Good afternoon. And welcome to Asure Second Quarter 2023 Earnings Conference Call. Call. Joining us for today's call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Head of Investor Relations, Randal Rudniski. Following their prepared remarks, management will hold a question-and-answer session for analysts and investors. I would now like to turn the call over to Randal Rudniski for introductory remarks. Please go ahead.

Thanks, operator and good afternoon, everyone. And thank you for joining us for Asure's second quarter 2023 earnings call. Following the close of markets, we released our financial results for the quarter. The earnings release is available on the SEC's Web site and our Investor Relations Web site at investor.asuresoftware.com, where you can also find our investor presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items along with 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 our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. Finally, I'd like to remind everyone that this call is being recorded and it will be made available for replay via a link that can be found on the Investor Relations section of our Web site. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thanks, Randal. And welcome, everyone to the Asure Software's second quarter 2023 earnings call. I'm joined on the call by our CFO, John Pence. John and I will provide a business update for the quarter and our outlook for the remainder of 2023. Following our remarks, we'll be available to answer your questions. As you can see from the reported results, our strong momentum continued in the second quarter with strength coming from solid execution across the business. Our revenue growth for the second quarter was 50%, all of which was organic with reoccurring revenues growing by 21% relative to the prior year and non-reoccurring revenues up $6.2 million on continued strong performance of our ERTC solutions. This top line growth also drove a significant increase in adjusted EBITDA, which reached $6.1 million in the second quarter with adjusted EBITDA margin of 20%. Through the first half of 2023, we have generated 20% more adjusted EBITDA than we produced in all of 2022, showing a powerful operating leverage we have built in the business as we continue to grow revenues. Powering this performance is our focus on delivering a unique value proposition for our target market that addresses the needs of our clients. This approach starts with identifying imactful solutions that we believe will make a real difference to our clients and is supported by engaging in efficient technologies. It also involves mobilizing our sales teams to make sure that our message and value proposition is well understood and providing prompt and reliable customer service. Our sales efforts for the second quarter produced an 80% increase in new sales bookings, which also builds upon the 87% growth rate we achieved in the second quarter of last year. We continue to invest in the sales force expansion and been very pleased…

Thanks, Pat. As Randal mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You'll 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 Web site at investor.asuresoftware.com. Now onto the second quarter results. Revenues reached $30.4 million in the second quarter, rising by 50% relative to prior year, all of which was organic. Recurring revenues rose 21% relative to prior year to $23 million. Second quarter recurring revenues grew on the strength of our HR compliance solutions, Asure marketplace and increased interest revenues with an average client [balances] exceeding $200 million in the quarter. ERTC revenues were recorded in the professional services hardware and other category in both the current and comparable periods. Non-recurring revenues saw an increase of $6.2 million on the strength of ERTC processing activity. Relative to the first quarter, revenues declined in the period. However, that is attributable to the normal seasonality of our business as recurring annual year end W2 and ACA revenue is recognized in the first quarter. Net loss for the second quarter was $3.8 million, a $2.1 million improvement over prior year loss of $5.9 million. Gross margins rose by 12 percentage points to 72% in the second quarter relative to the prior period, while non-GAAP gross margins rose 11 percentage points to 77%. It is notable that our revenues rose by 50% year-over-year in the quarter, while our non-GAAP cost of sale rose by only 2%, which allowed for almost a 100% fall through of each dollar revenue growth into the non-GAAP gross margins. This operating leverage reflects the…

Thanks, John. We achieved a new milestone in the second quarter, achieving 50% revenue growth, all of which was organic. We achieved this growth by investing in products and technologies that will make a difference for our clients. It is very gratifying to see the positive reception to our solutions from our clients. The feedback supports our view that by enabling them to focus on their core businesses, we can create meaningful value for them. We are very encouraged by the early results of the Asure marketplace, which we think is a game changer for Asure. Its results to date have made a meaningful contribution to our overall performance and there are lots more to come. Earlier I previewed our activity with retirement solutions under the Secure Act 2.0. And while we believe our initiatives here will be significant, they are just one example of the many ways we can leverage our systems and knowledge to create impactful solutions for our clients. We are also leveraging our strengths in areas such as HR compliance. Our solutions address real business challenges facing main street America. We anticipate demand for HR 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 of today's HR. Investments in market leading technology that support our client solutions is also a high priority at Asure. The partnership with AWS is an example of our focus on delivering compelling solutions. These efforts enable us to tackle the critical business issues our clients are facing and supports our efforts to maximize sales and cross sell our solutions. Supporting all of these initiatives are our efforts to improve our cost structure and efficiencies via our consolidation efforts. We continue to be on-track to deliver annual savings of $5 million annually once its implementation is complete. Our upwardly revised revenue and adjusted EBITDA guidance reflects the positive momentum we achieved with our expanding portfolio of solutions and continued strong new sales performance. In conclusion, we're very excited about the performance of the business and the direction we're headed. We are focused on creating value for our clients and on delivering consistent, positive results for our stakeholders. We look forward to speaking with you again next quarter. So with that, I'll send the call back to our operator for the Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Bryan Bergin with TD Cowen.

I wanted to start off with the demand question here. So just any comments, any measurable change in client demand that you've witnessed over the last three months? Obviously booking strength seems to imply a healthy continuation, but we know you've got a lot of moving pieces here as you're scaling a lot of the new offerings. So I'm just really curious if you've seen any change to what clients are demanding in the current environment and nearly any change by client size that's worth calling out?

We do not see any demand changes. I mean, I think if you think about early in the quarter the July 4th week is always a vacation week, et cetera. But bookings have been solid, demand's been -- interest, level's been really high, leads have been flowing, we feel really good about our solution set.

My follow up then to margin expansion. So can you talk about how you're feeling about a sustainable gross margin here? Just understanding you've had some higher margin revenue contributors, like the non-recurring, I believe, here that support the second quarter strength. Can you kind of give us puts and takes in that second half margin outlook? And do we need to be mindful of potential grow over pressures as you get into next year as things like ERTC sunsets?

Let me go off the first one, Bryan, and then I'll let kind of Pat get his perspective on that. I mean, I think in general what you can tell is that the cost of goods sold line is generally becoming relatively fixed. I mean there's a little bit of variable component to it, like in the first quarter there's more shipping. But I would say in general it's fixed to going down just based on, again, the standardization and some arbitrage in terms of offshoring some of those positions. So I think that's the way to think about it. And from my perspective is there's relatively kind of high fixed cost to doing business, but once we add that incremental revenues, that's where you see the margin. So that's the way I would think about it in the back half of the year. So however, we are guiding revenues, think about cost of goods sold being relatively consistent, the way I think about -- and then you can talk about the kind of year over year kind of going forward issues.

Bryan, I think we've done an excellent job with the cost structure. John's really done a nice job of budgeting that. And then our team has automated solutions in such a way where we can achieve those results where COGS is roughly flat. As we look and turn into page and ‘24, we'll probably share ‘24 guidance next quarter. But just on a whole the ERTC program we put it in the 1 time item and we've done that all year. There's no question that ERTC as a program ends first quarter of 2025. So there will be some headwinds in the 2024. But if you think about kind of what we've done as a business, we've got several early day products that we're working through that we're pretty proud of. The Secure Act 2.0 with 401(k) will a great extension and we're launching that as we speak. So we think that'll be a good tailwind. HR compliance will be a good tailwind for us. The marketplace will be a tailwind. Our tax filing business in general will be a tailwind. And what I'm proud about the sales organization is they've achieved some outstanding productivity. And what we've kind of locked into here is if you think about small businesses in this environment, access to capital is probably their number one concern and then expertise on the changing compliance, whether it's HR, payroll or tax filing is number two. So to have a partner to be able to solve their problems is really, really important. And that's really what we set out to do and we've automated the back end in such a way for that to be efficient. So there's no question, there might be some 1 time tailwind -- headwinds going into ‘24, but we have our share of tailwinds going into it, and more to come next quarter when we announce ‘24 guidance.

Our next question comes from the line of Eric Martinuzzi with Lake Street.

I wanted to go layer deeper on the guidance for Q3. If I'm looking at -- and I know you characterized the expectation for ERTC as modest, but I'm trying to put a finer point on that. If I take the growth rate that you just had in Q2 on the recurring rev side and I apply that to Q3, I kind of -- I'm backing into sort of a $2.3 million number for non-recurring, and I want to know if that's in the ballpark?

Yes, I think what we've been saying consistently is that's our typical range is in that -- if you try to put the non-recurring back to a norm without the last couple of quarters where we've had the incremental success, I think that's what we've been kind of contemplating in the guidance. So we've tried to put the non-recurring as if we weren't having the extraordinary sales in ERTC, so that's kind of implicit in the guidance.

And then the retention trends in the core HCM, just curious to know if we've seen an improvement there. It feels like small business is doing better. But just wondering if you're -- what you're seeing in the retention trends…

My perspective, they're trending up from where we have been. So yes.

I would say, Eric, just we've been 1%, 2% up over the past year and it's been pretty consistent. I think we've had good accountability, good product rollout, good solution set, good upsell capabilities. So if you think about, we were probably at a low point around COVID, we've achieved the improvement about 1% or 2% per year since COVID and feel like we have a good momentum there. I would say, small business formation looks pretty strong. Small business, I would say, access to capital is probably their number one need. But as far as continuation and growth, we feel really good about where we are.

Our next question comes from the line of Richard Baldry with Roth Capital Partners LLC.

If you look back a couple of quarters, it looks like the sales and marketing line’s up 50% in pretty big hurry. Can you talk about how much of that is headcount, resource expansion versus just commissions on faster sell throughs? And then you talked a little bit about that line continuing to grow and investing in that. Is there any way to sort of scale how much numerically or even qualitatively you expect to keep adding to that organization? Obviously, you are seeing some efficiencies but that could argue that there is more to go after as well because of their successes.

Just in general, we add headcount to our sales organization and we are somewhere around a 100, I think you play the tape forward, we will be about 120. So we are going to continue to grow headcount. As far as, costs going up, some of it's account commission, productivity has been very strong and so naturally commission is up. There is some referral dollars that are also up. And then as far as efficiency, we have a field sales organization and we have a inside sales organization. We spent some more money on marketing leads and those leads have paid off very well. We spent some money on internal tools to really automate inside sales, and so that's an expenditure. We are really happy with the productivity in sales organization. In general, we will continue to invest in sales. And if you think about our plan over the last couple of years, it's been to be more efficient operationally to automate, invest in some technology and then grow the feet on street or the sales organization, and it's really starting to pay off. John, I don't know if you have color.

No, I was thinking about the slide that was on our board presentation from about a week ago. We were looking maybe at not the same time horizon you were Rich, but we were kind of an 18 month view and the shift was almost head-for-head from operations to sales and marketing. So again, you see the overall spend not going down but it's really that composition of where it's landing on the P&L. And obviously, if we can take it out of cost to serve and put it into the tip of the spear that's what we've been trying to do. So again, we have got that shift going on as well as, again, as Pat mentioned, lead gen and commissions. And then again, we intend to continue to try to add to that group over the next half a year and into the next year.

And you had a lot of new products launching, but you are still holding the R&D -- I'd say, first half of this year versus first half last year is also pretty flat. Are you seeing the composition of that changing some leverage points on that, that are new, do you think that that will have to start trending up closer to revenues overtime? Just a little more color there.

Yes, I think, actually, it's probably up, if you were to look at how much has been capitalized versus prior year. So I think in general what you are seeing is the maintenance line is staying pretty steady, it's actually trending down maybe a little bit, which means that we are still spending more but we are capitalizing because it's all new and an innovative investment versus just maintaining the , which is kind of how it's delineated in terms of how we account for it. So I would say, we are investing probably at a healthier rate than prior year, it's just not showing up in the P&L, it's getting hung up on the balance sheet.

The other thing I'd add to that, John is and Rich is, our partnership development partnership with AWS, where we really have a strong five year agreement and they've put some calories and money into our development effort around a modernization effort of our payroll tax filing products, and so they're investing along with us in that case and the spend is going up. But the nice thing about it's going up in new products and services and new development, which adds to the capital line.

And last for me, when you look at the marketplace side, you're obviously pretty happy with what's happening there. Could you maybe break it into two pieces, sort of the successes you're having with people you've had as partners there for a couple quarters? And then maybe more recent activities, how you're feeling about newer partners being added that'll be the fuel for the future?

I think from the marketplace, a couple things. First of all, our ability to find partners and have partners want to do business with us is high. So really feel good about that. I think, the first partnerships that are live, whether it's Equifax or H&R Block or Intuit, those are really strong partnerships. What I would tell you, a lot of them are multi-year in nature. So we sent an agreement with 401(k) vendor Vestwell. Clearly, the Zoom partnership is under underway. You'll see more partnerships being signed. I think all of them have a little bit of a different economics around it. And then a lot of them have different lead times where it might be a quarter, six months or a year as you layer it in. So long term, feel really good about the partnership opportunities. I feel good about the biz dev team and what they're putting together from a technology service organization. You know we kind of leg into each partnership in a different way but suffice to say the future's bright in that area.

Our next question comes from the line of Josh Riley with Needham and Company.

Nice job on getting these ERTC deals through. We've discussed this a little bit, but maybe could we get some more details on how the pipeline is shaping up for the rest of the year on the ERTC processing deals. And obviously the guidance doesn't include much for Q3 or Q4 there. And then along with that, can we get some -- are there any proof points or commentary you can share with us about how the ERTC deals have been leading to cross-selling of other Asure solutions?

I think, first of all, from ERTC solutions, we have bundled with HR compliance and payroll and have some pretty good attach rates. Probably number one is HR compliance, second is payroll. So that's been very, very strong. When we look at guidance for the rest of the year, we anticipate that ERTC backlog will turn into revenue and maybe not as fast to pace the second quarter, but we'll still be there. And we talked a little bit about ‘24 and we'll have more color next quarter. As far as kind of our ability to execute, what I'm really excited about is now that we've connected small business owners to government programs and access to capital, the Secure Act 2.0 where you have multiple states now requiring 401(k) plans, and we sit on that data so we can tell if they're compliant or not. We then have -- give them not only the ability to set up 401(k)s but also allow them to get government credits on the matching and the matching of funds. So there again, we're not only helping them be compliant but we're also helping them get access to money to start the program to be compliant. So that's a very strong trend. There's other tax credits that our tax engine can process on behalf of small businesses. So we'll keep connecting there. So we have a multi-year strategy around this. We're just getting going. Clearly, ERTC in the second quarter, probably over-exceeded expectations a bit. But the way we're setting this up, we're early, early innings to a multi-year growth plan.

Well, I was going to add one thing too, just in terms of the mechanics. We don't have a lot of ERTC that sits and languishes, right. Because of the nature of our engine and what we've built, we're very efficient. So once we've got it to the closing, it turns around pretty quick in terms of our ability to process on behalf of the client. So that's one of the things, I think our advantage is once they get into the funnel, they go through it pretty quick.

And then on the digital marketing that you mentioned that you're doing a little bit more of now. What exactly are you doing differently there maybe and any proof points there on what that's been driving for you guys?

Yes, a couple of things. First of all, our HR study that we announced that's an example of our thought leadership. And even though we have a study here and a survey and then we linked small business success with best-in-class HR practices, by the way, we can offer that, that gives us content for almost a year and it allows us to have the messaging. And then when you think back before ‘23 here, our investment in SalesLoft, Salesforce, ZoomInfo, it gives us content, it gives us repeatable marketing. So now it's best-in-class content management. We also do some other MQL marketing or digital marketing based on keywords, et cetera. But we're driving people to have engagement with Asure. The other day we had a sales kind of quarter two in review and the average customer in some cases is engaging with us 6, 7, 8 times where they're looking and consuming our content and then making decisions to go with us around a program. So that's the kind of engagement we want. The old days you were knocking on doors or you're doing telephone calls, here the client gets to try you out on various thought leadership pieces or the Web site. And then when they're ready to buy, we're there for them and we're there in an automated way. So we've just been more efficient in continuing to drive new clients. And when you think about it, our productivity in the quarter, we had a very strong quarter and that's coming off an 87% compare. So I couldn't be more pleased with our marketing sales efforts.

And then maybe one just last housekeeping question for me. How has the sales headcount trended year-to-date? I think you mentioned it's around 100 now. Is that 100…

Josh, I think we're 98 as we speak. Beginning year, Randal, maybe we were somewhere around 88 or so. So we probably trended up 10. I anticipate we will be closer to 120 sometime in '24. So we are continuing, look to hire. And by the same token, we are not just chasing a number. We are chasing quality. And if we fall a little short in that area and get better quality, that's right where we want to be.

Our next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.

Thanks for taking my questions, appreciate it. And real nice quarter here guys. A few questions. Pat, on the unique tax ID numbers, just what are you growing there in terms of TINs on the payroll platform? And then, does that mark acceleration or steady growth over the -- maybe the past couple of quarters?

We will publish unique identifiers, I think, once a year. What I would say is probably steady growth. I think retention has been very positive. As far as new sales, I know we are adding more customers than we are losing, which is a very positive side. And then we are getting better attach rates in HR compliance. Obviously, we've talked about tax, the marketplace, et cetera. But I would say, it's steady growth. I do think, from a new product perspective, our partnership with AWS, et cetera, will continue to grow. But once a year, we publish TINs and I would say, we'd have steady growth.

And maybe just expand a second on HR compliance, a little surprised given -- at least the manual component of that that it levered to the degree it did. Maybe expand on that a second, and when I say leverage, I mean, the operating leverage…

Jeff, one of the things that I think is a misnomer is, there is not a ton of manual effort. When you think about, let's say, a handbook, we automate best practices within the handbook. So it is -- a lot of it’s in rinse and repeat. Some of the government legislation et cetera is pretty automated, some of the best practices are. And then we have kind of a use it or lose it philosophy where in some cases, it's almost an insurance policy where you have small businesses that they want somebody in the huddle and it's a long way from HR professional to employment attorney. So what they are looking for is sometimes they get very sticky situations. And if you think about even coming out of COVID, people working from home, hybrid, do they have to come into work, what if they don't, do I have separate rules for separate people? There is all kinds of complexity. And then some of it too is just if you think about minimum wage. 10 years ago, we had one minimum wage and it was at the federal level. Well, now there is places in California you have four levels of minimum wage, whether it's a city to county, to state or federal government. And the small business owner is throwing up its hands and saying, hey, help me. So we have been able to automate in such a way where there is a lot of leverage to that model. We have pretty good pricing power and we set it up a way where we are very pleased with the results top and bottom line.

One last one, just on the competitive landscape, the [pays] have talked a lot about coming down market. Are you seeing more of that group or any changes in particular of who you are seeing?

We see Gusto, Paychex, ADP and occasionally we'll see the [pays], but I don't see those companies on a regular basis.

Our next question comes from the line of Vincent Colicchio with Barrington Research.

Curious about the bookings growth breakdown between new and existing clients?

We're pretty strong on new, we're probably about -- historically about 60/40, we were right in line with 60 new, 40 existing. So we've had some really good growth in new logos. We also had very strong growth in additional products and services, especially the introduction of some of the products I mentioned around whether it's tax or marketplace or HR compliance.

How is the tax product revenue versus your plan? And when do you expect to make the improvements you're currently working on, when do you expect to complete that?

I don't think we had a ton built in up to this stage. I think that you'll start to see it become more meaningful second -- I mean, probably fourth quarter ‘24. But again, we weren't playing a ton into this year but trying to build the foundation. So I think it really starts to kick in as we talk about next year.

To John's point, Vince, a lot of -- I think you'll see very strong bookings in tax. But because of the nature, whether it's workday or some of the books of business attacks, the install times are a little bit longer than a 10 employee payroll. So you'll see that play in in a meaningful way on revenue in ‘24, but we're real excited about marketing and the booking potential.

And then I was trying to -- what I was trying to ask is the current improvements you're making to the tax product, when will those be complete and do you expect that to significantly improve traction?

I don't think it's ever completed, right, especially if you're going up market to some of these enterprise accounts, you're always going to have to be investing in it. So I don't think it's a -- it is not a big bang, there's not like this one day that this thing's going to be completed. So it's just -- it's an ongoing process from my perspective.

And then lastly on acquisitions, is this something that we should see happen in the next six months or so?

I think so. I mean, look, we've been pretty consistent on this one since the beginning of the year that we were going to take a hiatus, try to focus on the core business. But it's clearly part of our model. I mean, it's something that we think makes a lot of sense in terms of being very accretive from a cash generation perspective. So it's something that we think we've perfected. But I think we'll opportunistically look and see if we can find some stuff back after this year and going into ‘24. But there's nothing imminent, we don't have anything under a letter of intent at this point.

Our next question comes from the line of Greg Gibas with Northland Securities.

Wanted to get a sense, because I think the ERTC solutions activity was provided some upside relative to expectations. And I guess just whether in your maybe full year outlook just trying to get a sense of how much of that strength in the professional services and other continues into the back half, what's kind of implied in your outlook for the year?

Yes. I think what I would -- I think that was questioned earlier, I tried to answer it the same way. Hopefully I'll answer it the same way. But I think we were -- when we look at kind of our guidance in the back half of the year, we look at it being kind of back to normal in terms of that line item, and historically it's been a couple million dollars over the last few years in that line. And so we didn't forecast and implicit in our guidance huge numbers for that. But again, just because of the nature of the pipeline and how quickly it turns through in fact that it is non-recurring in nature, it's just not as predictable as the recurring line item obviously.

Greg, what I would say, second quarter was 21% reoccurring, there's really no ERTC in that line. And we think we have the ability to keep going on the reoccurring line, and in some of the products we talked about give us reason for that conviction. So we'll continue to grow that. And then what I would tell you is the ability to sell kind of the processing of the ERTC credits. Now we move that over time into 401(k) and tax credits around [indiscernible], et cetera. And there's other things that we have the ability to go. I think you'll see some line extensions in that area that will bear fruit in ‘24. But the reoccurring revenue of this business being up 20%, both the first quarter and the second quarter a year gives us pretty good optimism heading into the back half of 2023.

And I know you broke out -- you said bookings growth was kind of 60/40 new versus existing. Apologies if I missed it. But did you break out booking’s growth in the quarter?

Have we broken it out before?

No, nust wondering what it was -- in Q2 bookings growth…

We were about 60/40. I would tell you we've hovered between 40/60, 50/50, 60/40 depending on products and depending on kind of where we're at. Our new logos has been particularly strong here the last six to nine months and that is in investment in marketing and both the digital marketing, as well as the content that we had, and our HR survey, if you go to asuresoftware.com, you can get a copy of that survey. But that's some of the thought leadership that's been -- we've been able to monetize into new logos and that's been very successful. And then as far as the growth rate of some of the services and products that we offer, the attach rates have been up on the new logos, which is very, very strong. But that's led to some of the new logo growth, that's probably more so than we've had in past years.

Okay, got it. Thank you.

Greg, thank you. Operator, any more questions?

There are no further questions. Therefore, I'll turn it back over to you, Pat, for closing remarks.

Well, great. Hey, been here, gosh, almost 14 years now, really proud of the staff. There's always four constituents that I think of in running a business; it's the employees that we have and they've done an outstanding job; it's the clients we serve, and on behalf of the a million seven employees that we serve and a hundred thousand clients we serve, really good to see the momentum. The investors are a big piece of -- we want to satisfy from a financial return. And year-over-year, we have had pretty strong stock performance. We are not satisfied. We want to continue to improve that, and it's the communities we serve. We have the good fortune of being in a number of cities across the United States and we always want to help in the community. Really positive of where we are at. Feel like we have a long way to go. We have not yet reached our potential and we will do so over time. And this gives us a great jumping off point. Look forward to seeing you next time and appreciate your interest in Asure. Bye now.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.