Asure Software Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 13, 2023

There are 10 speakers on the call.

Operator

Greetings. Welcome to the Vashore Software's Third Quarter Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Operator

At this time, I will now turn the conference over to Patrick McKillop, Vice President. Patrick, you may now begin your presentation.

Speaker 1

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Q3 2023 earnings call. Following the close of the 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 expects, believes and may to indicate forward looking statements, and we encourage you to review I will hand the call over to Pat in a moment, but I just wanted to take a moment to remind folks of some upcoming Investor Relations activities. We will be participating in the TD Cowen HCM Conference tomorrow, November 14, with virtual 1 on 1 meetings.

Speaker 1

On November 15, we will be attending the ROTH MKM Technology Conference in New York. And on November 16, we will be attending the 14th Annual Craig Hallum Alpha Select Conference in New York, plus participating in the 13th Annual Needham Virtual SaaS 1 on 1 Conference. The management team will use a split squad to cover both events on November 16th Investor outreach is very important to Asure, and I would like to thank all those that assist us in our efforts To connect with investors, I would like to remind everyone that this call is being recorded and will be made available for replay via With that, I would now like to turn the call over to Pat Geppel, Chairman and CEO. Pat?

Speaker 2

Thank you, Patrick, and welcome everyone to Asure Software's Q3 2023 earnings call. I'm joined on this call by our CFO, John Pence, and we'll provide a business update for the quarter and our outlook for the remainder of 2023, Plus our guidance for 2024. Following our remarks, we'll be available to answer your questions. As you can see From our reported results, our strong momentum continued in the 3rd quarter with strength coming from solid execution Across the business, our revenue growth in the 3rd quarter was 34% versus the prior year period, Which was almost entirely organic, reoccurring revenues grew 19% versus the prior year period and our non reoccurring revenues were up Slide $3,600,000 versus the prior year period once again driven by ERTC revenue strength. We will discuss more detail on ERTC once we get to our updated guidance, which we gave in today's press release.

Speaker 2

Our HR compliance revenues and Assure marketplace revenues both showed very strong growth during the quarter versus the prior year period, And we're very excited about the future for these business lines. Over time, we believe that the Assure marketplace It can become 30% plus of our total revenues and it is a high margin business as is the HR compliance business. Additionally, Interest revenues contributed to the growth in the quarter and we're able to benefit from the rise in the yield curve, plus we benefited from Consolidation of bank accounts, which drives higher investable balances. We continue to build on our momentum by advancing our technology Through leading partnerships and launching strategic sales initiatives such as the bundling of our 401 products with payroll To drive new client additions, this particular initiative was launched a short time ago and the reception we have received Thus far has been very enthusiastic. Many small businesses traditionally have not had the resources To offer 401 retirement solutions, but approximately 22 states in the United States have mandated 401 plans For small businesses, and we expect more to pass similar mandates, the U.

Speaker 2

S. Government's SECURES Act 2.0 Aims to increase employee participation in retirement plans by funding the setup of employer based retirement plans, While providing the funding they need to do so and Assure has the solutions employers need to set up the plan. Our sales efforts And the 3rd quarter produced a 26% increase in new sales bookings over and above The 91% increase we delivered last year, we've expanded our sales force during the year and been very pleased with the quality of the new hires we made. We're supporting our sales efforts with digital marketing, which is driving higher level of sales leads and Productivity in 2023. Based on our performance and our current expectations, we're guiding for 4th quarter revenues to be in the range $25,000,000 to $27,000,000

Speaker 3

which excludes

Speaker 2

any potential revenues from ERTC filings. We are expecting our 2024 revenues to be in the range of $125,000,000 to $129,000,000 with EBITDA margins But does include our plans to resume acquisitions in earnest. As many of you are aware, The IRS placed a pause on the processing of ERTC claims back in September to clamp down on some bad actors that were filing claims, which should not have been filed. Asura is a processor of claims only, and we refer our clients to their tax advisers To see if they qualify for the ERTC credit, we continue to await further clarification from the IRS And expect the program will likely be resumed. However, given the uncertainty, we want to be conservative in our assumptions On ERTC revenue going forward.

Speaker 2

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

Speaker 4

Thanks, Pat. As Patrick mentioned at the beginning of this call, several of the financial figures discussed today are given on a non GAAP 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 in the Investor Relations section of our website atinvestor.assuresoftware.com. Now on to the 3rd quarter results. Revenue reached $29,300,000 in the 3rd quarter, rising by 34% relative to prior year period.

Speaker 4

Recurring revenues rose 19% relative to prior year period to 24,000,000 3rd quarter recurring revenues grew on the strength of our HR compliance solutions, Assure Marketplace and increased interest revenues With the average client balance exceeding $200,000,000 in the quarter. ERTC revenues were recorded in professional services, hardware and other category in the current and prior year period. Non recurring revenues saw an increase of $3,700,000 on the strength of ERTC processing activity. Net loss for the Q3 was $2,200,000 a $2,300,000 improvement over the prior year's loss Of $4,500,000 Gross margins rose by 10 percentage points to 72% In the Q3 relative to the prior period, while non GAAP gross margin rose 8 percentage points to 76%. EBITDA for the quarter was $3,000,000 up $1,700,000 from prior year period.

Speaker 4

Adjusted EBITDA rose by $4,400,000 relative to prior year to $6,200,000 and our adjusted EBITDA margin reached 21% The quarter compared with 8% in the prior year period. 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 the expansion of our sales and marketing activities, we continue to believe there is substantial margin upside over the longer term as the business scales. We ended the quarter with cash and cash equivalents of $32,800,000 During the quarter, we completed an equity capital raise For net proceeds of $43,000,000 We also paid off $30,900,000 which This pay off substantially enhances Assure's cash flow and This accretive to earnings and creates financial flexibility as we execute our stated strategy to deliver double digit revenue growth By growing both organically and inorganically. Now in terms of guidance, for the Q4 of 2023, 2024, we are guiding 4th quarter revenues to be in the range of $25,000,000 to $27,000,000 Which at the midpoint of the range would equate to 19% growth year over year.

Speaker 4

Adjusted EBITDA for the Q4 is anticipated to be between $2,000,000 to $3,000,000 Revenues for the full year of 2023 are Still expected to be in the range of $118,000,000 to $120,000,000 with EBITDA margins between 19% to 20%. Moving on to the 2024 guidance. We expect revenues to be in the range of $125,000,000 to 129,000,000 With adjusted EBITDA margins up between 20% to 21%. As Pat mentioned in his comments earlier, each of these new guidance figures Exclude any contribution from ERTC revenues, but assume a resumption of acquisitions. We are awaiting further clarification from the IRS pause that was placed on processing claims in September and we feel that being more conservative is the best approach.

Speaker 4

We believe that the program will resume with some modifications to make the application process more stringent. And so there is The growth from our HR compliance at your marketplace as well as Revenues and our newly introduced 401 solution are all expected to continue being strong contributors going forward. Additionally, our payroll tax management product has multiple shots on goal with the platform being offered as a service to large enterprises As well as HCM vendors. While the above mentioned are strong contributors to our growth, we also expect to drive growth through inorganic methods By acquiring businesses that we feel are attractive, our growth profile going forward will be a mix of both organic and With the recent capital raise and debt payoff, we have the flexibility to resume making smart profitable acquisitions. In conclusion, we are pleased with our performance in the Q3 and the momentum we have built on the strength of product development, technology and sales.

Speaker 4

This gives us confidence in our forward looking guidance. We are excited about the remainder of 2023 and are looking forward to 2024 It's potentially a breakout year for Assure in driving profitable growth and leveraging the initiatives we have implemented across the business With that, I will turn the call back to Pat for closing remarks.

Speaker 2

Thanks, John. We're pleased to continue to deliver growth in the 3rd quarter, achieving 34% revenue growth. We achieved this growth by investing in products and technologies that make a difference for our clients. It's really gratifying to Assure Marketplace is just getting rolling and is expected to contribute to our growth for the longer term. Its results to date have been meaningful contribution to our overall performance and there's lots more to come.

Speaker 2

As I previously mentioned, The SECURE Act 2.0 gives small businesses the funding they need to implement 401 plans, Which many states are mandating now and we expect more to pass mandates as well. Our recent sales initiative in bundling 401 With payroll, it's got an enthusiastic reception thus far and it's only early days into that effort. We also anticipate demand for our HR compliance solutions will continue to be healthy as businesses increasingly seek to supplement their internal capabilities with external experts who can help them navigate the increasing complexity and doing business day to day. Our guidance in the Q4 and 2024 both reflect our expectations for continued growth, Which will be delivered with a combination of organic and or inorganic growth. Our margins have continued to improve as the business has scaled And we have focused on improving efficiency across the business, which helps improve the cost structure.

Speaker 2

In 2023, we've expanded the sales force as well as invested in the marketing initiatives And we now feel the business is right sized for future success as we enter 2024. We'll continue to provide innovative human capital management solutions that help small businesses drive Human Capital Management Providers grow their base and large enterprises streamline tax compliance. Thank you for listening to the prepared remarks. So with that, I will send the call back to the operator for the Q and A session. Operator?

Operator

Thank you. At this time, we'll be conducting a question and answer session. And our first question is from the line of Joshua Riley with Needham and Company. Please proceed with your questions.

Speaker 5

All right. Thanks for taking my questions and nice job on execution here in the quarter. I guess maybe With regards to the ERTC claims that you've already submitted and the accounting and cash flow ramifications included in these expectations and maybe Some more color on how that impacts the 2024 guidance that you highlighted in the press release?

Speaker 4

Yes. Josh, I'll take a first shot at it and then Pat can add to it. We have obviously seen a little slowdown in terms of cash coming in from the IRS and to our clients since September. We see a balance is actually down quarter over quarter. So I thought we did a good job on the 3rd quarter leasing collecting Some of the prior monies that we recognized for ERTC claims.

Speaker 4

As Pat I think we're I'd be pretty clear with regard to our guidance. For the Q4, we've not included any revenue in the numbers that we guided In terms of revenue, dollars 25,000,000 to $27,000,000 And then again, for the Q4 I think for 2024, the 125 to 129 guide that we gave in terms of revenues also includes no Incremental ERTC revenues. Now, we think that it's going to get turned back on, so there'll be some Kind of upside potentially to that guidance, but we didn't want to take it into account in terms of the Near term, just because of the uncertainty, and this one is going to get turned on and how it's going to get turned back on. But that's kind of how we played it in at this point.

Speaker 3

Yes. I would say a couple of things. 1, just I want to point out in our press release, The guidance was $125,000,000 to $127,000,000 We there was a typo there, it's $125,000,000 to $129,000,000 and verbally we Said that, we'll make that correction as quick as possible. As far as the guidance with ERTC, we're going to follow the IRS' guidance and we do believe that the program probably will turn on, but we'll wait for their guidance and we want to take it out of the numbers So there was no ambiguity and take a very conservative stance. That being said, we are filing Paperwork as we get it.

Speaker 3

And we know that on behalf of our clients, it's in the queue. And When and if that resumes, we'll process according to the IRS regulation. And to

Speaker 4

put a little bit finer point, too, just on 4th quarter guidance. If you think about last year, 4th quarter, without ERTC, We were roughly $22,000,000 There was approximately $7,000,000 in Q4 of last year, $2,000,000 of it was in recurring and $5,000,000 in the non operating line. So we're looking at 22,000,000 And kind of relative to the 25% to 27% guidance. So we think the midpoint of that's kind of in the mid teens Growth, so it's kind of 14% to 23% is what we're guiding for in terms of growth quarter over quarter From prior year when we exclude ERTC. So that's the I think that's the real compare that we want people to take our focus on is we're going to take it out of the guide, we often need to take it out of the prior year compare.

Speaker 4

And so we feel like it's still a pretty healthy growth, but it is a little bit of a muddy story.

Speaker 5

Got it. And then just another follow-up on the Q4 guidance. If you look at the implied adjusted EBITDA margin, It's down sequentially, as you would probably expect with a little bit of loss of leverage from the lower ERTC revenue. But why would it bounce back? Maybe you can help us in 2024 to kind of that 20% to 21% range?

Speaker 5

Thank you. Yes.

Speaker 4

I think we've been pretty consistent, I think, in this messaging. It's a scaled business, and we think if the revenue breaks, that's where we generate the adjusted EBITDA, right? So We're back in our guidance kind of in that again for 'twenty four, revenue guidance is $125,000,000 to 129,000,000 We think that after the revenue breaks, we should be at 20% to 21% adjusted EBITDA company. This year's guide, I think, was 118 to 120 in total for the year, producing 19% to 20% adjusted EBITDA. So the composition of the revenues is not the key.

Speaker 4

It's really the Absolute number, absolute amount of revenues. And so we're getting a little bit of that impact in the 4th quarter with the decline in revenues as a result of that Well, we're ERTC revenue, but we think in absolute numbers, as that revenue gets back into that size, We can produce that amount of adjusted EBITDA.

Speaker 3

Yes. And Josh, just as a footnote to that, we make decisions 6 months ahead of, In many cases of where we're going to go, clearly with ERTC and if you think about the summertime, We know we wanted to expand the sales force to 120. We knew we wanted to do potentially a raise To get more aggressive in replacing ERTC revenue, we didn't know ERTC at the time was going to happen so quickly. So our path doesn't change. The Q4, we have made investments in salespeople and tax filing.

Speaker 3

We've made investments in the technology area, and all that was planned investments that we started to make over the summer. When ERTC was halted or paused on September 14, what we did is continue those investments, And we're really happy with the raise and the ability to play offense. But what that did in the 4th quarter is put a little pressure Temporarily on EBITDA, and so we've called that out now that we've taken ERTC. And as John mentioned, as we get back to the revenue numbers The $125,000,000 to $129,000,000 that EBITDA snaps back very nicely because it is a scale business.

Speaker 5

Got it. Very helpful color. I'll pass along the queue. Thank you.

Speaker 3

Thank you, Tash.

Operator

Our next question is from the line of Bryan Bergin with TD Cowen. Please proceed with your questions. Hi, guys.

Speaker 6

Thank you. Appreciate you providing an initial 'twenty four outlook here just in the middle of the uncertainty. As we try and unpack An apples to apples recurring growth rate implied in that 'twenty four outlook.

Speaker 7

Can you give us a sense

Speaker 6

of what the grow over pressure combined from the ERTC and the revenue will be as you turn the calendar from 'twenty three to 'twenty four?

Speaker 4

Yes, I think from my perspective, float shouldn't have a lot of it should be kind of flattish. In terms of ERTC, for the 1st 9 months this year, it's roughly $17,000,000 that we have to grow over. So You kind of think about what we're doing in terms of the guide and that $17,000,000 ERTC, we're probably 100, 102 ish Exiting this year in recurring revenue or revenues. And so that 125% to 129%, we're talking to really is a 25% to 29% growth next year. Again, this is and I think we made the point clear in our prepared remarks, That's going to be a combination of both organic and inorganic.

Speaker 4

So we've started putting some of the raised money to work and we're going to do some more of that And next year or so, I think we've been pretty transparent on that. It's pretty consistent with the model we've been talking about over the years, right? It's in the higher deck. We expect it's going to be an organic and organic grower over time.

Speaker 8

Yes. And the only thing

Speaker 3

I'd say, Brian, is If you think about the $100,000,000 or so that John mentioned, and then if you think about second quarter, it was a little over 20% repetitive Well, if you think about lapping into tough compares around float, you may have About 6% or so kind of headwinds on the flow. But as far as momentum in the business, This quarter continued close to that 20%. Float would be a headwind and the marketplace might be a little bit of a headwind on Lapping growth compares, but we feel really good about the sales motion and the repetitive revenue. And then that's why we've been adding to it And feel that we can lap the ERTC compares with a combination of the organic Growth engine that we built as well as the tuck in acquisitions that we're in a unique position to execute and that's why we did the race.

Speaker 6

Okay. Okay, that makes sense. And I guess as the as you think about it organic versus inorganic, is it kind of relatively even mixed So according to the long term strategy, as you think about that 24 view?

Speaker 4

I think so. It will be lumpy, right? It's not perfectly linear. So you're never going to see it just line up 100% even. It will spike it once in a while with an acquisition.

Speaker 4

But I do think it's When I think about it, I do think that is a pretty healthy mix of both.

Speaker 3

Yes. And we have really good visibility to double digit organic growth. We will one of the reasons we did the raise is we want to get aggressive with inorganic growth and we feel like we have a pipeline of So while it might be lumpy, there's pretty good certainty on the revenue going forward.

Speaker 6

Okay. Very good. And if I could squeeze one more on, can you just comment on how client employment levels trended in the quarter?

Speaker 3

Really about flat. It's interesting. Small businesses still have more jobs than people. And there are certain industries that cannot get people hired even today. What I would say is There is a little bit of a white collar recession, and there's pressure on that higher end.

Speaker 3

But I would say in small business, we've had a mixture of Some pressure around the technology area and some of the higher end employment, but I would say that blue collar employment or In the areas of restaurant, in the areas of even trades, they can't get enough people. So, the overall hiring has been about flat. And seasonally, we would have expected maybe a little bit of an increase. But clearly, there's a want there to hire more employees if they can get them.

Speaker 6

Okay. Thank

Operator

you. Our next question is from the line of Richard Baldry with

Speaker 7

Thanks. Can you talk about sort of the M and A pipeline then seems to be factored in for 2024? Are you seeing reasonableness in what sellers are looking for and interest levels to take action on it? And just any sort of characteristics around that? And then maybe given we took down a lot of the debt in the quarter, When you look forward, what kind of terms or structures you're really trying to focus on?

Speaker 7

Would it be a lot less on the debt side, more on cash and stock?

Speaker 3

And John will jump in as well. But when I think about, 1st of all, the environment of small business payroll companies, The environment is pretty tough. First of all, regional banks have stopped lending. So, access to capital Is the number one concern. 2, the payroll industry in general is getting regulated more and more By state money transmitter licenses KYC, which is Know Your Customer AML, BML, which is anti money laundering, etcetera.

Speaker 3

So, small businesses have a tough time keeping up legislatively. They have a tough time keeping up with the changing landscape of the laws. They have Tough time keeping up with capital needed. And in some cases of ACA, some of the banks are requiring deposits that You know, are tough to fund, especially if debt levels are tough to get. So the backdrop is that what I would say is also When you think about how they're going to grow their business and what they look like and interest rates going up, Very often, they might be looking for a different exit strategy at this point in time To counter what they're going through and we're a logical exit strategy for them.

Speaker 3

So, we've had some conversation over the last couple of years. We get with our resellers and we get with our trusted partners a couple of times a year. And many times, you can telegraph that early on. We did a Subsequent acquisition that we put is an extension of the queue in October already. We do believe we have a pipeline.

Speaker 3

As far as multiples, the multiples are reasonable and feel That they're starting to pull in given the backdrop. And then people are worried about potentially a recession or potentially a Slowing down in the economy. So, we think it's the right time to continue to grow. And then, for us, We've been purposeful about kind of growing this business and calling out it's a scale business. The operational and technology initiatives that we've to improve the bottom line and really grow margin here 10% over the last couple of years.

Speaker 3

We're ready to handle that volume. And so, in many cases, luck is preparation meeting opportunity. We feel it's really a good time to go and be aggressive here. And the pausing of ERTC has given us a catalyst As well-to-do that. So, those are some of the things of how we think about it.

Speaker 3

And then, as far as your last Question around lending or cash or stock. For us, we have Three levers. We have cash. We have a seller note, which is important to us because it's a low cost note and it protects us On indemnification, from a stock perspective, only if we feel that the acquisition could add value to us long term while we look at stock. We also have a little over $30,000,000 in cash and feel that we have the ability to make some acquisitions.

Speaker 3

We do think the lending market over time will be more reasonable than it is. So that's a lever that we could add. But some kind of cash, stock And indemnification of a low cost loan will continue to be our model.

Speaker 7

And flipping back to organic, you posted up a 26% increase in bookings on top of 91 a year ago. You talked just generally about average tenure sort of capacity you feel like your utilization is or What's left? Can you continue to grow? Or do you think you really have to focus more on adding headcount to try to keep up the organic growth now? Thanks.

Speaker 3

Yes. Thanks, Rich. And we are adding from 100 sales reps to 120. And One of the reasons we're adding is, we got people successful. We're going to have over 50% of them at the summit that we have I would say that that's a record number for us that are going to go to the summit and they've been successful.

Speaker 3

The training program we put together, the hiring of people, we've been able to attract really good, what I'll call, And to assure they've been successful, we also have a culture of mentoring and You've done a really good job bringing people into the organization. So there's going to be no slowing down of continue to grow. And then If you look at the model and we've improved margins here, almost doubled margins the last couple of years because we're starting to get scale, We want to not only invest in our talent, but then also add more. And we believe that as we add more and get the More gross dollars, not only from productivity, but new people and the quality of the new people that adds to the bottom line. So it's a multi Your commitment, but we feel really strong about it and we're fortunate to be in a position to be able to do that.

Speaker 7

Thanks.

Operator

Our next question is from the line of Brad Reback with Stifel. Please proceed with your question.

Speaker 7

Great. Thanks very much. Heading back to 2024, the guide, from your commentary, is it correct to assume about $10,000,000 to 15,000,000 From acquisitions, is it the $125,000,000 to $129,000,000

Speaker 4

Yes.

Speaker 7

Great. And the employment trends that you're modeling for 2024,

Speaker 4

It's just flat. We've not taken anything down. We've assumed our employers are going to stay relatively flat for 2024.

Speaker 7

That's great. That's all I got. Thanks very much.

Speaker 3

Thanks, Brad. Thanks, Brad. The

Operator

The next question is from the line of Jeff Van Rhee with Craig Hallum. Please proceed with your questions.

Speaker 7

Great. Thanks for taking the questions. Pat, just On the SECURES Act, maybe you talked about early traction. Can you put a little oomph behind that? Any quantification, a little more color there would be helpful.

Speaker 7

And then On the 26% growth in bookings, does that include or exclude ERTC? If it includes it, what was it ex ERTC?

Speaker 3

Yes. Just a couple of things. First of all, your first question, Jeff, was around I apologize. Say that again.

Speaker 7

The Cures Act, you said you're off to a

Speaker 4

certain point.

Speaker 3

Yes, yes, Cures Act. And I'm sorry. Shortly after September 14, which put a pause on ERTC, we've already begun to pivot towards Secured 2.0 Act. And those that don't know about Securus 2.0 Act, it's really a Social Security It's going to be challenged over the future years with retirement funding. There's still many Americans out there today that don't have to a 401 plan.

Speaker 3

And already now with the Secured 2.0 Act, the government will provide funding not only to set up a 401 plan, but also provide funding in the area of tax credits to employer matches. And So we get people starting to save and create some independence in addition to Social Security and that Sliding scale of the MAX goes over 5 years. That program has been adopted by 22 states already, and We anticipate that it will continue to be driven. And if you think about the data that we sit on with It has 401 deduction codes and it also has forms like the 5,500 To go over the plan, we're pretty visible and our offering already It's around compliance. And from a compliance perspective, whether it's minimum wage, sexual harassment training for those States that require it, our HR compliance, our payroll taxes, our payroll wage and hour, compliance is what we do And what we're skilled at, so we're going after those clients and those prospects in the states They have mandatory 401 plans.

Speaker 3

We're excited to partner with Benswaal, which is also partnered with JPMorgan Chase, which we're partnered With another company around our treasury management system. And so, we're going to go after 401 in a big way. I anticipate that we'll do in over 700 plants here next year. We're already probably do something like 10% this year, and we have visibility around 70 plus plants To sell here in the Q4, I wouldn't be surprised if we beat that. The marketing qualified leads, the sales qualified leads, the interest level It's really, really high, and we've only been doing this in a little bit over a month.

Speaker 3

So people are pretty excited about As far as sales numbers, the 26%, we have ERTC and we'll Start reporting bookings ex ERTC. We'll also do some with ERTC. Some are standalone Going forward, if we do book any RTC deal, it will be a current client with a current product. So we'll provide a bigger breakout of that. But suffice to say, the 20%, 6% on ARR It's really largely without ERTC because and we'll provide a bigger breakout of a definition BRTC, because in and of itself, BRTC was more of a one time event than an ARR event.

Speaker 3

It did get Kind of packaged and we'll have the kind of more have a nuance breakout for you in future quarters, but the 26% ARR Bookings is on top of what we booked in ARR, which implicit in that number did not include the RTC.

Speaker 7

Okay. All right, great. And then on Marketplace, did it ramp as expected? And any More precise thoughts or bounds around what it might do for 2024? That's my first question.

Speaker 7

And the last would be gross margin, John. Just what how should we think about gross margin

Speaker 4

Q4. Sid, do you want to go first?

Speaker 3

Yes. Yes. I will present the marketplace. First of all, 401, we were looking at some big category of marketplace. With the Secured 2.0 Act, we pulled it out of the marketplace and Really have it as a separate category with payroll.

Speaker 3

So that will perhaps take from the marketplace, but it's going to be a huge Initiative going forward, we announced Lendio in the marketplace this past quarter because small businesses do need Lending options that aren't regional banks, so that will be a good one. The Equifax relationship has gone very well Into the Q4 and momentum is building across the marketplace. We'll provide a more fulsome update We got a lot of partners that we're working on right now and as we speak into the Q1 of the following year. But suffice to say, we're starting to lap some tougher compares. By the same token, we're going to grow the marketplace and pretty Level is going to be pretty high pretty quickly.

Speaker 4

On margins, I would say, the way I think about it would be to think about just kind of the cost of goods sold. I believe That 4th quarter cost of goods sold will be in line with the previous 3 quarters. So if you take a blend of that, I think we did like 8.7%, 8.4%, 8%. So it's going to be in that range, right, somewhere between 8.7% and 8%. So I think that's a fair way to think about.

Speaker 4

And that Yes, the revenue will just generate the gross margin based on that cost gets sold.

Speaker 7

Yes, got it. Okay, great. Thank you.

Speaker 2

Thanks, Jeff.

Operator

Our next question is from the line of Eric Martinuzzi with Lake Street. Please proceed with your questions.

Speaker 8

Yes. You gave us the 9 months on the ERTC. I'm curious, can you give us the Q1 and Q2 revenue contribution?

Speaker 4

Yes. So you're talking about this year?

Speaker 5

Yes.

Speaker 4

The 23? Yes, I'm going from memory. I can dig it out of my notes here, but it was roughly, I believe, dollars 5,000,000 in the Q1 and $7,000,000 in the 2nd quarter and then about $5,000,000 So that's a total of 17. So testing my memory.

Speaker 3

And a lot of the one time revenue Services revenue in Q1, Q2, a vast majority of it was ERTC.

Speaker 8

Okay. So was there any recurring revenue in Q1 and Q2? I know there was in Q4, but

Speaker 4

I think there might be a couple of $100,000 in Q1. But yes, it was we had a contract that we changed Early in Q1 of this year, that was going to look like a recurring contract and then it morphed as we modified it.

Speaker 3

Got you. The real the big quarter that we had that the ERTC was in the 4th quarter reoccurring To the tune of about $2,000,000 As we change that contract, there might have been a couple of 100,000 that bled in the Q1, but the vast majority of ERTC is in the professional services line.

Speaker 8

Okay. And John, you said $5,000,000 for Q3, but I had $3,700,000 from your prepared remarks. Is that did I have that?

Speaker 4

That's an increase year over year, I believe. So I think we did 1.4% in Q3 of last year. So the 3.7% is just an increment, Fine, absolutely.

Speaker 8

Okay. And then last question, the sales headcount, I know you're targeting 120 by year end, where are we now?

Speaker 3

110 or 112. Let's say, we have commitments to 112, I think, as of today. So that's where we're at.

Speaker 8

Got it. Thanks for taking my questions.

Speaker 3

Thanks. Appreciate it.

Operator

The next questions are from the line of Vincent Colicchio with Barrington Research. Please proceed with your questions.

Speaker 6

Yes. Pat, I'm curious, did direct sales productivity meet your expectations in the quarter?

Speaker 3

I would say slightly behind, but all in all, it was a good quarter. Obviously, when the IRS paused ERTC on September 14. It caused a little bit of pivoting and just understanding and Sales cycle disruption, by the same token, we were already well on our way to Pivoting and working through the Secure 2.0. So maybe we lost a couple of weeks in that area. But all in all, We are very pleased with the quarter.

Speaker 3

We've been very pleased with the sales staff and the organization. We think we have the right leaders And the right people in place, and I'm pretty excited about the pipeline going into Q4. So maybe a blip that we had, that we had some change management. But all in all, I was very pleased.

Speaker 6

And any changes in the competitive environment, particularly interested in pricing?

Speaker 3

No. I would tell you, 1st of all, I think we're focused on ARR and repetitive revenue. Getting a customer is tough. I mean, we have good companies that we compete with and we get after it. And I'm very pleased in how we position and how we get our clients.

Speaker 3

I think we're winning our share, which is important. And we're getting to clients that with value propositions that are probably more valuable than our And broader in some respects, especially around compliance and legislation. So I feel really good about where we are. In general, it's a tough sales environment and people depending where if you're bullish or not or you Seeing a recession and all that kind of stuff. But we block out the noise.

Speaker 3

We have a value proposition Excited and energized talking to our sales people because they're successful and they're going to stay that way.

Speaker 6

Thanks, Pat.

Speaker 3

Thanks, Matt.

Operator

Our next question is from the line of Greg Gibas with Northland Securities. Please proceed with your questions.

Speaker 9

Hey, Pat and John. Thanks for taking the questions. Wanted to follow-up on assumptions with occurring versus other revenue in 2024 guidance. And maybe what could ERTC contribute next year, if not excluded, like how much did you take out from guidance reflecting that uncertainty?

Speaker 4

I think the majority of that guidance for 2024 is recurring. We've not forecasted an ordinary amount of nonrecurring. How much ERTC could it be? That's kind of speculative. We were running at a pretty nice Cliff, if you could tell, historically, I don't know what was going to keep at that clip going into 'twenty four.

Speaker 4

So I think if you were going

Speaker 3

to ask me that question maybe 2 or

Speaker 4

3 months ago, I probably I said, maybe $10,000,000 or so for the year. I don't know what that looks like now, just based on all the uncertainty. Again, that's why we didn't put it in the guidance. But Thanks for your first question. The current guide, the 125 to 129 assumes almost all that being recurring.

Speaker 3

Yes. And Craig, just if you look through even our past numbers, less ERTC, we're somewhere around 1,500,000 Services or so, if that. So, and that's a quarter. So, let's say, if you want to Include that or straight line, it is a number that's $4,000,000 to $6,000,000 maybe of professional services. Mentally, I was coming into this year over the summer saying I had to replace $8,000,000 to $10,000,000 of BRTC.

Speaker 3

The program is going to change a bit. I think it's going to be more stringent, which is Actually good and we support that, because I think there'll be a flight to quality around vendors, etcetera. But that's what I had kind of thinking that we would replace. So if that's kind of mentally where our heads at and What is to come, we hopefully have taken a conservative stance. And as we get revenue, great.

Speaker 3

But by the same token, we got to run our business in a way that we can optimize and get the best value proposition to our

Speaker 4

And this is what we're going to do.

Speaker 9

Great, very helpful. And yes, I think it makes sense to exclude it. Just great to get a sense of that Potential upside or how you were thinking about it. So I wanted to follow-up to, it sounds like leads still remaining strong. Like are you seeing Slow down there and maybe anything if you could comment on retention, any trends you're seeing there as well?

Speaker 3

Yes. No, We meet every morning and we talk about retention and our retention numbers have been pretty positive. Really since COVID, We probably had an improvement around 2% that was strictly related to COVID and then probably a 2% improvement That wasn't related to COVID. So our retention numbers have been very positive. Our cross sell components around HR compliance and tax and some of the other products and services that we're able to layer on have been very positive.

Speaker 3

So we feel like the things that we can control, we're doing a great job and we'll continue to Build on momentum. As far as the economy, I think, if you turn on the TV, sometimes there's doom and gloom and recession this and recession that. When you talk to Main Street America, they still they want access to capital. They want to Grow their businesses. They want to provide a value proposition to get better employees and more employees.

Speaker 3

And there's still more jobs than people. And Some of that might change over time, but even if it does change, I think it will bring more people to the workforce. With COVID, about 5,000,000 Americans dropped out of the workforce. I don't think we're fully back there yet. And if you think about where we are in a cycle as a country where you have people retiring maybe faster than people coming into the workforce And very little immigration, there's going to be pressure to bring people to workforce.

Speaker 3

If you do have a slight kind of recession, if you will, It will bring more people back to work. And I actually think that's good for Small Business America. So we're pretty bullish, pretty excited. I'll tell you, We're going to grow over ERTC here. And when you look at a repetitive revenue company That's $100,000,000 talking about guiding to $125,000,000 to $129,000,000 next year And do that and not include any ERTC revenue.

Speaker 3

You feel really good about Your business and we think we have a lot of momentum and we think the value proposition that we have on behalf of our clients will stand the test of time. So Thanks for the question. And but that's how we're thinking about it right now.

Speaker 6

Thanks. That's helpful.

Operator

Thank you. At this time, we've reached the end of our question and answer session. I'll hand the floor back to management for closing remarks.

Speaker 3

Yes. I was just thinking about it. 14 years I've been here, I started people got ahead. We had to do pay cuts And we had less than 50 employees and we're $10,000,000 losing $10,000,000 $0.10 a share. And what I would say is when I look Forward to turning a page on the calendar year.

Speaker 3

I couldn't be more excited about what we're building and what we're doing. We're starting to get Capacity and scale in this business, we're have access to people that are phenomenal. We have access to clients that we couldn't get in our early days. We're growing as a business, We're growing by leaps and bounds. And I'm very optimistic in the future.

Speaker 3

Yes, there might be some uncertainties here and there on the economy or what have you. But the things that really matter at the end of the day is growing your business, helping your It's helping your employees succeed as they build families, and we think we have a lot of momentum. So As investors, sometimes the scoreboard is the share price, and I get that. But I also believe that as We've done over time is build value in the share price. And yes, when you look at the scoreboard, it can be frustrating at times, but The best days of Assure are the best days that are going to happen here in 2024.

Speaker 3

So appreciate you Listening in and look forward to seeing you next time. Thank you.

Operator

This will conclude today's conference. You may disconnect your lines at this time.

Speaker 4

Thank

Operator

you for your participation.

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Earnings Conference Call
Asure Software Q3 2023
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