Asure Software Q3 2021 Earnings Call Transcript

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Provided by Quartr
November 7, 2021

There are 12 speakers on the call.

Operator

Good afternoon, and welcome to Ashares Third Quarter 2021 Earnings Conference Call. Joining us for today's call are Asure's Chairman and CEO, Pat Goble Asure's Chief Financial Officer, John Pence are Head of Investor Relations, Randall Rygnitsky. Following their prepared remarks, there will be a question and answer session are the analysts and investors. I would now like to turn the call over to Raimo Rudniewski for introductory remarks. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Q3 2021 earnings call. Following the close of markets, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor. Asuresoftware.com, where you can also find the investor presentation.

Speaker 1

During our call today, we will reference non GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward looking statements that refer to future events and as such involve some risks. We use words Such as expect, 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 would 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.

Speaker 1

With that, I would now like to turn the call over to Pat Geppel, Chairman and CEO. Pat?

Speaker 2

Thank you, Randall, and welcome, everyone, to is Sure Software's 3rd quarter earnings call. I will begin today's presentation with an update on our business performance and strategy. Then we'll turn the call over to our CFO, John Pence, for a more detailed review of our financial results and outlook for the Q4 of 2021 in fiscal year 2022. We will then conclude the session with time to answer your questions. We are pleased with our performance in the Q3 with revenues reaching almost $18,000,000 which was up 12% relative to prior year and up 5% versus prior quarter.

Speaker 2

Macroeconomic trends continue to improve in our markets As is evidenced in the decline of the unemployment rate, I would say though there remains lingering softness in some areas Owing really to the labor shortage that is affecting many small businesses across the country. However, overall, We are pleased to have grown our organic revenues 8% versus prior year in this economic environment And our business is continuing to build positive momentum heading into 2022, driven by strong execution across the business. I also want to point out that Q3 was an important step forward in terms of executing our strategy. We divested the Space business, if you recall, in for 2019 in order to focus our portfolio and resources where we can make the biggest impact, and that is on the human capital management solutions for small businesses who need a strong partner so they can run their business. Then really we repositioned the Board of Directors And the management team in 2020 2021 in order to strengthen the organization's talent and leadership skills, so we could execute on this big opportunity.

Speaker 2

And in 2021, we're making targeted investments in sales, product and acquisitions, so we can enhance growth and margins for sure, of this strategy is execution. I believe we have the right people, The right resources, the right focus to successfully deliver against our long term revenue goal of 20% growth in revenues, driven roughly by equally organic improvements and acquisitions. So in terms of the 3 pillars of our strategy, which are sales expansion, product enhancements and target acquisitions, let's start with the discussion around acquisitions. In the Q3, we acquired 2 of our larger resellers, 1 based in New Jersey and the other based in Vermont. Both companies were acquired on the last day of Q3 and did not impact our results in this period.

Speaker 2

These resellers focus on providing payroll and related services to small and medium sized businesses within their territories. The acquisitions expand our direct operating territories, providing cross sell and up sell opportunities, and we will believe they'll be highly synergistic to our core business. We're really excited to bring these companies into the Asure family and then we expect them to be highly accretive to our business and our stakeholders over time. Both companies currently utilize our payroll solutions And accordingly, system conversion requirements are limited as we integrate their operations into Asure's platform. We expect that this should result in a smooth integration while we pick up new operating territories as well as experienced staff.

Speaker 2

Acquisitions will remain an important part of our growth strategy and we'll continue to be opportunistic in are rolling up our reseller partners that white label our human capital management solutions. We'll also consider acquisitions of other payroll businesses that complement and expand our capabilities as we build scale and scope to our solution offerings. Turning now to product. We're excited about the potential of our new human capital management solution we introduced in the market That combines the best features of our small business payroll and HR solutions into a single new solution with advanced customer experience tools. This significant enhancement simplifies the onboarding experience, provides new tools for employer self-service option now as part of our standard payroll offering.

Speaker 2

Also in the Q3, we launched a new partnership with Employee Navigator. We both have integrated our payroll platform with their system in order to provide employers with seamless communications and tracking across our combined networks. In addition to providing a much more integrated data solution, this partnership should lay the groundwork to enable us to move forward with our ambitions in the broker referral space. I also want to spend some time talking about our tax platform as well as HR for Health. Let's start with our tax platform.

Speaker 2

This is an asset we acquired in 2020. We feel it provides us with some outstanding differentiation in the human capital management market place, we've had significant client interest in our new tax capabilities, particularly among larger enterprise who see with the unique position that we have in the marketplace, this business has the potential to significantly expand are our total addressable market and to open up new client segments for us. We'll keep you updated on the integration As well as the product development that this business is, we're optimistic about the ability for this to be an important driver of revenues in the future, not only with tax filing, in addition to the money movement opportunities this opens up. HR for Health is another recent initiative we're excited about. This solution offers the healthcare industry full service payroll and tax filing services.

Speaker 2

We've had strong client interest for the solution, which is reoccurring revenues with a wholesale revenue model, it's growing and has a very attractive client retention characteristics, this solution has the potential to open up new end markets for us And continuing to grow our client base. So if you think of small dental offices, doctor offices, etcetera, That is the target audience here. It also fulfills our objective and that enables clients to focus on running their healthcare practices rather than focusing on back office improvement. We deliver the improvements for them so they can run their businesses. Turning now to sales activity.

Speaker 2

We continue to invest in our sales channels, our people and in lead generation activity for those salespeople. At the end of the Q3, we had 72 direct sales reps, up from 65 at the end of the Q2 and up from significantly from 31 when we started in 2020 after our Space divestiture. At year end 2021, we expect to have approximately 80 direct sales professionals. The average tenure of our sales team now is 14 months. It's up from about 10 months at the end of last quarter.

Speaker 2

Getting our sales staff to an average tenure of 18 months is an important milestone since at that point We see strong improvements in sales productivity, which then in turn drives revenues. With our recruitment And training efforts that we are getting closer to that important achievement while we continue to focus on the small business segment. These investments in sales and marketing are painting off with total bookings up 43% year over year in the 3rd quarter, Well, on a year to date basis, our small business bookings have doubled. I continue to be very proud of how the Assure team embraced these challenges and took a leadership role through the pandemic. For example, as part of our efforts to support more than 80,000 small business clients in navigating the complex COVID regulations, we introduced an employee retention tax credit, ERTC, solution to help them efficiently maximize this critical stimulus dollar program.

Speaker 2

I couldn't be prouder of our team as they have helped our clients file over $200,000,000 in total tax credits at the end of the 3rd quarter. These stimulus dollars can help our customers hire staff and grow their businesses. It also shows how our people and platform can respond to new and unique solutions and situations and deliver impactful solutions to our clients. As an essential small business, Asure remains committed to helping more than 80,000 small business clients navigate unprecedented compliance changes and grow in a very challenging environment. We're committed to ethical business practices, are values based culture, innovation, social responsibility and leadership as well as our support for small businesses throughout the United States.

Speaker 2

In summary, we're pleased with the Q3 performance. We acquired 2 of our larger reseller partners, Made significant strides in our product strategy, continue to invest in our sales teams, deliver another solid quarter of growth an economy that continues to experience new and significant challenges as we move past the pandemic. We're excited about our acquisition model. We believe our model works as we combine the acquired businesses with Assure's platform. We see the opportunity to drive significant value creation And enhance margins longer term, so that our future revenues can be effective in driving higher levels of EBITDA and cash well.

Speaker 2

Now, I would like to hand off to John Pance to discuss our financial results in more detail. John?

Speaker 3

Thanks, Pat. As Randall mentioned at the beginning of this call, several of the financial figures discussed today are non GAAP. You will will find a description of our GAAP to non GAAP reconciliations in the earnings release that was made available earlier today. The reconciliations themselves are also included in our most recent investor presentation posted in the Investor Relations section of our Web on our website at asuresoftware.com. Now on to the results.

Speaker 3

3rd quarter revenue rose by 12% versus prior year and 5 Recurring revenues grew by 7% versus prior year and our non recurring revenues more than doubled on the strength of our ERTC service offering, which continues to generate significant client interest. Interest on client funds was approximately $400,000 in the 3rd quarter, flat from the Q2 and up versus prior year by approximately $200,000 Client fund assets on our balance sheet were $174,800,000 at September 30 compared to $207,400,000 at the end of the prior quarter at $199,300,000 at the end of Q3 2020. We are pleased with our gross margin performance. Our non GAAP gross margin percentage reached 67% in the 3rd quarter, which is up 70 basis points versus Q2 And up from 64% in last year's Q3. This marks Q3 as the 4th consecutive quarter in which We have grown our gross margin percentage.

Speaker 3

This performance is owing to a return to revenue growth and cost containment efforts And has occurred despite the headwinds from higher pay and benefit increases. Non GAAP EBITDA for the 3rd quarter was $1,200,000 for an EBITDA margin of 7 The non GAAP EBITDA result was 21% higher than prior year and 15% higher from the prior quarter. Despite the increase in salary expense as we absorbed pay and benefit increases following the implementation of temporary reductions related to COVID. Compensation represents approximately 70% of our cash expenditures. So these adjustments have a meaningful impact.

Speaker 3

EBITDA comparisons also are affected by an increase in the number of sales representatives as we invest in a sales organization to drive higher revenues in future While there are some headwinds in the 3rd quarter expenses related to sales force expansion and pay restorations, we view these investments

Speaker 4

from the line of Steve.

Speaker 3

Turning to the acquisitions, we acquired 2 resellers in the quarter for an aggregate purchase price of $38,900,000 which was paid $25,300,000 in cash, dollars 6,600,000 in notes payable and by the issuance of 767,000 shares. The acquisitions have resulted in an increase in goodwill and intangible assets on our balance sheet. These acquisitions are important as we expect will accelerate our capacity to grow operating margins over time, yielding the benefits of operating leverage and the scale we have built in the business to date. We have a balance sheet capability to make further acquisitions and we'll continue to evaluate opportunities that fit our are our criteria and standards. Continuing with the balance sheet, we ended the quarter with cash and cash equivalents of $11,500,000 and had $39,700,000 of debt, which is comprised of an additional $30,000,000 drawdown from Structural Capital with a balance made up of seller notes from acquisitions.

Speaker 3

We achieved a critical milestone in the Q3 as we entered into a new $50,000,000 term loan facility with structural This facility is based on an advanced rate based on our pro form a annual recurring revenues. Aside from the recurring revenue ratio, We possess the financial structuring flexibility to pursue our previously stated strategy regarding organic and inorganic growth. We relied on the facility to complete the purchase of these 2 resellers in the Q3. We have openly communicated our plans to pursue acquisition opportunities that meet our from Goldman Sachs that we are really excited about. This venture is made possible because of the closure of our credit facility with Wells Fargo, Which enabled us to uncouple our credit facility from our money management activities.

Speaker 3

This has opened up new options for us with new partners and with new business opportunities. In combination with Goldman Sachs, we will be able to offer our clients state of the art money movement And to move into new business areas such as real time pay with 1 of the leading financial brands in the world. We also expect to benefit from their expertise in enhancing our investment returns as we invest excess client funds. In the quarter, we also booked a gain of 10 point This was booked as a discrete item in interest income and other line in our statements and is treated as for the Q3 of 2019. While the continuation of this credit is part of the current debate in Washington, we expect to qualify for similar quarterly credit in the 4th quarter if the law is not modified.

Speaker 3

Now I'm going to turn to guidance for the Q4 ending December 30 on the call for Q1, 2021. This guidance is offered with the backdrop of continuing challenging environment to predict future economic results, given is providing the following guidance. Revenue for the Q4 of 2021 is expected to be in the range of between $20,500,000 to 21,000,000 Non GAAP EBITDA is guided to be in the range of between $1,500,000 to $1,700,000 and non GAAP EPS is guided between negative $0.03 and negative $0.05 For 2022 fiscal year, we are also introducing the following guidance. Revenue in 2022 is expected to be in the range of $85,000,000 to $90,000,000 We also anticipate fiscal year 2020 to non GAAP EBITDA margin percentages and non GAAP EPS to be in line with historical percentages and seasonal trends subsequent to the Space divestiture. Consistent with our historical performance, we expect the Q1 of 2022 results will benefit from revenue generated by the annual preparation of federal reporting regarding to focus on cost levers that we can reasonably control, pursuing beneficial and accretive acquisitions, amplifying our core solution offerings by improving functionality and customer experience and by expanding our sales efforts to tap into market demand for innovating and trustworthy payroll HR now.

Speaker 3

With this stabilized foundation as a backdrop, we are pursuing exciting new product and service offerings to better serve over 80,000 direct and indirect customers and their over 1,000,000 employees. So with that, I will turn the call back over to Pat for for final remarks.

Speaker 2

Thanks, John. In summary, we are pleased with our 3rd quarter performance. We continue to have good momentum in the marketplace as evidenced by our 12% annual growth rate in revenues and 5% sequential growth in organic revenue. We grew our non GAAP EBITDA by 21% relative to prior year And 15% relative to prior quarter despite headwinds from restoring salary and benefits. Our ERTC solution continues to have great traction in the market and in total our clients have filed for more than $200,000,000 in ERTC credits.

Speaker 2

We launched the next generation user interface of our small business with payroll clients that combines our payroll and HR solutions into a single solution with improved user controls and a fresh new look. We implemented a new integration with employee navigator that keeps employee data in sync, adds value to our solution will enable us better to penetrate the broker referral marketplace. We completed 2 acquisitions that we're excited about And that we expect will be highly accretive for stakeholders over time. And we've diversified our sources of capital, which helps to drive the business forward for growth in both organic and inorganic revenues. I am very proud of the execution are the Asure team, their commitment to our clients and to providing enhanced payroll and HR solutions that meets and exceeds their needs.

Speaker 2

With that, I'll turn the call over to the operator for the question and answer session. Operator?

Operator

Thank first question will come from the line of Joshua Riley from Needham. You may begin.

Speaker 5

All right. Thanks for taking my questions. Congrats on the quarter, guys. Maybe starting off with the 2022 guidance of $85,000,000 to $90,000,000 in revenue. What how should we think about the organic growth rate assume in that number?

Speaker 4

Yes. I don't think anything's changed, Josh. I mean, from our historic guidance, I mean, we're hoping for 10%. I think this number really don't anchor too much on 2022 right now. What we were trying to give you is a sense of where the was out historically for 2022 with the impact of these 3rd quarter acquisitions.

Speaker 4

So I think more to come as As we go through the budgeting process and as we sharpen our pencil for 2022, but we did want to give you some sense as to kind of what the impact of the acquisitions would be, would be relative to kind of where everybody had us at for 2022. And we've not historically, at least since I've been here, been giving guidance that far out. So it was just an attempt to kind of some sense as to what we thought about the acquisitions.

Speaker 5

Yes. No, that's helpful. And then how much of the gross margin benefit in the quarter is due to the ERTC product? And then how sustainable should we think about those revenues being? And does that create a headwind somewhat going into next year if there were some change Yes,

Speaker 4

definitely helped on the gross margin, right. So we didn't add a lot of people to service that incremental revenue opportunity. So that was impactful. I'll let Pat kind of address the kind of headwind comment.

Speaker 6

Yes. I think Josh from my perspective, we've said scale and we've done a lot of improving in the business. We have several initiatives that we think will be impactful in 2022 to gross margin, including some of the new Product introduction, some of the centralization initiatives with AWS and You've been kind of refining how we go to business, including some of the robots that we talked about last quarter in the background. And So we think that there'll be several initiatives to layer in. As far as ERTC, we were opportunistic.

Speaker 6

We felt like it was a great program. And Danny pluses this quarter, we think there'll be some plenty of positives to help mitigate that or improve on that next Sure.

Speaker 5

Okay, great. And then maybe I can sneak one more in on that line of questioning there. You hired a new CTO at the beginning of 2021. Curious now as the M and A machine is kind of restarting, is there anything specific you can point to that you guys have done on the integration process on this side of COVID versus the acquisitions you made pre COVID that's either going to make the integration go quicker and or be more margin accretive? Thanks.

Speaker 6

Yes, I think couple of things. So first of all, really after the space business, we hired a new Board of Directors for the most part with human capital management expertise and I think they did a great job. Todd Wilevsky, who came from CopyPay and was former President. He's really in charge of some of the operational improvement initiatives going forward. And then specifically your question, Yasmeen Rodriguez, who is the CTO, who has a wonderful background in payroll and tax.

Speaker 6

And really, we're pointing to several initiatives that we think will help over time grow gross margins and help the Acquisition integration. First of all, almost all now by the Q1 of 2022 or Q2 of 2022 will be on the same instance of kind of or the same platform within the AWS environment. So that's a real positive development for us. 2, I think just the standardization initiatives that we have. 3, we talked about introducing the robots and really taking kind of the non value add work Out of the employment kind of cycle where we can keep headcount relatively stable, but really do a lot more with production around the robotic effort that was led by Yasmeen as well.

Speaker 6

And then finally, just kind of where we are within a product set and we introduced kind

Speaker 4

of a new user interface that will

Speaker 6

help us integrate going forward. We'll do That will help us integrate going forward. We'll do more stuff on the web. The customer will be able to do more in a successful environment. All of that will help us on the integration going forward.

Speaker 6

So it's not any one person, but a series of initiatives that we've been playing for over the next couple of years.

Speaker 5

Awesome. Thanks guys.

Speaker 4

Thanks Josh.

Operator

Our next question comes from the line of Richard Baldry from Roth Capital. You may begin.

Speaker 7

Thanks. Sort of thinking historically, I feel like M and A tends to be a bit of a drag on adjusted EBITDA before now integration optimization sort of brings up a new level. But against that backdrop, you're actually guiding for adjusted EBITDA to grow pretty solidly from Q3 to Q4. So Could you maybe talk about what gives you that confidence that those acquisitions aren't going to sort of pull back first before you go higher? And then how long should it take perhaps without an eye to your back end integration being completed across the AWS platform.

Speaker 7

Do you think you can be faster at fully integrating the acquired entities now and in the future? Thanks.

Speaker 4

Yes, I think we can. I don't We have not modeled in all the synergies in the Q4. Clearly, we are expecting that to bleed into 2022 and we would hope to We've done for sure by the end of 2022 with these integrations. To answer your question about The drag, I think just to be clear, I think Pat mentioned about just the integration Historically, these companies are using our same software platform. And in the difference, I'm trying to think of a good analogy, but it's Configuration.

Speaker 4

So it's the same use of software, but think about Excel and maybe moving buttons Right. So each one of these resellers might use our software just a little bit differently in the wild. And so what we're doing is where we're standardizing The use case of our software internally amongst all our previous acquisitions as well as when we bring across new acquisition, they kind of come into our use case of the same software. So we're able to do the integration a lot quicker, get to the standardization a lot quicker and then we hope drive margins, higher, a lot quicker and then we hope drive margins higher quicker as well.

Speaker 6

And I would just add, I'd point you to the Q1 acquisition. We Did a smaller acquisition in the Northeast in January. If you look at our kind of headcount and kind of where we've run the business here. This year, we've added some sales people, but the overall headcount is down from where that period was And meaning we absorbed that acquisition without headcount over time. And we're 9 months from that acquisition.

Speaker 6

I think, what a similar kind of result over time will lead to a good result here with these two acquisitions.

Speaker 7

Last thing, Can you talk about the degree to which the companies you acquired, the resellers were growing themselves or if this is really more about the earnings integration and you're not really thinking so much about the maybe productive sales capacity you're bringing on board from those? Thanks.

Speaker 6

Yes. No, I think both were very well run operators that were in the business. So while Both were growing. Now the backdrop of ER excuse me, COVID, etcetera, but they were growing. And And we anticipate that they will grow going forward and we also believe that their expertise coupled with Being in business as a partner for a decade or so will lead to a seamless integration.

Speaker 4

Yes. And I think we've been pretty clear on this point. This last year has been challenging just from the standpoint Yes. We're kind of at that breakeven point. And getting to scale is important to us.

Speaker 4

I think it affords us a lot more flexibility in what we invest in and the speed at which we invest. And so it's key for us. And I think we've been pretty transparent That we do want to get the scale quickly. And that's why we did the deal with Structural. That's why we put the registration statements on file.

Speaker 4

Scale is important. We're not going to do things. They're imprudent, but we do want to get the scale sooner rather than later. We would think it's important for the business.

Speaker 7

Great. Thanks.

Speaker 6

Thanks, Rich.

Operator

Our next question comes from the line of Bryan Bergin from Cowen, you may begin.

Speaker 8

Hi, guys. Good afternoon. Thank you. A question for you around client employment level. So 2 quarter here.

Speaker 8

So pre pandemic employment level, can you comment on where average client size for you sits today relative to prior to COVID And how much more recovery you're anticipating over the next couple of quarters? And then I didn't hear it, but just the pace per control metric in 3Q, sorry if you did disclose that.

Speaker 6

Yes. Just from a client level employment, let's talk at a macro level. Early in the COVID Mahesh said, I think we lost $25,000,000 in this as far as the United States of America jobs early. Then it normalized about $10,000,000 Even though you see improvement in the economy and the jobless claims, we're probably $5,000,000 or so out of the workforce. And we've done some IR deck modeling, etcetera, around that.

Speaker 6

As far as pays per control, this quarter, we were at a little over 20, I believe, as far as pays per control, probably Pre pandemic, probably in the area of 2022 or 2023, and some of that has some noise in it, but That's the order of magnitude. I would say this quarter, slight tick up. And just speaking Almost any business owner, they're looking to hire people. It takes 2 though. You got to want to hire people and then somebody's got to want to come into Job, and I would say Main Street America and small business in general, where we're affected, probably was a little bit disproportionately affected.

Speaker 6

So we're improving, but we're not quite there yet. Chad, I don't know if you have anything now.

Speaker 4

No, but you hit the point I was going to make at the end. I do think that our client base is disproportionately impacted and you hit the right metrics. There is a slide we added to the IR deck to this point. It kind of shows that that $5,000,000 gap still on Returned to normalcy, even though unemployment rates have started to return, there's still you'll see it in the news and all the analysts talking about it, there's still A gap in the overall employment levels pre and post pandemic. So I think we're still you have some upside in it kind of gets back to normal.

Speaker 8

Okay. All right. That's helpful. And then on as we think about these two acquisitions, Are they in line with the acquisition economics that you've talked about on targets in the past? So I guess, what are you expecting here in 4Q revenue contribution.

Speaker 8

I'm curious too, is the client size larger than yours? You've been talking about mid market pipeline here for a couple Curious if this was in line with that?

Speaker 4

No, I think pretty consistent customer base. In Revenue contribution is obviously reflected in the guidance we gave you at the 21% to 20.5%. The multiples we paid, I think we've been pretty And we talked about it in our IR presentation. Goldilocks scenario is 2 times. We think that smaller deals will be closer to 1 time And bigger deals will be closer to 3 times.

Speaker 4

We want to kind of be in that 1 to 3 range. These were on the higher end in terms of size. So you kind of infer from that

Operator

our next question comes from the line of Jeff Van Rhee from Craig Hallum. You may begin.

Speaker 9

Great. Thanks for taking my questions. Pat, I think you commented just briefly and I want to make sure I heard it correctly on the acquisition front. You said you were open to things and I thought you were saying open that are non Evolution of Retailers and more maybe a little bit of a variation on the typical model. So maybe just clarification on that to start.

Speaker 6

Yes. First of all, I think, obviously, we have a reseller network that is pretty powerful and we think we have some opportunities to continue growth. We're also though feel pretty good about our ability now to start to get to scale. And then as we get to scale, we think we have some other assets within the Family that could be interesting. And one of them that we talked about was our acquisition of PTM, Where we start to have standalone tax filing, we have some money movement.

Speaker 6

We think that there could be some opportunities as it relates to that. And then if you talk to our customer base, there's an interesting some interesting cross sell opportunities, etcetera. I think ERTC, just ability to get our customers to access to their money shows some of the ability that we can cross sell. We think that there may be some other opportunities. I wouldn't we're introducing it.

Speaker 6

I think it could be highlight some opportunities. I don't have anything immediate, but as we turn the page to 2022, there could be an opportunity that would present itself.

Speaker 9

Okay. That's helpful. And then on the HR Payroll integrated offering, can you put a wrapper around that at all in terms of expectations? Does that drive ARPU up what is the impact to Ross sell ARPU adoption? Just how should we think about the impact of this new integrated offering?

Speaker 4

I think first of all, some of the things that Pat mentioned are really just ease of use and customer sat, right? So I don't think ARPU uplift based on ease of use for customer sat, but hopefully that leads to higher retention rates. I think on the cross sell, I think Pat just kind of touched on a point that I think is pretty important. This ERTC was primarily sold in to our existing customer base. And I think we had a pretty good penetration, roughly 10% so far, which is pretty healthy for something that's only been out there for about 5 to 6 months.

Speaker 4

So really, really attacked our Customers and deliver tons of value to them. And I think it's kind of a proof point that as we get some of the other products that we've got Better ready to cross sell that we've demonstrated the ability to do that. And so I think that's kind of where Pat's alluding to for 20 Really want to spend some time honing some of the product lines that we've got in house and making them a lot easier for Our sales force to kind of take across the installed base. And I think, again, the acquisitions are an interesting point too, right? So they're primarily just buying one product today.

Speaker 4

So we're really going to focus not just on adding new logos, which obviously is always important, but really trying to make sure that we're delivering that ARPU increase and that value Across our current customer base as well.

Speaker 6

Yes. And the only point I would add is we're through the budget. We're just getting through the budget process. We'll wrap that here and then in March, we'll really talk about, I think, some more specific metrics. And frankly, we'll talk a little bit more about the product line, because I think we're Really increasingly excited about some of the opportunities since we look forward.

Speaker 6

So you'll see that in March.

Speaker 9

Yes. Maybe one last, if I could sneak it in, John, on the guidance that for FY 'twenty two non GAAP EBITDA margin and EPS growth in line with historical trends prior investors, can you just maybe expand on that a second? There's a lot of trends in there, which specific trends or relations are you calling out there?

Speaker 4

Specifically kind of the bottom line, right. So the percentages, there's a seasonal component to our EBITDA, which is pretty obvious, right. In that Q1, we really, really pop a lot of the And then it kind of trends just because of the absolute numbers down. So I think that's what I was trying to get across. And then EPS Just ties it right into that, right.

Speaker 4

So it's just kind of have that same trend and always going to be much bigger in the Q1. That's what I was trying

Operator

on our next call, we will come from the line of Eric Martinuzzi from Midstream. You may begin.

Speaker 10

Yes. My question is regarding the Q4 guidance. Given the 2 acquisitions, The gross margin assumption here, you guys have been operating between 66% 69%, just kind of going back here the past 3 quarters or so, what should we think about for gross margin for Q4 with the acquisitions layered on?

Speaker 4

I think, hopefully, we have a little bit of improvement over this quarter, but nothing heroic. I think I would expect us to continue to trend up based on some of the things that Pat Mentioned, but nothing dramatic. I think, you know, probably flat to a little bit up would be the way I would look at it.

Speaker 10

Okay. And you do you've laid out an aggressive goal. I mean, you looking backwards, you had an aggressive goal adding Coming into the beginning of the year, you mentioned, I think, 72 now and Another net 8 between here year end. We are kind of in that 7 weeks left in the year. Are these folks already kind of in the interviewing pipeline or are they yet to be identified those incremental direct reps?

Speaker 6

Yes. No, they're Identified or in the process, let's say, we hope to finish the year around 80. I think we have a really good line Excited that, I could see us then going up from there and how much we decide on that will be March's guidance. But Clearly, we think we have a lot of sight to turning the year at 80 reps.

Speaker 10

All right. And that is in the organic, we're not talking inherited reps from the acquired companies?

Speaker 4

It will be combined. Yes, I think the 80 would be both.

Speaker 10

Okay. All right. Thanks for taking my questions.

Speaker 6

Thanks, Eric. Thanks, Eric.

Operator

Our next question will come from the line of Vincent is Rui Chiault from Barrington Research. You may begin.

Speaker 11

Hello, Pat. Nice quarter. Curious how wage inflation, how do you see that impacting your business in the near term on the cost side? And Also in terms of pricing, is there any willingness to accept higher prices in the market?

Speaker 4

We haven't had a lot of resistance on pricing, Vince. And then on Craig, I think we're On pricing, Vince. And then on Craig, I think we're suffering some of the same issues that the rest of the market is Lower end of the employees, the people that are on the customer service side, generally are starting at lower pay rates, right? So it's kind of an And those entry level jobs are really where we're seeing more inflation across the board. We think we're going to be able to through it just with some of the efficiencies that we're trying to get in the business.

Speaker 4

But we're still in the 2022 budgeting process, But don't feel like it's going to be an inordinate headwind for us. But yes, we're definitely seeing it.

Speaker 6

And I think, Tim, one thing I would add is, I do think as we capture flow, sometimes wage inflation From our customers, we'll have an opportunity to capture those dollars and then ultimately that could lead to More flow revenue, but that's that'll be kind of growing with the market. And so that's one area where we could see it, would be a positive.

Speaker 11

And then, Pat, if you can comment on pricing in terms of Things you're looking at in terms of reseller acquisitions. I know there's some pressures on both ends. Folks think their assets are worth quite a bit more than they may be on the one hand. On the other hand, there's potential capital gains tax Changes coming. Are you seeing more deals that you can get done at economical value?

Speaker 6

No, I think it's always a healthy discussion. And I do believe, 1st of all, as the nation and the marketplaces Starts to stabilize coming out of COVID and we're not quite there yet, but there's a little bit more certainty. And when you Certainly, you can make those value judgments together easier. I would say there's some people testing the The market, but from the same token, I think common sense is prevailing. And I feel like we have the opportunity to get deals done here in the first half of the year.

Speaker 6

We're going to do the right deal and the right deal for this stage within Asure, but we think that there's opportunity to grow and to get scale and we want to take advantage of that.

Speaker 11

Again, nice job on the quarter. Thank you.

Speaker 6

Thank you. I appreciate it. Any operators or any other questions?

Operator

I'm not showing any further questions, sir.

Speaker 6

Well, thank you. I really appreciate everybody's attention on this call. We went into some detail, wanted to make sure you understood the business. We think we have some pretty good momentum. For those of you that have followed us, we think we're headed into a pretty exciting 2022.

Speaker 6

I'm very pleased with the

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Earnings Conference Call
Asure Software Q3 2021
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