting around for their bonuses, and so there's a little bit of a lull in the first couple months getting those people as they're settling up on their prior year performance. So I would expect a little bit of a lull in the first couple months, but then once those top performers start to get paid out, that's what we're going to go after.

Okay. Thank you.

Thanks, Vince. We appreciate it.

Thank you, presenters. I'm showing no further questions at this time. Alan, I would like to turn the conference back to our CEO, Mr. Pat Capel, for any closing remarks.

Yeah, no, I really appreciate your time today. We had a longer call than usual. Just there were a lot of stuff to talk about with year end and year began. And then obviously everybody's interested in the economy and the stimulus and COVID and returning to normal. I want to thank everyone. 2020 was a tough year. I think it was a great year. It was a foundation year for us. We've made some improvements. We'll continue to make some improvements. We'll continue to get better each and every day, and we appreciate your investment in us. We treat it really seriously, and we'll continue to improve for you through 2021. So until we meet again, thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for joining. You may now all disconnect.