Asure Software Stock: Multiple Tailwinds To Sustain Profitable Growth (NASDAQ:ASUR)

Asure Software program (NASDAQ:ASUR) supplies cloud-based Human Capital Administration / HCM software program options primarily for SMBs. Their income comes from a mix of recurring {and professional} service charges. They generate recurring charges from payroll, tax administration, time and labor administration, and HR compliance actions achieved inside its platform in addition to from the cost made by reseller companions for white-labeling ASUR’s answer. They generate skilled companies income from implementation charges, consulting initiatives, upkeep, {hardware} gadgets, and transactional revenues from the Worker Retention Tax Credit score / ERTC.

85% of ASUR’s purchasers are served by means of ASUR’s white-labeled answer supplied by the resellers. As a part of its progress technique, ASUR had been strategically buying their HCM resellers between 2016 – 2021. This enables them to broaden their distribution channels and attain a broader buyer base.

The enterprise confronted a problem throughout COVID-19 in 2020, although progress has considerably accelerated since, and the present outlook suggests a excessive likelihood of continued progress adopted by margin growth resulting from some catalysts on the inventory. Draw back threat stays minimal to reasonable within the close to time period.

On this protection, I improve the inventory to chubby. It seems that ASUR has progressed very properly since my first protection in 2021, the place it was buying and selling at ~$6.3 per share then. Right now, the inventory is buying and selling at ~$12 per share.

Catalyst

I feel that three near-term catalysts could proceed to learn ASUR into FY 2023 and past. The primary one is the persevering with enchancment within the US employment price because the pandemic, the second is the well timed introduction of a number of options since 2021, resembling ASUR market, which have confirmed to achieve success and demonstrated the potential to maintain progress past 2023. Lastly, I view the $5 million annual cost-saving initiative talked about by the administration as a chance to keep up the comparatively strong gross margin degree as seen in Q1 in addition to to unlock margin growth.

As an HCM platform supplier, ASUR generates income from mounted and extra per-employee charges charged to its SMB customers for using its tax processing or payroll companies. As such, regardless of the mission-critical nature of the platform, companies like ASUR nonetheless depend on an optimum employment price as a key progress driver. In the course of the COVID-19 pandemic in 2020 when the mandated nationwide lockdown created large layoffs and headcount changes throughout companies of all sizes, the unemployment price noticed a steep improve to +14%. Finally, this appears to have affected a lot of ASUR’s SMB purchasers too, because it reported a ten% decline in its income then.

Since then, the labor market has step by step normalized and the unemployment price as of Might 2023 was 3.7%, which is just about on the pre-pandemic degree. Consequently, ASUR has additionally benefited from such macro enchancment. Only a 12 months after seeing a ten% decline, ASUR recovered rapidly and reported a +16% progress in FY 2021. Progress even reaccelerated additional to ~26% in FY 2022.

I feel that at 3.7%, unemployment price can be across the low finish of the pre-pandemic vary in 2019. As is clear with the layoff pattern and concern of recession, it’s doable that unemployment price might even see smooth uptick within the close to time period, although I consider that we could anticipate much less volatility. Within the close to time period, I anticipate that the unemployment price to in all probability range inside 3.4% – 5% vary, and if any, the influence on ASUR’s enterprise would even be minimal and in stark distinction with what we noticed throughout COVID 19. Because of this, I consider that ASUR ought to proceed to learn from the macro tailwind with its progress path stay intact in and past FY 2023.

Alternatively, ASUR has additionally demonstrated a robust capability to execute its progress technique to seize the macro-driven progress alternative, significantly in successfully leveraging strategic M&As to create worth. Recognizing that resellers play an important function in its gross sales movement, ASUR acquired ~17 HCM resellers between 2016 and 2021. This transfer appears to align with the truth that by gaining management over the reseller community, ASUR could keep and optimize its progress higher.

Moreover, I anticipate Asure Market, which was launched in Might 2022, to proceed driving progress for ASUR past 2023. In Q1, {the marketplace} enterprise already contributed 20% to the overall improve in recurring income. The important thing driver in any third-party integration market enterprise is the persevering with utilization and addition of latest complementary HCM companies by working with extra companions. These actions would then create cross-sell alternatives.

I feel that it’s comparatively stunning to see how rapidly {the marketplace} enterprise has gained significant traction in simply lower than 12 months after launching. As such, it’s fairly doable for {the marketplace} to make up 30% – 40% of ASUR’s enterprise sooner or later, as per the administration’s remarks in Q1.

Equally, the HR compliance service, enhanced by ASUR in 2022, has exhibited constant power in Q1. These achievements are mirrored in ASUR’s spectacular Q1 outcomes, the place it reported 136% progress in bookings and 36% progress in income, suggesting that the enterprise remains to be within the early phases of its momentum and prone to proceed its progress all through FY 2023.

In the long run, I additionally anticipate ASUR’s $5 million annual cost-saving plan to drive margin growth. I feel that there’s a lot of room for optimization throughout value of gross sales, S&M / gross sales and advertising and marketing, in addition to G&A as a result of doable operational inefficiencies from the current company initiatives over the previous few years, together with the 17 HCM reseller M&A roll-ups. In FY 2022 and 2021, as an illustration, improve in company bills resulted in G&A bills being 35% – 36% of income, a comparatively excessive determine. Equally, value of gross sales was additionally ~35% of income in FY 2022 – leading to 65% gross margin.

I feel that as recurring revenues proceed to extend alongside the cost-saving initiative actions, resembling consolidation and standardization efforts, going down internally post-M&As, we ought to be seeing margin growth resulting from value construction turning into extra environment friendly. Early indicators of enhancements have been seen in Q1, the place gross margin expanded to 74%, whereas G&A was already ~30% of income, 500 bps higher than the FY 2022 annual determine, and 100 bps higher than Q1 2022.

Assuming prices keep flat and an anticipated $5 million annual value saving is utilized in 70:30 proportion solely in the direction of G&A and price of gross sales (utilizing the FY 2022’s figures), meaning we could anticipate an FY 2023 G&A expense of +$30 million and price of gross sales of +$28 million, representing ~31% of income and 74% gross margin respectively. Because it stands, we’re principally taking a look at an analogous monetary outlook to Q1 2023, suggesting that the initiative is very achievable and ASUR stays on monitor to understand margin growth for the FY.

Threat

I consider that near-term draw back threat stays minimal to reasonable. Into the following 18 months, I might in all probability recommend traders hold tabs on the event of ASUR’s tax processing (beneath skilled companies / PS) and curiosity income (beneath recurring income / RR) streams. I view these two income streams to be far more delicate to the change within the macro state of affairs.

Since 2021, ASUR’s tax processing income has been pushed by the rising ERTC submitting actions in its platform. ERTC is a tax reduction program for companies impacted by COVID-19. In FY 2022, ERTC income contributed to the numerous 93% YoY progress in PS income. In Q1, PS accelerated additional because it grew by greater than 3x additionally as a result of progress in ERTC income. Because of this, PS ended up being +15% of ASUR’s total enterprise as of Q1 2023. On the identical time final 12 months, it was merely 5% of the enterprise.

Nonetheless, as per the 10K, this system is predicted to be discontinued in 2025 or probably even earlier, suggesting that ASUR ought to anticipate a detrimental influence on its skilled companies income at most within the subsequent two years.

Moreover, ASUR has additionally been producing curiosity income, which comes from the shopper’s funds collected for the aim of worker cost disbursement. ASUR would sometimes make investments these funds into low-risk short-term monetary devices, and acknowledge the return as an curiosity income beneath the RR stream. Because of the present high-interest price setting, curiosity income has elevated and contributed meaningfully to RR progress in current instances. In Q1, a rise in curiosity income contributed virtually 36% of the overall improve in RR and was the only largest improve, greater than a rise in HR compliance or market income, as per the quarterly report:

Recurring income for the three months ended March 31, 2023 was $27,956, a rise of $4,952, or 22%, from $23,004 for the three months ended March 31, 2022. Recurring income improve is primarily resulting from a rise of roughly $1,874 in curiosity earned on funds held for purchasers, a rise of $1,336 in HR compliance income, and a rise of $1,157 in income from AsureMarketplace™.

As with the ERTC outlook, ASUR’s curiosity income could probably expertise a decline, following the downtrend of rates of interest in all probability within the second half of FY 2023 and past as inflation softens.

Valuation / Pricing

For FY 2023, the administration guided to income of $111 million – $113 million and an adjusted EBITDA margin of 17% – 18%. To estimate the goal value for ASUR in FY 2023, I assume the next bull vs bear state of affairs:

1. Bull state of affairs (80%) – ASUR to complete FY 2023 with $113 million of income, on the excessive finish of its steerage, and an EBITDA margin of 17.5%, the midpoint of the steerage.
2. Bear state of affairs (20%) – ASUR to overlook FY 2023 estimate with $107 million of income. Because of this ASUR falls in need of its upward revised steerage and performs extra according to its outdated steerage of $105 million -$107 million as an alternative. Likewise, I anticipate EBITDA margin at 15%, lacking the brand new estimate however according to the outdated steerage of $14 million – $16 million.

I arrived at a probability-weighted adjusted EBITDA of $19 million for FY 2023. Contemplating the momentum on the inventory, ~18% progress, and excessive teenagers adjusted EBITDA margin, I feel that it’s doable for the FY 2023 EV/EBITDA to commerce nearer on the greater finish of 21x – 25x, which is a valuation vary based mostly on the low-mid progress payroll sector common for FY 2022 and FY 2023.

Nonetheless, making use of a relatively conservative 21x a number of with an assumption of $17.4 of web money and ~21 million common shares on a diluted foundation, I arrived at an FY 2023 goal value of $18.17 per share.

Contemplating that ASUR is buying and selling at ~$12 per share as we speak, there is a chance to understand a ~50% upside if the inventory finally ends up on the modeled goal value of ~$18 at 12 months finish, and subsequently, ASUR is a sexy purchase alternative at current.

Conclusion

ASUR has three near-term catalysts that may profit the corporate going into FY 2023 and past. The draw back threat within the close to time period is minimal to reasonable, with specific consideration wanted on the event of tax processing and curiosity income streams, that are delicate to macro adjustments. Regardless of relatively conservative assumptions, I discovered that ASUR is undervalued based mostly on my goal value mannequin. I set a goal value of ~$18 per share for FY 2023. At ~$12 per share as we speak, the inventory presents a sexy shopping for alternative. I give the inventory an chubby score.