Asure Software Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the first quarter 2023 Assure Software Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Randall Radinsky. Sir, please begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Assure's first quarter 2023 earnings call. Following the close of markets, we released our financial results. The earnings release is available on the SDC's website and our investor relations website at investor.assuresoftware.com, where you can also find the investor presentation. 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 the 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 as such involve some risks. We use words such as expects, believes, and may to indicate forward-looking statements, and 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'd like to remind everyone that this call is being 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 Geffel, Chairman and CEO. Pat,

Thank you, Randall, and welcome everyone to Assure Software's first quarter 2023 earnings call. I will begin today's presentation with an update on our business highlights and strategy, and then I'll turn the call over to our CFO, John Pence, for a more detailed review of our financial results and outlook for 2023. We will then conclude the session with time to answer your questions. As is demonstrated from our results, The strong momentum we built in the business in 2022 carried through to the first quarter of 2023. Our revenues exceeded $33 million for the quarter, rising by 36% relative to the prior year's quarter, all of which was organic. Net income of $300,000 was a $3.4 million improvement from last year. Adjusted EBITDA more than doubled to $8.2 million from $3.4 million for a margin of 25%. It is also notable that our first quarter adjusted EBITDA was higher than we delivered in all of 2021, showing the growing significance of our scale and investments. And our non-GAAP gross profit margin climbed to $26 million from $17 million for a margin of 78% versus 68% in the prior year's quarter. We believe these results are the product of a very strong client reception to the investments and product enhancements we've made across the business. It also reflects our efforts to streamline and consolidate our business processes so that we can take advantage of new opportunities such as those in the Assure marketplace. The strength of client reception to our solutions is notable in our new sales bookings, which grew by 163% in the quarter relative to prior year. The enhancements that we've made to our sales programs are working, and the upgrades to our solutions are attracting strong demand. I also want to point out the growth we achieved this quarter is over and above the 43% growth rate we reported in new sales bookings in the comparable period last year. Our revenue and margin performance, which was entirely organic, were driven by strong contribution from several parts of the business in the first quarter. The first is HR compliance. Our HR compliance solutions are resonating strongly in the markets. In a quarter, our compliance revenues more than doubled relative to prior year as our solutions continue to drive cross-selling activity and attract new clients. These solutions ensure small and mid-sized businesses can navigate the increasingly complex regulations in federal, state, and local jurisdictions, helping businesses to remain compliant in a very effective and scalable manner.

Next.

is our Assure Marketplace solutions. Assure Marketplace contributed meaningfully to our revenue performance in the quarter. We launched Assure Marketplace in 2022 on the belief that our data and automation will enable us to broaden the scope of our solutions so we can offer new value to our clients and, of course, their employees. Assure Marketplace leverages the vast amount of data in our domain and allows us to explore, test, and create new sources of revenue. We continue to believe it could represent upwards of 30 to 40% of our overall revenues in the future. We are also continuing to expand the number and types of integrations we offer and expect to have further announcements in 2023. Interest revenues were also a strong contributor to revenue performance in the quarter. The rise in the yield curve has an important driver in this area. However, the real story is that the upside we're achieving is a result of our success in consolidating our back office systems and bank accounts. These efforts have enabled us to drive higher investable balances and revenues, and John will talk more about this in his section. Lastly, I want to highlight the contribution to revenues from the processing of employee retention tax credits, or ERTC. We have leveraged our differentiated tax processing capabilities to tap into this program on a very efficient basis. Notably, we converted 55% of each incremental dollar of revenues into adjusted EBITDA in the quarter relative to the prior year's quarter. This high flow-through is a direct result of our enhanced automation within our systems, our improved efficiencies via consolidation, and increased penetration from high-margin revenue segments. Now, I will turn to the initiatives we have underway in 2023 and our progress in achieving the milestones on our journey. Let us begin with sales development. Sales development, our focus in 2023 is on bundled offerings and new innovative products to drive value and diversify revenue streams. Behind these initiatives, we're driving performances by expanding our sales force and supporting our team with more effective marketing and sales lead development. Our bundling success has been particularly strong in HR compliance, where the value of the solutions is resonating with clients. We're also utilizing ERTC to cross-sell compliance and other solutions, which we expect to drive future reoccurring revenues. Our product initiatives have focused on the introduction of a sure marketplace and enhancements to our tax and treasury platforms. We believe that the Assure Marketplace has the potential to transform our business in significant and positive ways. The Marketplace supports a wide range of business-to-business and business-to-consumer applications. Business applications can include income verification, tax preparation, retirement solutions, and earned wage access. We're also developing consumer applications and expect those to be part of the Assure Marketplace in the future. Assure Marketplace supports Equifax's work number solution, where we work with Equifax to provide data to help consumers with their mortgage applications, car loans, government benefits, and other end uses. Earlier this year, we also announced our partnership with ZayZoon to allow customers to offer their employees earned wage access. Earned wage access allows employers to pay their employees in real time. This separates or differentiates employers in a competitive labor market and provides flexibility to employees. We believe earned wage access will be an increasingly common benefit moving forward, and we're very excited about our work with ZayZoon and the opportunity in this area. Another key initiative we've been working on is our strategic enhancements to the tax platform to capitalize on our unique position in the market. We're consolidating to a single tax engine, introducing a new tax portal, and improving technology to facilitate integrations, including ERTC processing. Overall, we anticipate this area of our business to deliver strong double-digit revenue growth in 2023 reflecting the enhancements we have made. Let's now turn to the enterprise efficiency initiatives. The goals of our efficiency plan are to create a leaner and more flexible organization to create a technology foundation to support a longer-term growth and to reduce costs. In terms of cost savings, our plan anticipates approximately $5 million in annual savings We expect to implement the plan by year end 2023, and we are on track to achieve this goal. Cost reductions have already begun from these initiatives. The consolidation of human capital management platforms to reduce duplication of efforts and accelerate product development. The increased use of robotics to enhance efficiency and improve automation. and the standardization of processes and data to give us greater flexibility in operations and also to reduce costs. Beyond cost, these initiatives are expected to enable us to accelerate product development, to enhance margins, and to improve quality and service delivery with increased revenue retention. The acceleration of our sales activity and efficiency gains from our enterprise initiatives is a positive start to the year. Based on our performance and our current expectations, we are now introducing revised higher 2023 financial guidance. We are now guiding for revenues of $111 to $113 million and an adjusted EBITDA margin of 17% to 18%. Our previous guidance was for revenues of $105 to $107 million and an adjusted EBITDA margin of 15 to 17%. Our 2023 guidance reflects our organic performance and does not include acquisitions. We're also introducing second quarter 2023 guidance of revenues of 25 to 26 million, which is approximately 25% higher than the second quarter of 2022, all of which is expected to be organic growth. For adjusted EBITDA, we're guiding to $2.5 to $3.5 million in the second quarter. As you can see from our guidance, we expect 2023 will be a strong year for revenues and adjusted EBITDA margins. We're excited about the year ahead and believe our investments and sales successes will drive performance in 2021. 2023 and beyond. Macroeconomic complexities continue to be on our radar, but we believe our expanding portfolio of growth solutions, our highly targeted sales initiatives, and the business momentum will continue to drive performance in 2023 and beyond. Now, I would like to hand off to John to discuss our financial results in more detail. John?

Thanks, Pat. As Randall mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. Reconciliations themselves are also included in our most recent investor presentation posted on the investor relations section of our website at investor.assuresoftware.com. Now on to the first quarter results. Revenues reached $33.1 million in the first quarter, rising by 36% relative to prior year, all of which was organic. Recurring revenues rose 22% relative to prior year to $28 million, while non-recurring revenues more than tripled to $5.1 million. Our revenue improvement was broad-based and was made up of similar drivers as the fourth quarter of 2022 revenue growth with notable contributions from our recurring HR compliance business, which has seen success in their differentiated solution, as well as being bundled with our ERTC offerings. Increased interest revenues, with average client balances exceeding 220 million per quarter. And a contribution to revenues from Assure Marketplace, which was introduced in the third quarter of 2022. Finally, we also experienced a nice uplift generating revenues from processing of earned retention tax credits, and you can see that impact on our professional services revenue. It's also important to keep in mind that the first quarter's results are seasonally strong as recurring year-end W-2 ACA revenue is recognized in this period. We do expect our 2023 revenues to show the normal season fluctuations. Net income for the quarter was $0.3 million, a $3.4 million improvement over the prior year's loss of $3 million. This is a notable achievement and reflects our scaling of our business as well as our improved operational efficiencies. Gross margins rose by 10 percentage points to 74% in the first quarter relative to prior year while non-GAAP growth margins rose 9 percentage points to 78%. This reflects our strong revenue gains, the high margin mix of our growth, and the impact of our standardization and consolidation efforts. EBITDA for the quarter was 6.8 million, a 4.3 million improvement from prior year's quarter of 2.6 million. Adjusted EBITDA rose by 4.8 million relative to prior year to 8.2 million, And our adjusted EBITDA margin reached 24.8% in the quarter compared with 14% in the prior year. Margin expansion was driven by growing high margin revenue streams, continued progress with our efficiency initiatives, and scale benefits from our growth. These gains more than offset the investments we are making in the expansion of our sales and marketing activities, as well as the development of technology to drive revenue success. We continue to believe there is substantial margin upside over the longer term as the business scales. At the end of the quarter, with cash and cash equivalents of $21.4 million, we also had $35.9 million of debt, which is comprised of $30.5 million drawn under a senior credit facility with the remainder made up of seller notes from acquisitions. Now, in terms of our guidance for the second quarter and the full year 2023, our guidance is offered with a backdrop of continued economic uncertainty and a dynamic labor market. We are raising our full year 2023 revenue guidance to a range of $111 to $113 million and adjusted EBITDA margin to a range of 17 to 18%. We are also introducing guidance for the second quarter revenues of $25 to $26 million and adjusted EBITDA of 2.5 to 3.5 million. Our revenue performance was strong in multiple categories in the first quarter, with trends building on the momentum we developed in the second half of 2022. These results are encouraging and inform our outlook for 2023. We expect continued positive momentum and bundling success with our HR compliance and tax processing solutions. We believe our multi-tiered HR offerings and automated ERTC filing capabilities are resonating with our small admin size business customers. Assure Marketplace is also expected to be an important driver in 2023. We are growing our list of partners and expect strong momentum from this solution. This is the result of a dedicated effort to enhance our technology and to leverage the data we have in our business. Further projects are anticipated to go live in the coming quarters. Regarding interest income, we have enjoyed our best quarter yet, with float as our consolidated efforts have enabled us to take full advantage of rising rates. We believe float revenue will be a strong contributor to our revenue performance in 2023. We are also continuing to advance our product development, sales development, and our centralization initiatives as we focus on high margin revenue streams and generating efficiencies and operating savings. In terms of acquisitions, while nothing is imminent, we will continue to be prudent in evaluating targets and will execute if the right opportunity arises to create value for our shareholders. With that, I will turn the call back to Pat for closing remarks.

Thanks, John. I'd like to conclude by saying we are very pleased with our performance in the first quarter of 2023 with notable successes in the following areas. First, We grew revenues organically by 36% year over year in the first quarter, driven by new sales bookings growth of 163% across multiple products. The successes that we had are the result of a lot of hard work over several quarters to enhance our products and to focus on our sales efforts in building out our sales team. We're continuing to invest. in product and technology to create a foundation for sustainable growth, and we made strides in enhancing our human capital management tax and treasury systems. These enhancements will help bolster our suite of offerings and provide our sales force with increased cross-selling opportunities. We also improved our cost structure and efficiencies by pursuing consolidation and standardization initiatives. As a result, we are on track to deliver annual savings of $5 million annually once the implementation is complete. These efforts enabled us to deliver margin expansion with quarter one adjusted EBITDA margins reaching 25% and non-GAAP gross margins reaching 78%. For 2023, based on our current outlook, we anticipate delivering double-digit organic revenue growth and strong adjusted EBITDA margin gains. Our revised higher revenue guidance anticipates positive momentum with our HR compliance and our tax solutions, reflecting the upgrades we have made and leveraging our prior success in bundling our solutions. We also believe a sure marketplace is a game changer for Assure as it enables us to leverage our technology and data to deliver new high margin revenue streams. Interest revenues also are anticipated to continue to increase due to the rise in rates and investable balances. As we continue to grow in 2023 and beyond, we expect efficiencies through the scale and consolidation to drive continued margin expansion ultimately guiding us to sustainable positive net income and free cash flow. In conclusion, we're very excited about the performance of the business and our future direction. We're eager for the quarters and years to come and remain focused on delivering consistent results for our stakeholders. We look forward to speaking with you again next quarter. or at one of our many investor conferences we're attending in the second quarter. So with that, I'll send the call back to the operator for the question and answer session. Operator?

Thank you. Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 1-1 again. Again, if you have a question or comment at this time, please press star 1 1 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Joshua Riley from Needleman Company. Mr. Riley, your line is open.

Hey, guys. Thanks for taking my questions. Great job on the execution here in the quarter. It's fun to see these other items layering in the model. I guess just on the ERTC, as we see that coming through the rest of the year here, maybe you can help us with how we should think about how the ERTC is going to be layering into pro services and other revenue. Can you just review, are some customers bringing you large batches at once and then there's a steady state amount after that that they bring you or how is that working exactly?

There's a lot of questions there, Josh. I'll try to address them. It kind of factors into the balance of the year. We've not taken a ton of extra credit into the balance of the year for ERTC. We think there'll be some, but probably not at the same levels that we've had in Q4 and Q1. At least that's not what we've modeled at this point. And they're all different flavors. We have some where we do have these minimum relationships, and then we have some where we're just directly contracting with the customer. So it's a little bit of all different flavors.

Got it. And then follow up on EBITDA guidance here. It implies pretty healthy margins, which is great to see the nice uplift here. Can you just help us parse out how much of the uplift specifically this quarter in the EBITDA margin guidance for the year is from higher interest income assumptions in the model? versus other sources of margin accretive revenue like ERTC and Marketplace entering the model?

So, I mean, I'll take a shot in, Pat.

You can give your perspective. I think in terms of the model, you know, what we've tried to demonstrate, you know, both Q4 and Q1 is that as we add these incremental revenues to the top line, we think we've got a pretty efficient operating model. So, it's kind of – it's It's like the FIFO concept, you know, which dollar contributes that incremental dollar to the margin. I don't know. I mean, it's a combination of marketplace, high margin, flows to high margin, ERTCs that are pretty high margin, right? HR compliance is at a pretty high margin. So what we're really doing is adding a lot of different revenue streams that are all high margin. So I wouldn't attribute the increased guidance and the flow through to one specific revenue stream personally. I don't know, Pat, what your thoughts are.

Yeah, Josh, and I would agree with John. I think, you know, if you think about the first quarter, We had approximately 5 million or so W-2s compared to 4.2 last year. That, in and of itself, is going to create some high margin in the quarter. ERTC, if you look at the one-time revenues, professional services, if you assume run rate, usually it's about 1.5 million. The rest would be ERTC. We're guiding what we think is appropriately with the visibility we have in Q2 and the rest of the year. where obviously the operational and gross margin improvements we've made over the last couple of years are starting to pay off. And, you know, we believe the guide is appropriate. And we do think, you know, we have some upside based on volume if it's there. But, you know, right now we think that's the appropriate guide. And we're pleased that we were able to raise guidance now two quarters in a row.

Got it. Thanks, guys. Fun to see the strong results. Thanks, Josh. Appreciate it.

Thank you. Our next question or comment comes from the line of Brian Bergen from Cowan & Company. Mr. Bergen, your line is now open.

Hey, guys. Good afternoon. Thanks for taking the question.

I guess just wanted to start off at a high level on the demand environment. So you clearly carried strong momentum here, but would value your perspective on any changes at all versus, let's say, three months ago, just given the U.S. banking volatility since you last spoke. So any nuances in client behavior that's changed and then anything you can comment on through April?

Yeah, we haven't seen it. I mean, I think volume has been really positive in the small business marketplace. I think there's trepidation in, you know, obviously the regional banks and some of that stuff. But as far as just creating buying behavior, you know, we just haven't seen it right now. You know, our clients, still can't find enough employees. You know, maybe when they would look for five, they're looking for three, but they're still looking for employees. I think the trepidation is more what will come. And, you know, if two or three regional banks is it, or is there going to be eight more down the horizon? I think those are the questions that they have. But as far as running their business, growing their business. We haven't seen a great deal of behavior change lately.

The only thing I would add potentially is, and you're reading the same stuff that we are, I think just what goes on in Congress with debt ceiling and do they in fact create a recession by their behavior. I think that's the other thing that's kind of going on in the background. But again, to Pat's point, I don't think we've seen it manifest in our results yet, but I do think That's at least what everybody's talking about when we talk to people.

Okay. Okay. Understood. And then pivoting to margin, maybe margin progression. So can you just talk about your investment initiatives as you're going to progress through the year? Just looking at the EBITDA outlook, the EBITDA margin 2Q, and then the implied second half EBITDA margin, any key considerations we should be mindful of, whether it's revenue mix or timing of investments as you move through the balance of the year?

No, I think, John, you can answer as well. I think just at a macro level, we're investing in product. We're investing in salespeople. We think we've made some healthy investments to date, and we'll continue to invest in that. As far as growth or growth drivers or HR compliance, the marketplace, tax, and ERTC and float, in addition to just driving more bundles of products and services. So we'll continue down that playbook. We think we have pretty good visibility in not only revenue but also margin, and we'll continue to make some investments to grow the business.

Yeah, I would just say that, I mean, I think in general some of the employment environments helped us. We've been able to opportunistically add some people into the dev environment and also into the sales environment. We had them budgeted for the year, but we've been able to get them in earlier than we might have hoped. So I think we're actually optimistic with some of those hires that they'll start to contribute earlier. So that's the only thing I would say back to past points.

Does that go for sales as well, or is that mostly dev?

No, we have some good sales hires as well this quarter.

Okay, great. Thank you very much.

Thank you.

Thank you. Our next question or comment comes from the line of Eric Martin. I'm sorry? Eric Martinuzzi from Lake Street Capital Markets. Mr. Martinuzzi, your line is open.

Yeah, my congrats as well on the quarter and the outlook. Just curious regarding the cost structure, this $5 million of annualized savings by the end of the year, are there people-related cuts that are coming here? Is this all on the back of integrated systems and the elimination of maybe some consultants? Where's that savings coming from?

Yeah, all those. Exactly. Yeah, it's a combination. It's not a white switch event. We've been working on this for the last couple of years, trying to get the business more standardized and nationalized. We're just starting to see some of the benefits of that, both on the systems side as well as on the operations side. So I think we're starting to realize some of the efforts that we've been putting forth. And again, we're putting those dollars back to work again in terms of putting it into the product and putting it into Salesforce. So they're hopefully, you know, start to create that momentum going forward for us and continue that momentum going forward for us.

Eric, I'll give maybe an example. And while it's, you know, I think it ties to your question in a limited world, but, you know, we put some calories and thought into a treasury system internally. And what we were able to do is go from 125 bank accounts to less than 20. So from a systems perspective, we were able to make those changes, save costs in the bank fees that we were paying to the tune of 800 grand. What we were also able to do is build an automated or a more automated check reconciliation process as part of that. So we were able to do more with less and take some people out of that reconciliation process by making it easier. And then as well as automate the process. And then when you look at some feature functionality that we were able to build, when some of the regional banks ran into some potential issues, we were able to isolate those accounts right away and not have to really do a ton of manual effort. So that's one example within about seven pretty big projects that we've been able to not only get some savings, and we'll have some savings to come, but then, as John stated, redeploy them into development and sales resources.

Understand. Thanks for taking my question. Thanks, Eric.

Thank you. Our next question or comment comes from the line of Jeff Van Ree from Craig Hallam Capital Group. Mr. Van Ree, your line is up.

Great. Thanks. Thanks for taking the question, guys. Congrats. A number for me. First, you know, obviously, Pat, you've done a lot on the product side. You've had a lot of capabilities. I think the pace of innovation is probably the highest I've seen. You know, have you seen specifically as it relates to new customer capture changes in win rates to the degree that you can track them and measure them?

You know, we definitely have seen the volume go up quite a bit. Our pipeline is very strong. When you think of the pace of change, it's almost in every area of business. You know, we invested in software tools around marketing. Marketing lead sources are up over 40% of a new sales is a marketing-led process that was probably 18% a year ago, so continuing to drive results in that area. We're getting more at-bats due to kind of the pipeline. Our win weights are going up, and they're increasingly going up in a bundle when we lead with either ERTC, HR compliance, we have higher win rates and able to capture the business owner as opposed to perhaps a functional leader. So those are the reasons why we've been able to win. And then kind of continuing to drive a more modern UI and a modern system, we're gaining you know, kind of win rates as we speak, but we also think we have a number of items that, you know, we're early in this journey, and we'll get those breakthrough results continuing all throughout the year and early next. So it's a journey, and it's a series of small differences on all aspects of it, but really, really pleased where we're at.

Makes sense. I mean, obviously, we're seeing good cross-sell, up-sells. and presumably larger deal counts. What about the tax ID numbers being processed on a weekly or monthly basis? What kind of TAN growth have you seen kind of year over year recently, and how does that compare to three, six months ago?

You know, I mean, I just take W-2s. I mean, we did 4.2. million in W-2 revenue last year. We did close to five this year. Clearly, that means we're getting more revenue for W-2s and, in effect, a good proxy for people that we produce payroll in. But it's not just payroll, right? Our HR compliance line is more than double than So not only the companies that are using payroll, but also using HR compliance has gone up dramatically, and we're still at relatively low penetration rates. So for us, it's about the marketplace. It's about more people on the platform, more companies on the platform, and then a really good cross-sell component that allows them to use more and more products and services.

Okay, just two other quick ones for me then. Just sales headcount now and goals maybe by year end, and then the last would be, Pat, you mentioned some consumer apps that you're thinking of with respect to marketplace. I don't know if you want to tip your hand, but even giving a broader sense of what might be to come there would be interesting.

Yeah, I think, first of all, sales headcount, I think March 31st, we were at 94. We'll be over 100 here in the second quarter. you know, we'll give you, you know, kind of a proxy in the third and fourth quarter, but I would assume we'll be in the low hundreds, you know, the rest of the year. As far as, you know, consumer apps, et cetera, you know, I think one of the areas where we roll out this Azune relationship, which is earned wage access, you know, obviously our employees now have access if they want to, get paid on an off-cycle payment 12 times a year to deal with rent. They have the opportunity to do that, and they can do that with a click of a button. That's an example of it. I think you'll see a more formal rollout of the employee and employer portal that really addresses that. But that's probably the second half of the year. So I'll raise that in one of the future earnings calls. But that's kind of a tip to where we're going.

Fair enough. Real nice work. Thanks.

Thank you.

Appreciate it.

Thank you. Our next question or comment comes from the line of Greg Gibbous from Northland Capital Securities. Mr. Gibbous, your line is open.

Great, thank you. Good afternoon, Pat and John. Congrats on the quarter. Wondering what do you expect maybe the marketplace to contribute to the top line this year as a percentage of the total?

Yeah, Greg, first of all, welcome to Coverage Universe. We appreciate you, Northland, covering us, and Northland is a great firm, so thank you. What I would say on the marketplace, you know, we announced – You know, a couple of press releases here with Harvard Compliance and Zazune. I think the rollout of Zazune is just starting to happen. I think you'll see more revenue in the back half of the year. You know, a rollout of the marketplace, you know, is company-specific. It's a technical interface as well as in some areas like Zazune and consumer adoption. So it takes some time. I think it'll be more meaningful in 24, but it'll continue to be revenue in 2023. I think you'll see announcements at the pace of about two a quarter throughout 2023 and more to come in that area. But the marketplace is, the idea is strong. We see some really nice opportunities. It does take a while to set them up, but once you do, you know, you have some meaningful revenues. So, we're excited about the model, and you'll see some activity, and we'll telegraph that, and then over time, you'll see more revenue, and we'll provide updates quarterly on that.

Okay. Sounds good. I wanted to follow up on kind of the increased margins. You know, great to see the expectations for the year going up. I'm wondering, you know, how much of that improvement is a result of increased scale from revenue growth versus maybe the improving operating efficiencies you've been talking about?

Yeah, I think it's, again, I try to address this comment again. I think it's a combination, right? So the revenues that we are adding incremental are very, very high margin and have a pretty solid fall through. So I think it's taking cost out of the structure and redeploying those into the R&D and sales areas, but then simultaneously adding revenue streams to the top line that have a pretty healthy fall through. So I think it's a combination of both of those.

Yeah, and the one thing I would add is, you know, I think we've talked about this before, but, you know, it's a high-fix thoughts business with the platform investments. For example, you have a tax change. The programming on the tax change, whether you have one client or 100,000 clients, it's the same amount of work. We feel like we've gotten through the high fixed cost and we're getting into a kind of rhythm of some incremental fall through and and we're pleased with that fall through and You know as we get scale the benefits of scale if we do this, right, you know every piece of work Becomes a little bit cheaper at scale than the previous and we believe we're on that track and then as John said the mix has been favorable for as well for us where we've been able to layer in higher margin products. So, really excited about the opportunity and where we could go. We're just getting started and to be able to raise margin again is very rewarding for us.

Got it. Helpful. I guess the last one for me, just relating to the recurring revenue growth, nice to see it up 22% year over year. I noticed it was a little bit lower than the 25% growth you saw last quarter. Just wondering if you can give a sense of maybe what that driver was.

Yeah, I don't know. Quarter over quarter, I mean, sales have been very strong. Bookings have been strong. Retention was a little bit ahead. I don't think there was anything super notable, I think, for us. You know, we were happy with the results and happy with the growth. Maybe, you know, there was a little anonymity in the compare, but I don't think there was anything that stood out that we were concerned about.

Okay, fair enough. Appreciate it, guys. Thanks.

Yeah, thanks, Greg. Welcome.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Our next question or comment comes from the line of Rich Baldry from Roth MTKM. Mr. Baldry, your line is open.

Thanks.

Could you maybe talk about the growth in the new sales bookings? I think you said it was 163% on top of a pretty tough compare year over year. How do you feel about your ability to keep growing that? Is that an area where maybe you're understaffed or stressed or And maybe you can talk about, you know, sales tenure in that area. Is that one of the things that's helping you? Trying to get a gauge for how much capacity you have to keep that up. And then maybe tag that with, you know, how broad you saw that new sales bookings. Was it concentrated around verticals or geographies or an enterprise partner side, or did you feel it was pretty broad-based? Thanks.

Yeah, thanks, Rich, and thanks for the thoughtful questions. First of all, I think from a numbers game, we're going to continue to invest in sales from the numbers. But what I'm most pleased with from the sales perspective is our marketing programs are really starting to pay off. Our cadence is really good. Our pipeline is growing. And then what I would say the investment we made really since December of 19, our turnover has been low. People are successful. They're achieving. We just came off our summit awards meeting. And people are starting to talk about that they're going to reach the next summit awards next year, potentially in the early second half of the year. So people are winning. They're excited they're winning. And they have visibility. And as you know from covering this space, years two and years three, you get exponential productivity improvement. Because once you understand the space, you're able to really drive results. And I would say it's been a broad swath of sales reps that have led to this performance. Really good marketing, really good bundling activities. activity and then excellent leadership. The combination of Bill Goldstein, our President and Chief Revenue Officer, and Mike Benoit, our Marketing Lead, They've really got a nice rhythm going. The people are excited. And by the way, the next level management is recruiting really good people. They're seeing the results. They're seeing success. They have bigger territories than most of their competitors. They have bigger bundling opportunities than most of their competitors. And people are gravitating where they can win. So I think it's a series of keeping our people with us, engaged. They're getting good leadership. They're getting the good bundles. They're getting good tools to be successful. Pipelines are strong, and we're having success. So we don't want to mess with they're happy. We want them to continue to drive excellent results, and we see that for the foreseeable future.

Thanks. And last for me, B, when you look into the M&A sort of pipeline, do you feel like there's been some softening of expectations from the other side? And then maybe contrast that to your internal efficiencies are improving. So does that lower the hurdle to what you could acquire because you could make it more creative, quicker, sort of faster than you might have thought so previously? Thanks.

Yeah. So first of all, I think there's no doubt that I think there is a little bit of a softening of expectations. We've been really heads down on growing our organic revenue and getting the operational efficiencies as well as the growth engine in place. We'll turn to the second half of 23 and 24 to look at acquisitions. There's nothing imminent here because we've been really focused on eliminating distractions and just growing our business and growing our revenue. I do think as we look to pop out and we've been engaged in some conversations. I do think expectations have changed a bit. And then as far as integration of any potential acquisitions, we're really confident that we can get those integrated in a very short order. And that's all really due to some of the system changes we made, some of the operational efficiencies. And so our people are ready to digest business when the time's right. I think the market's starting to come to us as far as future targets. But that'll be a second half, really, 2024 conversation as opposed to right now. But when the time's right, we're definitely going to strike. And we do think expectations are starting to come in a bit.

Thanks. Congrats on another great quarter, Pat.

Hey, Rich, thank you. Appreciate it.

Thank you. Our next question or comment comes from the line of Vincent Colicchio from Barrington Research. Mr. Colicchio, your line is open.

Yeah, Pat, congrats on the quarter. Just a couple for me. Most of mine were asked. Curious about the bookings growth breakdown between new and existing clients.

Yeah, I think we're about 55% to 60% existing clients, 40% to 45% new business. Maybe it's picked up a little bit on existing clients, but pretty good overall, and we're pleased with the mix.

And you had mentioned a couple times that you're happy with the marketing programs. I thought maybe you can give us more color in terms of which programs are working best.

Yeah, no, we implemented SalesLock, which is – kind of an auto-dialer tool a while ago, ZoomInfo, which has been very successful. So the tools are in place. The thought leadership, Mike Benoit's team does a really nice job with that. But it's not just Mike. Mary Simmons in the HR compliance area does a really good job of spelling out what it means to be compliant in HR. So we have some good campaigns. We have a good cadence. We meet just on sales and marketing really every day to talk about the cadence and the messaging and the scripts and how we're going to market. And we put that in place. And then finally, from a systems perspective, we have rolled out the service cloud of Salesforce across the whole organization. So everybody's on a common phone system, common chat system, common service cloud, common Salesforce. So the tools are in place and then the leaders and the individual contributors are executing in a big way. And so the focus has been there and then success breeds success and when you have success and And you can build on it. People have the opportunity with the comp plan to make a lot of money. And we've gone to quarterly attainment. So they see line of sight in a very short period of time where they have ability to blow it out. And it really aligns with the four quarters of the year. And then it goes back to what I'll call our our rainmaker, but Al Volstein has put this program together and has really done a nice job.

And the last one for me, I missed what you said earlier in response to an earlier question about ERTC. What is your growth expectation for the balance of the year?

We don't have a lot. Obviously, we have a little bit played in for the balance of the year, but not having it growing off of this quarter or the fourth quarter. Obviously, When we put out our guidance at the end of Q4 for Q1, we exceeded it in terms of what our expectations were, but we've not played in a ton of growth relative to this quarter for the balance of the year on ERTC specifically.

Okay.

Thank you.

Vince, thank you. Appreciate it.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

No, I appreciate all of you joining on the call today, whether you're an investor, third-party analyst, current client, employee. You know, Assure's been on this journey for a long time. We're really excited about the momentum that is happening here. We're doing all the right things. We're starting to get rewarded for it, but I still believe the best days of Assure software are to come, and there are They're that way because the people that are along for the journey and have done all the hard work. So I appreciate each and every one of you. And we look forward to seeing you at one of the conferences that we're at in the second quarter or in the second quarter earnings call. So thanks and have a great day. Take care.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speaker, stand by. Thank you.

Thank you. you Thank you. Thank you. Thank you. Thank you. Thank you.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the first quarter 2023 Assure Software Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone keypad. At this time, I would like to turn the conference over to Mr. Randall Radinsky. Sir, please begin.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Assure's first quarter 2023 earnings call. Following the close of markets, we released our financial results. The earnings release is available on the SDC's website and our investor relations website at investor.assuresoftware.com, where you can also find the investor presentation. 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 the 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 as such involve some risks. We use words such as expects, believes, and may to indicate forward-looking statements, and 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'd like to remind everyone that this call is being 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 Geffel, Chairman and CEO. Pat,

Thank you, Randall, and welcome everyone to Assure Software's first quarter 2023 earnings call. I will begin today's presentation with an update on our business highlights and strategy, and then I'll turn the call over to our CFO, John Pence, for a more detailed review of our financial results and outlook for 2023. We will then conclude the session with time to answer your questions. As is demonstrated from our results, The strong momentum we built in the business in 2022 carried through to the first quarter of 2023. Our revenues exceeded $33 million for the quarter, rising by 36% relative to the prior year's quarter, all of which was organic. Net income of $300,000 was a $3.4 million improvement from last year. Adjusted EBITDA more than doubled to $8.2 million from $3.4 million for a margin of 25%. It is also notable that our first quarter adjusted EBITDA was higher than we delivered in all of 2021, showing the growing significance of our scale and investments. And our non-GAAP gross profit margin climbed to $26 million from $17 million for a margin of 78% versus 68% in the prior year's quarter. We believe these results are the product of a very strong client reception to the investments and product enhancements we've made across the business. It also reflects our efforts to streamline and consolidate our business processes so that we can take advantage of new opportunities such as those in the Assure marketplace. The strength of client reception to our solutions is notable in our new sales bookings, which grew by 163% in the quarter relative to prior year. The enhancements that we've made to our sales programs are working, and the upgrades to our solutions are attracting strong demand. I also want to point out the growth we achieved this quarter is over and above the 43% growth rate we reported in new sales bookings in the comparable period last year. Our revenue and margin performance, which was entirely organic, were driven by strong contribution from several parts of the business in the first quarter. The first is HR compliance. Our HR compliance solutions are resonating strongly in the market. In a quarter, our compliance revenues more than doubled relative to prior year as our solutions continue to drive cross-selling activity and attract new clients. These solutions ensure small and mid-sized businesses can navigate the increasingly complex regulations in federal, state, and local jurisdictions, helping businesses to remain compliant in a very effective and scalable manner.

Next.

is our Assure Marketplace solutions. Assure Marketplace contributed meaningfully to our revenue performance in the quarter. We launched Assure Marketplace in 2022 on the belief that our data and automation would enable us to broaden the scope of our solutions so we can offer new value to our clients and, of course, their employees. Assure Marketplace leverages the vast amount of data in our domain and allows us to explore, test, and create new sources of revenue. We continue to believe it could represent upwards of 30 to 40% of our overall revenues in the future. We are also continuing to expand the number and types of integrations we offer and expect to have further announcements in 2023. Interest revenues were also a strong contributor to revenue performance in the quarter. The rise in the yield curve has an important driver in this area. However, the real story is that the upside we're achieving is a result of our success in consolidating our back office systems and bank accounts. These efforts have enabled us to drive higher investable balances and revenues, and John will talk more about this in his section. Lastly, I want to highlight the contribution to revenues from the processing of employee retention tax credits, or ERTC. We have leveraged our differentiated tax processing capabilities to tap into this program on a very efficient basis. Notably, we converted 55% of each incremental dollar of revenues into adjusted EBITDA in the quarter relative to the prior year's quarter. This high flow-through is a direct result of our enhanced automation within our systems, our improved efficiencies via consolidation, and increased penetration from high-margin revenue segments. Now, I will turn to the initiatives we have underway in 2023 and our progress in achieving the milestones on our journey. Let us begin with sales development. Sales development, our focus in 2023 is on bundled offerings and new innovative products to drive value and diversify revenue streams. Behind these initiatives, we're driving performances by expanding our sales force and supporting our team with more effective marketing and sales lead development. Our bundling success has been particularly strong in HR compliance, where the value of the solutions is resonating with clients. We're also utilizing ERTC to cross-sell compliance and other solutions, which we expect to drive future reoccurring revenues. Our product initiatives have focused on the introduction of a sure marketplace and enhancements to our tax and treasury platforms. We believe that the Assure Marketplace has the potential to transform our business in significant and positive ways. The marketplace supports a wide range of business-to-business and business-to-consumer applications. Business applications can include income verification, tax preparation, retirement solutions, and earned wage access. We're also developing consumer applications and expect those to be part of the Assure Marketplace in the future. Assure Marketplace supports Equifax's work number solution where we work with Equifax to provide data to help consumers with their mortgage applications, car loans, government benefits, and other end uses. Earlier this year, we also announced our partnership with ZayZoon to allow customers to offer their employees earned wage access. Earned Wage Access allows employers to pay their employees in real time. This separates or differentiates employers in a competitive labor market and provides flexibility to employees. We believe Earned Wage Access will be an increasingly common benefit moving forward, and we're very excited about our work with ZayZoon and the opportunity in this area. Another key initiative we've been working on is our strategic enhancements to the tax platform to capitalize on our unique position in the market. We're consolidating to a single tax engine, introducing a new tax portal, and improving technology to facilitate integrations, including ERTC processing. Overall, we anticipate this area of our business to deliver strong double-digit revenue growth in 2023 reflecting the enhancements we have made. Let's now turn to the enterprise efficiency initiatives. The goals of our efficiency plan are to create a leaner and more flexible organization to create a technology foundation to support a longer-term growth and to reduce costs. In terms of cost savings, our plan anticipates approximately $5 million in annual savings We expect to implement the plan by year-end 2023, and we are on track to achieve this goal. Cost reductions have already begun from these initiatives. The consolidation of human capital management platforms to reduce duplication of efforts and accelerate product development. The increased use of robotics to enhance efficiency and improve automation. and the standardization of processes and data to give us greater flexibility in operations and also to reduce costs. Beyond cost, these initiatives are expected to enable us to accelerate product development, to enhance margins, and to improve quality and service delivery with increased revenue retention. The acceleration of our sales activity and efficiency gains from our enterprise initiatives is a positive start to the year. Based on our performance and our current expectations, we are now introducing revised higher 2023 financial guidance. We are now guiding for revenues of $111 to $113 million and an adjusted EBITDA margin of 17% to 18%. Our previous guidance was for revenues of $105 to $107 million and an adjusted EBITDA margin of 15 to 17%. Our 2023 guidance reflects our organic performance and does not include acquisitions. We're also introducing second quarter 2023 guidance of revenues of 25 to 26 million, which is approximately 25% higher than the second quarter of 2022, all of which is expected to be organic growth. For adjusted EBITDA, we're guiding to $2.5 to $3.5 million in the second quarter. As you can see from our guidance, we expect 2023 will be a strong year for revenues and adjusted EBITDA margins. We're excited about the year ahead and believe our investments and sales successes will drive performance in 2021. 2023 and beyond. Macroeconomic complexities continue to be on our radar, but we believe our expanding portfolio of growth solutions, our highly targeted sales initiatives, and the business momentum will continue to drive performance in 2023 and beyond. Now, I would like to hand off to John to discuss our financial results in more detail. John? Thanks, Pat.

As Randall mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. Reconciliations themselves are also included in our most recent investor presentation posted on the investor relations section of our website at investor.assuresoftware.com. Now on to the first quarter results. Revenues reached $33.1 million in the first quarter, rising by 36% relative to prior year, all of which was organic. Recurring revenues rose 22% relative to prior year to $28 million, while non-recurring revenues more than tripled to $5.1 million. Our revenue improvement was broad-based and was made up of similar drivers as the fourth quarter of 2022 revenue growth with notable contributions from our recurring HR compliance business, which has seen success in their differentiated solution, as well as being bundled with our ERTC offerings. Increased interest revenues, with average client balances exceeding $220 million per quarter. And a contribution to revenues from Assure Marketplace, which was introduced in the third quarter of 2022. Finally, we also experienced a nice uplift generating revenues from processing of earned retention tax credits, and you can see that impact on our professional services revenue. It's also important to keep in mind that the first quarter's results are seasonally strong as recurring year-end W-2 ACA revenue is recognized in this period. We do expect our 2023 revenues to show the normal season fluctuations. Net income for the quarter was 0.3 million, a 3.4 million improvement over the prior year's loss of 3 million. This is a notable achievement and reflects our scaling of our business as well as our improved operational efficiencies. Gross margins rose by 10 percentage points to 74% in the first quarter relative to prior year, while non-GAAP growth margins rose 9 percentage points to 78%. This reflects our strong revenue gains, the high margin mix of our growth, and the impact of our standardization and consolidation efforts. EBITDA for the quarter was 6.8 million, a 4.3 million improvement from prior year's quarter of 2.6 million. Adjusted EBITDA rose by 4.8 million relative to prior year to 8.2 million, And our adjusted EBITDA margin reached 24.8% in the quarter compared with 14% in the prior year. Margin expansion was driven by growing high margin revenue streams, continued progress with our efficiency initiatives, and scale benefits from our growth. These gains more than offset the investments we are making in the expansion of our sales and marketing activities, as well as the development of technology to drive revenue success. We continue to believe there's substantial margin upside over the longer term as the business scales. End of the quarter with cash and cash equivalents of $21.4 million. We also had $35.9 million of debt, which is comprised of $30.5 million drawn under our senior credit facility with the remainder made up of stellar notes from acquisitions. Now, in terms of our guidance for the second quarter and the full year 2023, our guidance is offered with a backdrop of continued economic uncertainty and a dynamic labor market. We are raising our full year 2023 revenue guidance to a range of $111 to $113 million and adjusted EBITDA margin to a range of 17 to 18%. We are also introducing guidance for the second quarter revenues of $25 to $26 million and adjusted EBITDA of 2.5 to 3.5 million. Our revenue performance was strong in multiple categories in the first quarter, with trends building on the momentum we developed in the second half of 2022. These results are encouraging and inform our outlook for 2023. We expect continued positive momentum and bundling success with our HR compliance and tax processing solutions. We believe our multi-tiered HR offerings and automated ERTC filing capabilities are resonating with our small admin size business customers. Assure Marketplace is also expected to be an important driver in 2023. We are growing our list of partners and expect strong momentum from this solution. This is the result of a dedicated effort to enhance our technology and to leverage the data we have in our business. Further projects are anticipated to go live in the coming quarters. Regarding interest income, we have enjoyed our best quarter yet, with float as our consolidated efforts have enabled us to take full advantage of rising rates. We believe float revenue will be a strong contributor to our revenue performance in 2023. We are also continuing to advance our product development, sales development, and our centralization initiatives as we focus on high margin revenue streams and generating efficiencies and operating savings. In terms of acquisitions, while nothing is imminent, we will continue to be prudent in evaluating targets and will execute if the right opportunity arises to create value for our shareholders. With that, I will turn the call back to Pat for closing remarks.

Thanks, John. I'd like to conclude by saying we are very pleased with our performance in the first quarter of 2023 with notable successes in the following areas. First, We grew revenues organically by 36% year over year in the first quarter, driven by new sales bookings growth of 163% across multiple products. The successes that we had are the result of a lot of hard work over several quarters to enhance our products and to focus on our sales efforts in building out our sales team. We're continuing to invest. in product and technology to create a foundation for sustainable growth, and we made strides in enhancing our human capital management tax and treasury systems. These enhancements will help bolster our suite of offerings and provide our sales force with increased cross-selling opportunities. We also improved our cost structure and efficiencies by pursuing consolidation and standardization initiatives. As a result, we are on track to deliver annual savings of $5 million annually once the implementation is complete. These efforts enabled us to deliver margin expansion with quarter one adjusted EBITDA margins reaching 25% and non-GAAP gross margins reaching 78%. For 2023, based on our current outlook, we anticipate delivering double-digit organic revenue growth and strong adjusted EBITDA margin gains. Our revised higher revenue guidance anticipates positive momentum with our HR compliance and our tax solutions, reflecting the upgrades we have made and leveraging our prior success in bundling our solutions. We also believe Assure Marketplace is a game changer for Assure as it enables us to leverage our technology and data to deliver new high margin revenue streams. Interest revenues also are anticipated to continue to increase due to the rise in rates and investable balances. As we continue to grow in 2023 and beyond, we expect efficiencies through the scale and consolidation to drive continued margin expansion ultimately guiding us to sustainable positive net income and free cash flow. In conclusion, we're very excited about the performance of the business and our future direction. We're eager for the quarters and years to come and remain focused on delivering consistent results for our stakeholders. We look forward to speaking with you again next quarter on or at one of our many investor conferences we're attending in the second quarter. So with that, I'll send the call back to the operator for the question and answer session. Operator?

Thank you. Ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 1-1 again. Again, if you have a question or comment at this time, please press star 1 1 on your telephone keypad. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Joshua Riley from Needleman Company. Mr. Riley, your line is open.

Hey, guys. Thanks for taking my questions. Great job on the execution here in the quarter. It's fun to see these other items layering in the model. I guess just on the ERTC, as we see that coming through the rest of the year here, maybe you can help us with how we should think about how the ERTC is going to be layering into pro services and other revenue. Can you just review, are some customers bringing you large batches at once and then there's a steady state amount after that that they bring you or how is that working exactly?

There's a lot of questions there, Josh. I'll try to address them. It kind of factors into the balance of the year. We've not taken a ton of extra credit into the balance of the year for ERTC. We think there'll be some, but probably not at the same levels that we've had in Q4 and Q1. At least that's not what we've modeled at this point. And they're all different flavors. We have some where we do have these minimum relationships, and then we have some where we're just directly contracting with the customer. So it's a little bit of all different flavors.

Got it. And then follow up on EBITDA guidance here. It implies, you know, pretty healthy margins, which is great to see the nice uplift here. Can you just help us parse out how much of the uplift specifically this quarter in the EBITDA margin guidance for the year is from higher interest income assumptions in the model? versus other sources of margin accretive revenue like ERTC and Marketplace entering the model?

So, I mean, I'll take a shot in, Pat. You can give your perspective. I think in terms of the model, you know, what we've tried to demonstrate, you know, both of Q4 and Q1 is that as we add these incremental revenues to the top line, we think we've got a pretty efficient operating model. So, it's kind of – it's – It's like the FIFO concept, you know, which dollar contributes that incremental dollar to the margin? I don't know. I mean, it's a combination of marketplace, high margin, flows to high margin, ERTCs that are pretty high margin, right? HR compliance is at a pretty high margin. So what we're really doing is adding a lot of different revenue streams that are all high margin, so I wouldn't attribute the increased guidance and the flow through to one specific revenue stream personally. I don't know, Pat, what you're thinking.

Yeah, Josh, and I would agree with John. I think, you know, if you think about the first quarter, We had approximately $5 million or so W-2s compared to 4.2 last year. That, in and of itself, is going to create some high margin in the quarter. ERTC, if you look at the one-time revenues, professional services, if you assume run rate, usually it's about $1.5 million. The rest would be ERTC. We're guiding what we think is appropriately with the visibility we have in Q2 and the rest of the year where obviously the operational and gross margin improvements we've made over the last couple years are starting to pay off. And, you know, we believe the guide is appropriate. And we do think, you know, we have some upside based on volume if it's there. But, you know, right now we think that's the appropriate guide. And we're pleased that we're able to raise guidance now two quarters in a row. Got it.

Thanks, guys. Fun to see the strong results. Thanks, Josh. Appreciate it.

Thank you. Our next question or comment comes from the line of Brian Bergen from Cowan & Company. Mr. Bergen, your line is now open.

Hey, guys. Good afternoon.

Thanks for taking the question. I guess just wanted to start off at a high level on the demand environment. So you clearly carried strong momentum here, but would value your perspective on any changes at all versus, let's say, three months ago, just given the U.S. banking volatility since we last spoke. So any nuances in client behavior that's changed and then anything you can comment on through April?

Yeah, we haven't seen it. I mean, I think volume has been really positive in the small business marketplace. I think there's trepidation in, you know, obviously the regional banks and some of that stuff. But as far as just creating buying behavior, you know, we just haven't seen it right now. You know, our clients, still can't find enough employees. You know, maybe when they would look for five, they're looking for three, but they're still looking for employees. I think the trepidation is more what will come and, you know, if two or three regional banks is it, or is there going to be eight more down the horizon? I think those are the questions that they have. But as far as running their business, growing their business. We haven't seen a great deal of behavior change lately.

The only thing I would add potentially is, and you're reading the same stuff that we are, I think just what goes on in Congress with debt ceiling and do they in fact create a recession by their behavior. I think that's the other thing that's kind of going on in the background. But again, to Pat's point, I don't think we've seen it manifest in our results yet, but I do think That's at least what everybody's talking about when we talk to people.

Okay. Okay. Understood. And then pivoting to margin, maybe margin progression. So can you just talk about your investment initiatives as you're going to progress through the year? Just looking at the EBITDA outlook, the EBITDA margin in 2Q, and then the implied second half EBITDA margin, any key considerations we should be mindful of, whether it's revenue mix or timing of investments as you move through the balance of the year?

No, I think, John, you can answer as well. I think just at a macro level, we're investing in product. We're investing in salespeople. We think we've made some healthy investments to date, and we'll continue to invest in that. As far as growth or growth drivers or HR compliance, the marketplace, tax, and ERTC and float, in addition to just driving more bundles of products and services. So we'll continue down that playbook. We think we have pretty good visibility in not only revenue but also margin, and we'll continue to make some investments to grow the business.

Yeah, I would just say that, I mean, I think in general some of the employment environments helped us. We've been able to opportunistically add some people into the dev environment and also into the sales environment. We had them budgeted for the year, but we've been able to get them in earlier than we might have hoped. So I think we're actually optimistic with some of those hires that they'll start to contribute earlier. So that's the only thing I would say back to past points.

Does that go for sales as well, or is that mostly dev?

No, we have some good sales hires as well this quarter.

Okay, great. Thank you very much.

Thank you. Thank you. Our next question or comment comes from the line of Eric Martin. I'm sorry? Eric Martinuzzi from Lake Street Capital Markets. Mr. Martinuzzi, your line is open.

Yeah, Mike, congrats as well on the quarter and the outlook. Just curious regarding the cost structure, this $5 million of annualized savings by the end of the year, are there people-related cuts that are coming here? Is this all on the back of integrated systems and the elimination of maybe some consultants? Where's that savings coming from?

Yeah, all those. Exactly. Yeah, it's a combination. It's not a white switch event. We've been working on this for the last couple of years, trying to get the business more standardized and nationalized. We're just starting to see some of the benefits of that, both on the systems side as well as on the operations side. So I think we're starting to realize some of the efforts that we've been putting forth. And again, we're putting those dollars back to work again terms of putting it into the product and put it into Salesforce so they're hopefully you know start to create that momentum going forward for us and continue that momentum going forward for us.

Eric I'll give maybe an example and and while it's you know I think it ties to your question in a limited world but but you know we put some calories and thought into a treasury system internally and And what we were able to do is go from 125 bank accounts to less than 20. So from a systems perspective, we were able to make those changes, save costs in the bank fees that we were paying to the tune of 800 grand. What we were also able to do is build an automated or a more automated check reconciliation process as part of that. So we were able to do more with less and take some people out of that reconciliation process by making it easier. And then as well as automate the process. And then when you look at some feature functionality that we were able to build, when some of the regional banks ran into some potential issues, we were able to isolate those accounts right away and not have to really do a ton of manual effort. So that's one example within about seven pretty big projects that we've been able to not only get some savings, and we'll have some savings to come, but then, as John stated, redeploy them into development and sales resources.

Understand. Thanks for taking my question. Thanks, Eric.

Thank you. Our next question or comment comes from the line of Jeff Van Ree from Craig Hallam Capital Group. Mr. Van Ree, your line is open.

Great. Thanks. Thanks for taking the question, guys. Congrats. A number for me. First, obviously, Pat, you've done a lot on the product side. You've had a lot of capabilities. I think the pace of innovation is probably the highest I've seen. Have you seen specifically as it relates to new customer capture changes in win rates to the degree that you can track them and measure them?

You know, we definitely have seen the volume go up quite a bit. Our pipeline is very strong. When you think of the pace of change, it's almost in every area of the business. You know, we invested in software tools around marketing. Marketing lead sources are up over 40% of a new sales is a marketing-led process that was probably 18% a year ago. So continuing to drive results in that area. We're getting more at-bats due to kind of the pipeline. Our win weights are going up, and they're increasingly going up in a bundle when we lead with... you know, either ERTC, HR compliance, you know, we have higher win rates and able to capture the business owner as opposed to perhaps a functional leader. So those are the reasons why we've been able to win. And then, you know, kind of continuing to drive a more modern UI and a modern system, we're gaining you know, kind of win rates as we speak, but we also think we have a number of items that, you know, we're early in this journey, and we'll get those breakthrough results continuing all throughout the year and early next. So it's a journey, and it's a series of small differences on all aspects of it, but really, really pleased where we're at.

Makes sense. I mean, obviously, we're seeing good cross-sell upsells. and presumably larger deal counts. What about the seats, the tax ID numbers being processed on a weekly or monthly basis? What kind of TAN growth have you seen kind of year over year recently, and how does that compare to, you know, three, six months ago?

You know, I mean, I just think W-2s, I mean, we did 4.2% million in W-2 revenue last year. We did close to five this year. Clearly that means we're getting more revenue for W-2s and, in effect, a good proxy for people that we produce payroll in. But it's not just payroll, right? Our HR compliance line is more than double than So not only the companies that are using payroll, but also using HR compliance has gone up dramatically and we're still at relatively low penetration rates. So for us, it's about the marketplace, it's about more people on the platform, more companies on the platform, and then a really good cross-sell component that allows them to use more and more products and services.

Okay, just two other quick ones for me then. Just sales headcount now and goals maybe by year end, and then the last would be, Pat, you mentioned some consumer apps that you're thinking of with respect to marketplace. I don't know if you want to tip your hand, but even giving a broader sense of what might be to come there would be interesting.

Yeah, I think, first of all, sales headcount, I think March 31st, we were at 94. We'll be over 100 here in the second quarter. you know, we'll give you, you know, kind of a proxy in the third and fourth quarter, but I would assume we'll be in the low hundreds, you know, the rest of the year. As far as, you know, consumer apps, et cetera, you know, I think one of the areas where we roll out the Zazune relationship, which is earned wage access, you know, obviously our employees now have access if they want to, get paid on an off-cycle payment 12 times a year to deal with rent. They have the opportunity to do that, and they can do that with a click of a button. That's an example of it. I think you'll see a more formal rollout of the employee and employer portal that really addresses that. But that's probably the second half of the year. So I'll raise that in one of the future earnings calls. But that's kind of a tip to where we're going.

Fair enough. Real nice work. Thanks.

Thank you.

Appreciate it.

Thank you. Our next question or comment comes from the line of Greg Gibbous from Northland Capital Securities. Mr. Gibbous, your line is open.

Great. Thank you. Good afternoon, Pat and John. Congrats on the quarter. Wondering what do you expect maybe the marketplace to contribute to the top line this year as a percentage of the total?

Yeah, Craig, first of all, welcome to Coverage Universe. We appreciate you, Northland, covering us. And Northland is a great firm, so thank you. What I would say on the marketplace, you know, we announced, you know, a couple of press releases here. with Harbor Compliance and ZayZoon. I think the rollout of ZayZoon is just starting to happen. I think you'll see more revenue in the back half of the year. A rollout of the marketplace is company specific. It's a technical interface as well as in some areas like ZayZoon and consumer adoption. So it takes some time. I think it'll be more meaningful in 24, but it'll continue to be revenue in 2023. I think you'll see announcements at the pace of about two a quarter throughout 2023 and more to come in that area. But the marketplace is, the idea is strong. We see some really nice opportunities. It does take a while to set them up, but once you do, you know, you have some meaningful revenues. So, we're excited about the model, and you'll see some activity, and we'll telegraph that, and then over time, you'll see more revenue, and we'll provide updates quarterly on that.

Okay. Sounds good. I wanted to follow up on kind of the increased margins. You know, great to see the expectations for the year going up. Wondering, you know, how much of that improvement is a result of increased scale from revenue growth versus maybe the improving operating efficiencies you've been talking about?

Yeah, I think it's, again, I try to address this comment again. I think it's a combination, right? So the revenues that we are adding incremental are very, very high margin and have a pretty solid fall through. So I think it's taking cost out of the structure and redeploying those into the R&D and sales areas, but then simultaneously adding revenue streams to the top line that have a pretty healthy fall through. So I think it's a combination of both of those.

Yeah, and the only thing I would add is, you know, I think we've talked about this before, but, you know, it's a high-pitched thoughts business with the platform investments. And if, for example, you have a tax change, the programming on the tax change, whether you have one client or 100,000 clients, it's the same amount of work. We feel like we've gotten through the high fixed cost and we're getting into a kind of rhythm of some incremental fall through and and we're pleased with that fall through and You know as we get scale the benefits of scale if we do this, right, you know every piece of work Becomes a little bit cheaper at scale than the previous and we believe we're on that track and then as John said the mix has been favorable for as well for us where we've been able to layer in a higher margin product. So really excited about the opportunity and where we could go. We're just getting started and to be able to, you know, raise margin again is very rewarding for us.

Got it. Helpful. I guess the last one for me, just relating to the recurring revenue growth, nice to see it up 22% year over year. I noticed it was a little bit lower than the 25% growth you saw last quarter. Just wondering if you can give a sense of maybe what that driver was.

Yeah, I don't know. Quarter over quarter, I mean, sales have been very strong. Bookings have been strong. Retention was a little bit ahead. I don't think there was anything super notable. I think for us, You know, we were happy with the results and happy with the growth. Maybe, you know, there was a little anonymity in the compare, but I don't think there was anything that stood out that we were concerned about.

Okay, fair enough. Appreciate it, guys. Thanks.

Yeah, thanks, Greg. Welcome.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star 1-1 on your telephone keypad. Our next question or comment comes from the line of Rich Baldry from Roth MTKM. Mr. Baldry, your line is open.

Thanks.

Could you maybe talk about the growth in the new sales bookings? I think you said it was 163% on top of a pretty tough compare year over year. How do you feel about your ability to keep growing that? Is that an area where maybe you're understaffed or stressed or And maybe you can talk about, you know, sales tenure in that area. Is that one of the things that's helping you? Trying to get a gauge for how much capacity you have to keep that up. And then maybe tag that with, you know, how broad you saw that new sales bookings. Was it concentrated around verticals or geographies or an enterprise partner side? Or did you feel it was pretty broad-based? Thanks.

Yeah, thanks, Rich. And thanks for the thoughtful question. First of all, I think from a numbers game, we're going to continue to invest in sales from the numbers. But what I'm most pleased with from the sales perspective is our marketing programs are really starting to pay off. Our cadence is really good. Our pipeline is growing. And then what I would say, the investment we made really since December of 19, our turnover has been low. People are successful. They're achieving. We just came off our summit awards meeting. And people are starting to talk about that they're going to reach the next summit awards next year, potentially in the early second half of the year. So people are winning. They're excited they're winning. And they have visibility. And as you know from covering this space, years two and years three, you get exponential productivity improvement. Because once you understand the space, you're able to really drive results. You know, I would say it's been a broad swath of sales reps that have led to this performance. Really good marketing, really good bundling activity, and then excellent leadership. The combination of Bill Goldstein, our President and Chief Revenue Officer, and Mike Benoit, our Marketing Lead, They've really got a nice rhythm going. The people are excited. And by the way, the next level management is recruiting really good people. They're seeing the results. They're seeing success. They have bigger territories than most of their competitors. They have bigger bundling opportunities than most of their competitors. And people are gravitating where they can win. So I think it's a series of keeping... are people with us engaged um they're getting good leadership they're getting the good bundles they're getting good tools to be successful pipelines are strong and we're having success so we we don't want to mess with uh they're happy we want them to continue to drive excellent results and we see that for the foreseeable future thanks and last for me b

When you look into the M&A pipeline, do you feel like there's been some softening of expectations from the other side? And then maybe contrast that to your internal efficiencies are improving. So does that lower the hurdle to what you could acquire because you could make it more creative, quicker, sort of faster than you might have thought so previously? Thanks.

Yeah, so first of all, I think there's no doubt. that I think there is a little bit of a softening of expectations. We've been really heads down on growing our organic revenue and getting the operational efficiencies as well as the growth engine in place. We'll turn to the second half of 23 and 24 to look at acquisitions. There's nothing imminent here because we've been really focused on eliminating distractions and just growing our business and growing our revenue. I do think as we look to pop out and we've been engaged in some conversations, I do think expectations have changed a bit. And then as far as integration of any potential acquisitions, we're really confident that we can get those integrated in a very short order. And that's all really due to some of the system changes we made, some of the operational efficiencies. And so our people are ready to digest business when the time's right. I think the market's starting to come to us as far as future targets, but that'll be a second half, really, 2024 conversation as opposed to right now. But when the time's right, we're definitely going to strike, and we do think expectations are starting to come in a bit.

Thanks. Congrats on another great quarter, Pat.

Hey, Rich, thank you. Appreciate it.

Thank you. Our next question or comment comes from the line of Vincent Colicchio from Barrington Research. Mr. Colicchio, your line is open.

Yeah, Pat, congrats on the quarter. Just a couple for me. Most of mine were asked. Curious about the bookings growth breakdown between new and existing clients.

Yeah, I think we're about 55% to 60%. Existing clients, 40 to 45 new business. Maybe it ticked up a little bit on existing clients, but pretty good overall. We were pleased with the mix.

You had mentioned a couple times that you're happy with the marketing programs. I thought maybe you can give us more color in terms of which programs are working best.

Yeah, no, we implemented SalesLock, which is kind of an auto dialer tool a while ago, Zoom Info, which has been very successful. So the tools are in place. The thought leadership, Mike Benoit's team does a really nice job with that. But it's not just Mike. Mary Simmons in the HR compliance area does a really good job of spelling out what it means to be compliant in HR. So we have some good campaigns. We have a good cadence. We meet just on sales and marketing really every day to talk about the cadence and the messaging and the scripts. you know, how we're going to market. And we put that in place. And then finally, from a systems perspective, you know, we have rolled out the service cloud of Salesforce across the whole organization. So everybody's on a common phone system, common chat system, common service cloud, common Salesforce. So the tools are in place and then the leaders and the individual contributors are executing in a big way. And so the focus has been there and then success breeds success and when you have success and And you can build on it. People have the opportunity with the comp plan to make a lot of money. And we've gone to quarterly attainment. So they see line of sight in a very short period of time where they have ability to blow it out. And it really aligns with the four quarters of the year. And then it goes back to what I'll call our our rainmaker, but Al Volstein has put this program together and has really done a nice job.

And the last one for me, I missed what you said earlier in response to an earlier question about ERTC. What is your growth expectation for the balance of the year?

We don't have a lot. Obviously, we have a little bit played in for the balance of the year, but not having it growing off of this quarter or the fourth quarter. Obviously, When we put out our guidance at the end of Q4 for Q1, we exceeded it in terms of what our expectations were, but we've not played in a ton of growth relative to this quarter for the balance of the year on ERTC specifically.

Okay.

Thank you.

Vince, thank you. Appreciate it.

Thank you. I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

No, I appreciate all of you joining on the call today, whether you're an investor, third-party analyst, current client, employee. Assure's been on this journey for a long time. We're really excited about the momentum that is happening here. We're doing all the right things. We're starting to get rewarded for it, but I still believe the best days of Assure software are to come, and there are They're that way because the people that are along for the journey and have done all the hard work. So I appreciate each and every one of you. And we look forward to seeing you at one of the conferences that we're at in the second quarter or in the second quarter earnings call. So thanks and have a great day. Take care.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day. Speaker, stand by.