Good morning. Welcome to Asure Software's First Quarter 2017 Earnings Conference Call. Joining us for today's call are Asure's CEO, Pat Goepel; CFO, Brad Wolfe; and Director of Human Resources, Cheryl Trbula. [Operator Instructions]. But first, I would like to turn the call over to Cheryl, who'll provide the necessary cautions regarding the forward-looking statements made by management during this call. Please proceed.

Thank you, operator. Good morning, everyone. Before we start, I would like to mention that some of the statements made by management during this call might include projections, estimates and other forward-looking information. This will include any discussion of the company's business outlook or guidance. These particular forward-looking statements and all of the statements that may be made on this call that are not historical are subject to a number of risk and uncertainties that could affect their outcome. You are urged to consider the risk factors relating to the company's business contained in our reports on file with the Securities and Exchange Commission. These risk factors are important and they could cause actual results to differ materially from expected results. Finally, I would like to remind everyone that this call will be recorded and it will be made available for replay via a link available in the Investor Relations section of our website at www.asuresoftware.com. With that, I would now like to turn the call over to Pat Goepel. Pat?

Thank you, Cheryl and welcome, everyone, to our first quarter 2017 earnings call. We certainly appreciate your continued support. And whether you're an employee, analyst, client, investor or valued third-party resource, we welcome you to the call. 2017 first quarter was a very strong quarter. We're very pleased with our results. It's a -- it's part of the process and the stock market keeps score and the metrics keep score, but I think it reflects that we're just continuing to make progress in the business. And as you saw from today's earnings release, all major metrics were up significantly across the board. We saw double-digit year-over-year growth in our cloud sale, 69%. And other key metrics, including revenue, gross margin, EBITDA, sales were up in the double digits. So very, very pleased with those results. We also increased our cloud revenue as a percentage of total revenue to 73%. Many of you have asked through the years, "How do we get our cloud revenue as a percentage to total revenues up?" And with the 3 acquisitions and our migration to the cloud and our emphasize in the cloud, last year at first quarter we we're 57%. This year 73% which is a big increase. As you know, migrating existing clients has been a major initiative as well as new sales and it's encouraging to see a very clear metric go from 57% to 73%. And that means that we're positioning Asure not only for success today in the first quarter but also down the road. Acquisitions. In addition to our improving financials, our cloud sales, our metrics, first quarter was a very dynamic period for us from an operational perspective. Notably, we had 3 acquisitions. Personnel Management Systems, Inc. or PMSI which is a leading provider of outsourced HR solutions.…

Thank you, Pat and good morning, everyone. Turning to our financial results for the quarter ended March 31, 2017. Revenue for the first quarter was up 60% to $10.7 million from $6.7 million in the same quarter last year. The increase in revenue was driven by increases in cloud, hardware and on-premises software license revenue which was offset by decreases in maintenance and support revenue and professional services revenue. Our recurring revenue as a percentage of total revenue improved to 85% compared to 73% in the prior quarter and 77% in the first quarter of 2016. Our cloud revenue increased 103%. Hardware revenue increased 57%. On-premises software license revenue increased 21%, while maintenance and support revenue declined 25% and professional services revenue declined 11% from the first quarter of 2016. And as Pat mentioned, our cloud bookings in the quarter increased by 69% from the first quarter of 2016. Looking at our revenues by source. Revenue for our workspace management solution, AsureSpace, in the first quarter totaled $4.1 million, an increase of 10% from the $3.7 million in the same quarter last year. AsureSpace cloud, hardware and on-premises software license increased, offset by decreases in maintenance and support and professional services revenues. Cloud revenue increased $98,000 or 5%, hardware revenue increased $427,000 or 127% and on-premises software license revenue increased $80,000 or 464% over Q1 last year. Professional services revenue decreased $151,000 or 28%, primarily due to the timing of services. In Q1, revenue for AsureForce, our workforce management solution, was $6.6 million, an increase of $3.6 million or 122% from the $3 million recorded in the same quarter last year. This increase was primarily due to our acquisitions of Mangrove in March of 2016 and the acquisitions of PMSI, CPI and PSNW in January 2017, resulting in $4.2 million…

Thanks, Brad. The January acquisitions that Brad mentioned some of the detail have already proven to be quite effective financially as well as strategically. And strategically, CPI provides us a beachhead in the Midwest to grow from. PSNW provides us a beachhead in the Northwest to grow from. PMSI, as we mentioned before, will give us a beachhead in the HR outsourcing area to help midsize companies grow and use our software. The M&A approach that we have where people already use our software, we will roll those back up. We feel like we have a model that's very, very effective. I think you'll see us do more of those this year and in the future. And we feel that that's a good way to grow. Organically, we're very, very pleased with our sales department. They were up big in cloud sales. Eyal Goldstein gets it. He is a good leader. He's hired some good people, both -- that report to him. We have some good leaders that we've hired in the last 6 months here with Matt Absher, in charge of benefit sales; Brad Burrows coming from ADP. In addition to that, we have a couple of people that we think very fond of that have been with us a couple of years, Sharon Weldon and where we feel we have the opportunity and the metrics. The pipeline has gone way up, visibility on some big space deals is high and then the HCM cross-sell product where we have $40,000 now is our average deal size. Clearly, the January kind of positioning to sell all products is working. So with that visibility, we've updated our guidance on the revenue side from $45 million to $47 million to $45.5 million, $47.5 million. I would mention also that the repetitive revenue…

[Operator Instructions]. Our first question comes from the line of David Hynes with Canaccord.

First, Pat, I want to ask you high level, maybe just on the M&A pipeline, what you're seeing out there? And then maybe more specifically, the CPI, PSNW model. I mean, how many of these opportunities are there out there? And then maybe you could just talk about kind of the economic value that accrues to you guys by bringing these service bureaus in-house versus just licensing them your technology?

Yes. Thank you, David. And -- what we have is, we have -- when we bought Mangrove, we had 15 service bureaus. We've acquired 2, so that would leave 13 left. They're already using our technology. We believe that the best outcome from an exit strategy for those service bureaus is to go to us because they're already using our technology. We have the most possible synergies as opposed to going to another payroll provider because the last thing the end clients want to do is switch software. And we also have familiarity with them over years and years and years. So we're growing our service bureaus and helping those service bureaus grow, but we're also being opportunistic in providing them an exit strategy. As far as the economics, we believe that there is almost a 50% gross margin capability -- EBITDA capability, I should say, when you combine the resources because we're already hosting the same set of software. We're already servicing. We're already implementing. We're already selling. So there's quite a bit of an economic value or incentive for us to be able to sell. And then from a paying or price, the owner of the service bureau gets a lot of comfort that there isn't a huge disruption. It's a continuation of their legacy and they get a payment from somebody, now that's very fair and very market value. And then we could enjoy the synergies going forward. And in many cases, they can either have a job or not, depending on what their exit strategy is. So we have about 13 of those left. As far as the overall M&A marketplace, we're active in our pursuit to double the company and to continue to grow the company. We have been active in the past and will continue to be active in the acquisition market. And then organically, we feel really good about the structure and the process of where we're in and how we build the business going forward.

Yes. Perfect. And then I wanted to ask about the sales force a bit. I mean, you have those guys selling all the products now which is great. I mean, that increases the cross-sell opportunity. But is there any worry or risk of kind of elephant hunting now that they have all the products in their bag? I mean, how do you ensure that kind of the velocity of deals keeps up as the scope and size of the opportunity increases? And I'm sure, with new sales leadership, that's a lot of the focus, but maybe you could kind of give us your high-level thoughts.

Yes -- no. I appreciate the concern and the questions and Eyal and I have spent a lot of time talking about this. Really -- we really are pleased -- we just upgraded the whole sales function in a big way from the previous management. Our thought process here is top down. We're going into accounts strategically as opposed to bottom up. We almost had an activity focus instead of a strategic focus. And now that we're going strategically, we're getting in at the CFO, the VP of IT, the CEO, the VP of HR. And what we're doing is we're selling a tops down ROI-based solution. And we're using our technology in the cases of facial recognition or sensor technology to really prove our thesis and prove results. What that's done is put data on the front end of the cycle in a higher level than before. And what that's led to so far is quicker sales cycles and bigger kind of sales deals. So we're very pleased with that progress. We have a long way to go. By no means are we done. Or could we stall? We're early in a journey. But what I would say, the results are very, very encouraging and the pipelines are very encouraging. And we're hoping that the fact that we're solution-oriented and ROI-based and selling top down will add velocity to the sales -- the speed of the sales cycle because in the past we were more a feature-function, tactical in selling bottom up. And as you know, when you go bottom up, you're kind of begging the CFO for an order as opposed to getting there, buy an upfront and then getting the deal to execute. So we're cautiously optimistic and the first quarter results were pretty good.

Great. And then maybe if I could sneak one last one in for Brad. Brad, help us think about what we should see sequentially on the cloud line. I know some payroll businesses have kind of onetime form filing revenues in Q1. Is there any of that and should we expect to see sequential growth in cloud revenues? Or how does it kind of -- the linearity of it unfold over the balance of this year?

Yes. I think you're going to see -- you're going to continue to see growth in cloud revenue. I do think there is some seasonality which drives some of that in the first quarter, but I don't think that's going to cause us to come down substantially going forward. And as Pat has said and I said in my remarks, you look at the pipeline, you look at the bookings, you look at all the metrics, all that volume is increasing. So our expectation would be that cloud revenue would continue to increase and cloud revenue hopefully as a percentage of overall revenue will increase.

And our next question comes from the line of Eric Martinuzzi from Lake Street Capital Markets.

I was just curious to know -- the backlog, one of the things that you talk about is, how that's going to be rolling out throughout the year? But it was roughly flat. I think it was up 3% year-on-year. Talk to me about -- because I would have thought it would have been higher given the acquisitions.

Yes. Thanks, Eric and -- on the acquisitions, the acquisitions, in many cases, are mid-market kind of payrolls that really aren't as sophisticated as public company reporting. So they start -- I mean, they kind of start on the same day, if you will. And they're selling, in many cases, the payroll services. As we layer more services onto those acquisitions in the area of COBRA, time and labor management, health and welfare, space management, you may see backlog go up in the second and third and fourth quarter as it relates to those acquisitions. It did go 9% up year-over-year. We've been fortunate in some of our bigger deals over the last couple of years. We were early in the space deals, early on the sensor deals. A lot of that backlog has worked itself through the system. So even though sales are up pretty good, our backlog was 3% sequential, 9% year-over-year. So we're working through some of that backlog. I would say backlog now is at a place where now that PSSI was installed, Morgan Stanley was installed, MetLife has been installed, we've had some 3 really big deals get installed and those were global deals. We have some global in Procter & Gamble. We anticipate a few wins in the second quarter that will be over a year. But I would think backlog will go up, maybe half as much as sales growth or so over time. But in this quarter, we worked through a lot of the backlog and especially the January 1 starts.

Okay. And then one more question for me. On the gross margin, obviously, terrific expansion there, 77.3%. Certainly, a nice bump versus a year ago. But you do have a consulting business now. Just wondering how we should think about where gross margin winds up finishing the year. Or maybe just if we could focus on Q2, just so we have a sense of how the business has changed with the acquisitions and the increased cloud revenue as well.

Yes, I think -- this is Brad Wolfe. I think the gross margin -- we talked about this before. Sort of that 75% to 77%, even with the addition of PMSI, we expect those numbers to hold. We don't expect any significant lessening of the margins. And certainly, as we grow, I think there is even some -- opportunities for that to expand. So I think you're going to see us end the year in that 75% to 77% range. And on PMSI, a portion of that revenue, we would consider recurring because they have contracts that renew. And so that's just renewed revenue for us. So I don't think it's going to -- you're going to see pretty much what you've seen in the past.

And our next question comes from the line of Mike Latimore from Northland Capital.

I guess, Pat, do you still think you could see some organic growth rate improvements sort of throughout the year, just so [indiscernible]

Absolutely. I think, last year, we entered the year about 10% organic. This quarter, there is some noise in the numbers with the 3 acquisitions and the Mangrove partial. But I think if you take the noise out and some of the double count revenue of service bureaus, we probably grew about 11% or 12%. I still think organically, we'll probably be in that 1%, 2% improvement per quarter or so. So the goal would be 20% organic layer-on acquisitions and 20% EBITDA. And we'll continue to drive that formula for success.

Okay. And the huge growth in the pipeline again this quarter. Just want to clarify. That's mainly -- you're seeing mainly cross-sell opportunities with your broader product portfolio and it's mainly cloud?

It exactly -- it's exactly that. And what it is, is when we're leading with a ROI-based strategy, a bigger sales cycle, more products to the solution, we were able to get bigger opportunities. Now we got to close those opportunities. It's still relatively new for us. So while we're excited about the pipeline and excited about the opportunities and excited about the early results, we still have ways to go, but we think we have the right leadership, the right secret sauce, if you will and the right aggressiveness in the marketplace to continue to work through and get the results.

Great. And just last question. You mentioned some big space fields in the pipeline. I guess, can you just provide a little more color around that? Other than having great products for that vertical, what's sort of the catalyst with the customer to be making these decisions? Is it tied to lowering of real estate cost? Is it initiatives around next-gen work environments? What do you see as kind of driving those individuals?

Yes -- no, Mike, I appreciate that. I think there's really 3. One is the ability to track top talent. HR people today and especially in some of the bigger cities, let's say in London, Singapore, New York, Chicago, San Francisco, wherever -- Geneva. What they're looking is they want to track top talent. Top talent doesn't always want to go in the office every day and what they want to do is have a flexible workspace. So to attract that top talent, many times, HR people are looking for how do I attract top talent; how do I get a responsible, accountable work-life balance; and how do I get a work from home and a work from office strategy? I -- and that's perhaps the toughest question that HR people face, because many of them have gotten it wrong by doing it too decentralized or not having people come on in the office enough. And yet, some people have gotten it wrong by forcing everybody in the office every day. So they're working through that issue. Meanwhile, the CFO is taking numbers and saying, "Wow, if I can go to a 3:1 employee to desk ratio, I can save 2%, in many cases, to the bottom line." And that's a very attractive cost offering. And then three, the millennials are voting with their feet and voting where they work. And if they're not getting what they want, they go somewhere else. Then unemployment being at 3%, they have some power right now. So I think it's a combination of those 3 things. What I would say is our activity is very high in some of these areas and we anticipate selling some 7-figure deals here over the second and third quarter. And we feel good about our solution in that area.

[Operator Instructions]. Our next question comes from the line of Ryan MacDonald with Wunderlich Securities.

Really, I guess, starting on sort of looking at the income statement here. When you -- can you talk about with an expectation of gross margin sort of staying in that 75% to 77% range moving forward? Can you talk about what sort of expectations are for SG&A? It seems like it was a bit higher than we initially expected in the first quarter. And is this something that we should expect as being a high watermark for the remainder of the year?

Yes. Welcome, Ryan and thank you for the question. What I would say on the SG&A, first quarter expenses, we did have -- we closed 3 deals as well as there's a lot of training, a lot of how we do business. We were changing, especially in the front end of the business. We have our customer conference in the second quarter that we're working towards and getting people. So -- and then -- and in the first quarter, we pay employer taxes and a number of different things that we don't smooth out through the year. So we take the burden of some of the taxes upfront, et cetera. We also have a few tuck-in acquisitions that we're looking at. So we've had a busy quarter and a fruitful quarter, but costs were a little bit up. But Brad, as far as operating expenses?

Yes -- no. I'm just going to echo what Pat said. I think the first quarter traditionally has been and will continue to be our weakest quarter in terms of bottom line EBITDA. But if you look at that year-over-year, there is a substantial improvement. There is leverage as we get volume to run through the system. Also, we're reinvesting back into growth. I mean, we're a growth company now. So while we want to keep -- I think Pat said, 20% organic and 20% EBITDA. I think if we ran this company just to maximize EBITDA over time, we could get that margin up substantially, but we plan to invest back into primarily, I think, sales and marketing and product. So that's driving some of it. The other factor is, Pat has said, we're going to be active in the M&A market. So there are some cost to going out and hunting for deals and things like that. But if you take -- strip out all that stuff and you look at it, operating expenses are actually better year-over-year than they were last year. So I think things are going very well in that regard.

Got it. And then just quick follow-up. We've got the -- sort of the new accounting standards with ASU 606 coming out and being sort of an impending, I guess, issue that a lot more software are having to tackle. And while I realize that Asure is obviously focused on moving more to the cloud as a percent of the total revenues and had success there, can you talk about sort of -- if you're expecting to see sort of any impact from that materially related to the on-premise and license business? And does this impact or affect the way you look at your strategy moving forward between the balance of sort of on-premise versus the cloud?

That's a great question. We've been talking with our auditors, I don't know, since mid-last year, since this first came out. We just hired a new controller to come in who has 605 experience. So he's very familiar with the methodology in that regard. Based on those conversations, we don't expect this to drive strategy. We don't expect this to drive any meaningful changes, but we're working through it right now. We will have to go back and restate for comparability purposes. And it's high in our radar and, in fact, we had an audit committee meeting a couple of days ago. And every audit committee, we talk about this particular topic. But I don't expect that's going to drive strategy or any change in what we -- what we're doing strategically today.

And that, Brad, will go in effect probably for Asure in '18, right?

Correct. But we'll have to restate to be able to do comparability for prior years. So we're working on it and I think as it becomes more -- there's more clarity, we can give the investor community and investors insights into it. But I don't expect it to drive strategy or any meaningful change in the economics for Asure.

I think that's all the questions that we have today. So I think, in summary, the big takeaway, Asure is making nice progress. The organic engine is -- we feel really good about -- we feel good about the change in methodology around sales. We think that there is operational leverage. We're going to continue on a hunt for acquisitions. We like the tuck-in acquisitions that especially are already on our technology. That model works very nicely. We're pursuing the short-to-intermediate goal of $100 million. We believe we're in an oligopoly kind of marketplace where you have some big companies and then you have a lot of small companies and nobody in the middle. And we're going to stake that ground where we're going to get to be a mid-cap company, et cetera and continue to grow through that. We're going to do that both organically and with acquisition and we feel that there is a need for our services. We're going to delight our clients. Our metrics are very sound. And we're really excited to be in this position and look forward to future quarterly calls. Thanks for your time.