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spk01: Afternoon, and welcome to Assure's second quarter 2021 earnings conference call. Joining us for today's call are Assure's Chairman and CEO, Pat Jebel, John Pence, and Vice President of HR, Cheryl Torbola. After the speaker's remarks, there will be a question and answer session. I would now like to turn the call over to Cheryl for introductory remarks. Please go ahead.
spk02: Thank you, Operator. Good afternoon, everyone, and thank you for joining us for Assure's second quarter 2021 earnings call. After the market closed, we released our financial results. The earnings release is 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 measures, can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and assets involved 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 on the investor relations section of our website. With that, I would now like to turn the call over to Pat Geppel, Chairman and CEO. Pat?
spk09: Thank you, Cheryl, and welcome everyone to Assure Software's second quarter earnings call. I will begin today's presentation with an update on our business performance and strategy. Then we'll turn the call over to our CFO, John Pence, for a more detailed review of our financial results and outlook for the third quarter of 2021. We'll then conclude this session with time to answer your questions. In the second quarter, Assured delivered total revenues of $17.2 million and net income of $3.7 million. Our revenues grew 22% versus prior year, with reoccurring revenues rising by 17%. Importantly... Our revenue growth was balanced in nearly equal contributions from organic growth and acquisition-related growth, in line with our strategic aspirations. I'm pleased to reaffirm our long-term strategy to grow roughly 20% each year, made up of 10% organic and 10% inorganic, is unchanged. A significant contributor to our inorganic growth in the quarter was the acquisition last July of Payroll Tax Management. The new tax platform has improved operational efficiency for our payroll operations and accelerates our ability to integrate accretive acquisitions. It also expands our capabilities to new small business clients, resellers and large brands who have already expressed interest in using our tax engine to power their payroll and treasury departments regardless of which payroll platform they use. The integration of a small Northeast-based reseller acquired in December 2020 is now complete. This is important because it provides a positive proof point regarding our acquisition model. The model we developed enables us to acquire similar value-added resellers, integrate them quickly, and then expand their revenues by more effectively delivering on our strengths. This model works and is highly accretive to customers, the business, and our shareholders. We'll continue to be opportunistic in rolling up our reseller partners that white label our human capital management solutions. This is in line with our strategy where our partners are reselling our solutions and then joining the Assure family. Acquisitions of our resellers continues to be a part of the growth strategy, and we will continue to be active in the marketplace. We're also pleased to announce that we've signed a commitment letter with Structural Capital Investments, their third fund LP, and want to express our thanks to Wells Fargo for their partnership over the years. Shifting now to organic revenue growth, same-store sales, which roughly tracks national unemployment rates, was up 7% year-over-year for the second quarter of 2021 and up 5% sequentially compared to the first quarter of 2021. This marks the first uptick since the start of COVID pandemic, both sequentially and year-over-year, pointing towards an improving environment for our clients and for Assure. We previously outlined to you our plan to significantly increase the number of direct sales representatives across the United States. We continue to be active in this area. At the end of the second quarter, we had 65 direct sales reps, up slightly from 64 at the end of the first quarter, and up significantly from the 31 at the start of 2020. At year end 2021, we expect to be about 75 to 80 direct sales professionals. The investments in sales and marketing are paying off. Bookings were up 48% year over year, 51% sequentially. We'll continue to invest in this area and expect even more productivity from existing sales reps as their tenure increases. The successes have been possible with our continuing focus on small business, which is where most of the sales efforts are. This is evident in our small business bookings, which increase more than 133% year over year. As we previously discussed, these new sales are bundled solutions. As we've discussed in the past, the previous 16 months or so have been different from any other time that we've experienced before. We're encouraged by the early signs of the economy reopening as our small business clients are largely back to business, yet uncertainty obviously remains with COVID and its new variants. That said, we're opportunistic about tailwinds in our model. As employment levels rise, clients and partners become more available for face-to-face meetings, and the uncertainty that freezes buying decisions returns to normal. I continue to be very proud of how the Assure team embraced these challenges and took a leadership role through the pandemic. For example, as part of our efforts To support more than 80,000 small business clients navigate the complex COVID regulations, we introduced an employee retention tax credit solution to help them efficiently maximize this critical stimulus program. I couldn't be more prouder of our team as they helped our clients file for nearly $100,000. million in tax credits in the second quarter. These stimulus dollars can help our customers hire staff and grow their business. As an essential small business, Assure remains committed to helping more than 80,000 small business clients navigate unprecedented compliance changes and grow in a very challenging environment. We're committed to ethical business practices, a values-based culture, innovation, social responsibility, and leadership, as well as our support for small businesses throughout the United States. Overall, we are pleased with our second quarter results. The business has returned to organic growth following the negative impacts of COVID and has allowed us to return our employees to their traditional compensation structure. Our acquisition model has delivered tangible, positive results and created new areas of strength for Assure. We continue to be vigilant in managing expenses while improving our scalability so that future revenues can be effective in driving higher levels of EBITDA and cash flow. Now, I'd like to hand off to John to discuss our financial results in more detail. John?
spk08: Thanks, Pat. As Cheryl mentioned at the beginning of this call, several financial figures discussed today are non-GAAP. You will find a description of our GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. And the reconciliations themselves are included in our most recent investor presentation posted in the investor relations section of our website at AssureSoftware.com. Before I get into the details of our second quarter results, it's important to remind you that our first quarter results feature a seasonal lift related to recurring revenue generated by annual preparation of federal reporting regarding employee-employer reporting of W-2 income and ACA compliance. This lift happens each year in the first quarter and has a significant impact on our quarter-over-quarter comparisons in Q2, but does not affect year-over-year comparisons. Now onto the results. When excluding year-end fees from the first quarter to second quarter sequential revenue comparison, revenue was up 5.6% to $17.2 million. This first quarter, where we have a post-COVID to post-COVID comparison for you or your results. When we look at that comparison on the top line, we were up a little over $3 million, or nearly 22%, from $14.1 million in the same quarter of the prior year. As Pat indicated, our revenue growth was well balanced, with strong contributions both from organic and inorganic sources. Recurring revenue represented approximately 94% of our total revenue for the quarter, Interest on client funds was approximately $400,000 in the second quarter, flat from the first quarter, and up from prior year of approximately $100,000. The average balance of funds held on behalf of our clients was approximately $203 million in the second quarter, down from approximately $234 million in the first quarter, and up over prior year of $94 million. Non-GAAP EBITDA in the second quarter was $1.1 million. This compares stably to the first quarter, which would have been approximately break-even after taking effect for the year-end fees recognized in the first quarter. And this is down approximately $300,000 from prior year's second quarter. This small decrease year-over-year was realized despite the increase in salaries as we absorbed pay and benefit increases following the implementation of our temporary reductions related to COVID. Compensation represents approximately 70% of our cash expenditures, so these adjustments have a meaningful impact. Additionally, expense comparisons are also impacted due to expenses related to the transition service agreements from the sale of the space business at the end of 2019. And finally, as Pat mentioned in his remarks, comparisons are also affected by an increase in the number of sales representatives as we invest in sales organization to drive higher revenues in future periods. While there were some headwinds in our second quarter expenses related to Salesforce expansion and pay restorations, we view these investments in our organization and people that will deliver future results and are key to building momentum in our business. Underlying those increases are significant efforts to increase scalability of our platforms and to improve our cost efficiency. We have a broad set of initiatives underway that will standardize our processes, simplify our internal and external interactions, and enhance our self-service capabilities. As previously mentioned, we intend to return full benefits for our employees in the second half of 2021, which would include bonuses and company matching of 401 contributions. We expect this range statement of these costs to be offset by some of these anticipated cost efficiencies, yielding a net neutral operating profitability contribution. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $20.3 million. On June 30, 2021, we also had $13.3 million of debt. which comprised of 9.0 million term loan and a balance made up of seller notes from acquisitions. Since December 31st, 2021, we have reduced our indebtedness to 13 million from 25 million. A large component of this reduction was forgiveness of 8.6 million of our PPP loan during the second quarter. On an income statement, you will see the extinguishment of the PPP loan created a gain of 8.7 million, and that contributed to our net income in the quarter of 3.8 million. This gain, however, is not reflected in the non-GAAP EBITDA I previously discussed. As Pat mentioned earlier, we are also pleased to announce the signing of a commitment letter today with Structural Capital Investments for a $50 million term loan facility. Once closed, availability of the facility will be based on an advanced rate based on our pro forma annual recurring revenue. Besides maintaining this ratio, there are limited financial government compliance metrics This new facility has a four-year term, and once closed, we believe, combined with our previously filed registration statements, we possess the financial structuring flexibility to aggressively pursue our previously stated strategy regarding organic and inorganic growth. We anticipate that this facility will close before the end of the third quarter and are very excited about the potential of this new agreement and the opportunity to work with our new partners at Structural Capital Investments. It is our intention to use the proceeds to repay our existing $9.8 million facility and to deploy the balance of the proceeds for growth opportunities. As Pat indicated earlier, we have demonstrated our ability to make accretive acquisitions that are beneficial for both our customers and our shareholders. These acquisitions create new revenue opportunities by expanding our footprint and accelerating cross-product sales opportunities. As we have consistently communicated, We plan to pursue acquisition opportunities and this new facility lays the groundwork to accomplish our strategic goals. Now I'm going to turn to guidance for the third quarter ending September 30th, 2021. This guidance is offered with the backdrop of continuing challenging environment to predict the future economic results given the ebbs and flows of employment trends and COVID. We're providing the following guidance. Revenue for the third quarter of 2021 is expected to be in the range of between $17 million to $17.5 million. Non-GAAP EBITDA is guided to be in the range of $800,000 to $1 million. And non-GAAP EPS is guided to be between $0.03 negative and negative $0.01. While the economy and labor markets continue to be volatile, we focus on the levers of the business that we can reasonably control. We expect to accelerate our acquisition program for resellers of our software solutions. At the same time, we are also continuing to drive significant process efficiencies throughout the organization to build scale and enhance operating leverage which should benefit our results in future periods. With that, I will turn the call back over to Pat for some final remarks.
spk09: Thanks, John. In summary, our second quarter results I think are very encouraging. We have developed some early momentum in terms of revenues and are starting to turn the corner. We've also substantially improved our balance sheet, and once we have closed our new term loan agreement, we believe we'll have provided a foundation and have flexibility to drive future value creation. The second quarter results also show the positive impact on our financials of recent acquisitions that provide us and our clients with enhanced solutions and capabilities. We continue to further integrate our payroll, HR, time of attendance, and tax products for an improved user experience while also streamlining the back-end hosting and system architecture to simplify support and reduce cost of goods sold. We're also streamlining and improving our internal and external processes in order to build scalability and to make it easier to do business with Assure. These include substantial standardization and simplification efforts, as well as enhanced digital and self-service capabilities. And over the past year or so, we've focused on significantly improving the quality of our board and key executives. In that regard, I am pleased to announce that we've created a new role of Chief Technology Officer. We're excited to appoint Yasmeen Rodriguez to this role. Yasmeen brings over 20 years of experience building world-class human capital management technology solutions and she'll lead our IT infrastructure process automation and technology roadmap driving innovation to better serve our clients congratulations he has me so that concludes our remarks and with that I'll turn over the call over to the operator for the Q&A session operator
spk01: Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by. We'll compile the Q&A roster. And once again, if you have a question, that is star 1. And our first question comes from Joshua Riley from Needham. Your line is now open.
spk07: Hey, guys. Congrats on the quarter, and thanks for taking my questions here. So if you look at the significant improvement in bookings during the quarter here, how would you attribute the results to the improving macro versus sales execution? And then second, how do you think about the opportunity for rep productivity improvement for the rest of the year versus where it's at today? And maybe how did it trend in the quarter? Thanks.
spk09: Yeah, I think, Josh, thank you for your questions on sales. I think a couple things. One, I remind people that our average tenure of our sales force right now is about 10 months. So I think the best days are here to come for quite some time. I do think the macro environment is improving, but I also think we're improving almost on a daily basis. So very pleased with the progress. I think the focus is there. I do think you'll see growth at this level or potentially more throughout the year. And I really think we're set up for 2022 and beyond as well. So I'm really encouraged by the productivity and the progress that our sales people are making.
spk07: Okay, great. And then maybe just one follow-up. You know, the same store sales improved nicely in the quarter. What are you seeing in terms of outlooks here in in August so far, I guess it's early, but in July. But what do you think about the improvement here for the rest of the year on that? Thanks.
spk09: You know, we're not modeling a ton of improvement. We see, I think, frankly, a lot of fits and starts. And then, you know, I think we're all hopeful that maybe coming in the August, September timeframe where, you know, maybe some of the unemployment programs potentially end, you that there might be some hiring and more hiring improvement down the line. So we haven't modeled a ton into it. You know, I think we're taking a cautious approach to that in our models going forward and in our guides. John, I don't know if you have anything to add.
spk08: No, I mean, I think, obviously, we considered it when we came up with the guides that we just gave you. So 17 to 17.5 reflects kind of our view, and it's tempered because we just really are still, as Pat pointed out, seeing fits and starts.
spk07: Great. I'll pass the cue. Thanks, guys. Thank you, Josh.
spk01: Thank you. And our next question comes from Eric Martinuzzi from Lake Street. Your line is now open.
spk04: Hi. Congrats as well on the quarter. I had a question regarding your pipeline for the back half of the year. I know we're coming up on kind of evaluate the current platform season or, you know, evaluate alternatives for those prospects who might be willing to entertain switching over to Assure. I'm wondering if you could just kind of have amnesia on last year and take us back to 2019. Is pipeline behavior similar to two years ago as far as lead gen? Because I know people kind of got to be in market here over the next two, three months to make that year-end switch.
spk09: No, Eric, I think a couple things. One, what I would say, if I think about two years ago and last year, and I'll kind of normalize for COVID last year, I think our pipeline was pretty strong in the small business area. I think this year, you know, we have some emerging pipeline in the mid-market that I think, frankly, is quite a bit of improvement over last year. If you think about our acquisition of PTM, we have some tax filing pipeline that that really interest us and I think could move the business forward. Small business pipeline is strong. And then from the reseller opportunities, I think there's some couple unique opportunities there. So I would say it's... Compared to two years ago, I think it's broader-based compared to last year. You know, normalized, again, I think we're excited about a number of products and services, and it's not just small business growing, but I think the pipeline in some of the other areas, whether it's mid-market tax and some of the other product lines, we're excited about. Now we're in that summer season and we're really pointing to the third and fourth quarter here and primarily the fourth quarter, but I would say we're cautiously optimistic.
spk04: Okay, I want to follow up on the reseller opportunities. Obviously you're lining up a credit facility here. M&A for Assure is a little bit different than M&A for a lot of tech companies in that you're probably already working with these people. And in many cases, they're founder-owned types of businesses. So as soon as we get the green light on the credit facility, could we expect to see some kind of a surge in the inorganic side?
spk09: Yeah, I mean, I think we're not opening a credit facility for our health, right? You know, we're interested in putting it to use. I would say if you think about some of the tax changes that have been floated and talked about, I think there's some opportunities. I'm less concerned about timing. I'm more concerned about lining it up to our strategic vision and execution of the business. But, you know, I would anticipate we'll be active. Thank you.
spk01: And thank you. And our next question comes from Richard Baldry from Roth Capital. Your line is now open.
spk06: Thanks. Could you talk about challenges in hiring sales in a, you know, still semi-quarantined environment, I guess, about, you know, finding the right people, vetting them, onboarding them, sort of building up without the ability to sort of be in person, which you would have been prior to?
spk09: Yeah, no, Rich, I think it's a thoughtful question. I mean, first of all, I think coming out of COVID – some people want to make a change. And so I think there's some pent-up demand which gives us opportunity. I think because of our leadership team having been in the marketplace for a number of years, sometimes too many, we can play six degrees to almost every candidate very, very quickly. So we know who's good. And it's almost like, you know, if you're Thinking about the basketball recruiting wars, and you have your five-star athletes, four-star athletes, three-star athletes. A lot of people are jumping in the transfer portal. We want to take advantage of that. Certainly, we have to be judicious around the digital media and the interviews, why they're making a change. But if I step back... We have a number of different products and technology and open territories that are bigger than our competition. People have the opportunity to really make a lot of money, and they're interested in pursuing options at this point in time. So I think the recruiting environment has some challenges from face-to-face, but it also actually has some opportunities that are like no other that I've seen over the last couple years.
spk06: And maybe looking into the same-store sales a little bit, it's up 5% sequential. I think last quarter you said that the pace per control was down about 13% year-over-year. Yes. Do you feel like that same-store sales has a lot of room to keep moving over the second half? You know, obviously there's some uncertainties around Delta, but maybe think about the linearity of that 5%. Did it really come on late in the quarter and feel like it's still ramping, or was it sort of consistent throughout?
spk08: Again, let me take a shot at this one, and Pat can fill in some of the gaps. Again, I have the luxury here. Disadvantage, wherever you want to look at it, I'm not having a history. But when I look at it, I look at the overall average client size of where the company sat prior to COVID to where it's at now, and it's still down. So from my perspective, there's a decent amount of room to go once that hiring comes back on a per customer basis. Now, how quickly that comes back or have the models changed, I don't know. But I can just tell you there's still a definite impact pre- and post-COVID in terms of the overall employee needs sitting at our customers.
spk09: Yeah, and, Rich, just to echo what John says, I agree with everything he said. I do think – There's opportunity for those employment to come back. I think we're a little bit cautious on getting ahead of it or modeling it. We'd rather let's see it and let's see it take place.
spk06: Without talking about specific targets, I'm curious about the M&A backdrop in terms of willingness to sell because your targets would also be coming off a tough year. whether that puts any pause in their minds to try to get operations back fully smoothed out before they would look at selling the business as a whole or just any sort of color on that environment. Thanks.
spk09: You know, yeah, Rich, that's a great question, and I don't think there's one quick answer. Some of you, you know, there's an opportunity to sell the business, take advantage of some tax savings this year versus perhaps – the tax is increasing next year. Some, you know, want to get credit for COVID, normalized COVID headcount. Some say, boy, you know, this, you know, I'm not quite in the financial position I was two years ago. It'll take me a while to get back. Maybe there's an opportunity to sell. Some will say, hey, I want to double down and grow and use this as a a way to get lean and mean and then have an opportunity to grow. So I don't think there's a one-size-fits-all. I do think there's an opportunity to grow, and I think we've been active in some discussions. And, you know, one of the decisions that we made really nine months ago or so when we brought on kind of a new executive team coupled with some people that we really trust as part of the executive team, was really to build a business to scale, kind of test out the new models of some of the acquisitions, expand in the area of automation and tax, and now it's time to leverage that. So I think the marketplace is right for us to do it. I think they're ready for us, and I think we're ready for them, and we're excited about this next evolution of the journey.
spk06: Great. Thanks. Congrats on the quarter. Thank you.
spk01: And thank you. And our next question comes from Jeff Van Ree from Craig Hallam. Your line is now open.
spk03: Great. A couple for me. On the bookings front, just talk about what you saw in there that might have been different, the mix of new and existing. And then along those lines, how have your competitive win rates varied over the last two, three quarters, sort of looking through the overall macro headwinds that everybody's facing? How are you faring versus your typical competitors?
spk09: Yeah, Jeff, I would just say I think the competitive win rate hasn't changed much. I think we have an opportunity, and we're very competitive, and we win. I think there's turbulence sometimes. Is there a process? Do they slow down based on COVID? Is there other business concerns? So sometimes the drivers within it are turbulent, but as far as the competitive win rate, I think we're in pretty good shape. I would point out the ERTC funds. I think as a company, I think we've done that program really well. We've helped companies. you know, get access to the money. And I think we're kind of nimble enough to help them in a better way than some of our competitors. And I think that's led to some loyalty in sales that will benefit us not only this year but in future years. So I'm excited about that. But that's how I see the marketplace. And then I'd point out that we have this in the investor deck, the tenure of our sales reps and the productivity and our average tenure being 10 months. I think over the next couple of years, you're going to see the experience of some of the salespeople going through this environment, and I think they're going to be very productive the next couple of years.
spk03: You put in a new CTO. What is it at this point you're most focused on delivering on the product side that you might not have done in the past?
spk09: Yasmeen Rodriguez came to us. in December, and she's run some of the tax business and the systems around that. You know, we have a common tax filing platform, you know, within the company, and then we can market on a standalone basis. When I think of COVID, we probably had more tax changes in 16 months than we've had in 16 years. And, you know, Yasmina's really handled that well. But for me, it's a number of things. So if you think about, first of all, the operational efficiency, and as we, you know, have integrated resellers, The automation of the processes around bots and stuff like that, they made a big impact and they're going to have a big impact going forward. The standardization of processes and using technology will do that. The acceleration of some of the product efficiencies and the integration opportunities. I don't think it's anything completely new. but I think it's an enhancement in speed of a total solution, and we think we can make some pretty big improvement. And then finally, I think in the area of money movement and treasury management systems, I do think there will be a continued acceleration focus in that area.
spk03: Got it.
spk01: Thank you.
spk09: Thanks, Jeff.
spk01: And thank you. And again, ladies and gentlemen, if you have a question – That is star one. Again, if you'd like to ask a question, that is star one. And our next question comes from Vincent Colicchio from Barrington Research. Your line is now open.
spk05: Yeah, good afternoon, Pat. Nice quarter. Thank you. I'm curious, are you seeing, given the tight labor market, wage inflation pressures? How should we think about that?
spk09: You know, somebody told me one time that when they talk to a CEO, they never say they're overvalued, right? So I do think from an employment perspective, I think competition for good employees and then employees are getting clear about how they want to work, where they want to work, you know, kind of the stress of COVID, the stress of coming out of COVID, you know, maybe rethought their families. I think people are open, more open to different possibilities than they were pre-COVID. So I think what that has done is create... you know, a talent match that perhaps is greater than the last five or six years. So that's the backdrop. I would say, you know, I think people are also open and tools available to us to do business differently. You know, maybe it's robotic automation as opposed to, you know, green shades and looking at stuff. are available to us. I think we can make our roles very attractive, very satisfying. They can do something with us that they can really leave footprints in the sand for their future. I think we have a competitive value proposition. In certain areas, I do think there's a war for talent. whether it's wage inflation or value proposition, you know, people are looking for that. But I also think there's ways that, you know, whether it's flexibility, whether it's different work schedules, you know, whether it's some kind of a hybrid offering, there'll be opportunity to choose. Some of them will be money motivated, inflation oriented. Some will be flexibility oriented. Some will be schedule oriented. And some will be, hey, give me a, If you can eliminate the dread of something that's
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