Asure Software: An Initial Assessment (NASDAQ:ASUR)

America is a land of taxation that was founded to avoid taxation.” Dr. Robert J. Peter.

Today, we put Asure Software, Inc. (NASDAQ:ASUR) in the spotlight for the first time. As can be seen below, the stock in this small software concern has been cut in half since late April despite the company being nicely profitable and seeing solid sales growth. Oversold or more pain to come? An analysis follows below.

Company Overview:

This software solution concern is headquartered in Austin, TX. The company develops and provides cloud-based human capital management software and services primarily to small enterprises and some midsize businesses.

Its software focuses on tax, compliance, and wage components including benefits, withholding, 401K contributions, tax credits, overtime, etc… The company has a direct sales force, and its solutions are also marketed by resellers. The stock currently trades just north of eight bucks a share and sports an approximately market capitalization of $200 million.

Second Quarter Results:

Asure Software, Inc. posted its second-quarter numbers on August 7th. Asure Software had a GAAP loss of 18 cents a share for the quarter, a nickel a share over expectations. The net loss of $3.8 million favorably compares to the GAAP net loss of $5.9 million from 2Q2022. EBITDA of $3.3 million, compared to a negative $100,000 EBITDA in the same period a year ago. Adjusted EBITDA came in at $6.1 million versus $600,000 from the prior year period.

Revenues rose 50% on a year-over-year basis to $30.4 million, nearly $5 million above the consensus. Recurring revenues rose 21% to $23 million. Non-recurring revenue from Asure’s ERTC processing services came in at $6.2 million. The company believes it is in the early inning of a multi-year growth plan on this side of the business. Management attributed the growth in recurring revenues to:

“strength of HR compliance solutions, Asure marketplace and increased interest revenues with an average client balances exceeding $200 million in the quarter.”

Leadership also boosted its FY2023 sales guidance range by some $7 million.

Analyst Commentary & Balance Sheet:

Since the second quarter results were posted, five analyst firms including Lake Street and Stifel Nicolaus have reiterated Buy ratings on Asure Software. Price targets proffered range from $15 to $20 a share.

Approximately two percent of the outstanding float is held short. Several insiders sold approximately $1.4 million worth of shares collectively in March at an average cost of just north of $14.00 a share. There has been no insider activity in the stock since that time.

According to Asure’s second quarter 10-Q, the company ended the quarter with just over $21 million of cash and marketable securities on its balance sheet. At the end of the quarter, Asure had $36.8 million of debt, $32 million of which was drawn under their senior credit facility.

In mid-August, the company announced a coming secondary offering of unspecified size. Then four weeks later, Asure disclosed it had to pay down a just over $30 million secured promissory note, and the action would be accretive to earnings and improve cash flow going forward.

Verdict:

Asure Software made 23 cents a share of non-GAAP profit in FY2022 on just under $96 million in revenue. The current analyst firm consensus has profits soaring to 54 cents a share in FY2023 on sales growth of approximately 24%. They see sales growth slowing to seven percent in FY2024, but profits rising to 75 cents a share.

The company is aiming at a large market and concentrated on the needs of small and midsize businesses. Asure currently serves some 100,000 diverse clients with some 1.7 million employees. The company is garnering better returns on its float thanks to much higher interest rates over the past year. Profit margins should continue to expand as its revenue base grows. The stock has strong support in the analyst community despite the weakness in the shares.

Asure Software, Inc. stock also does not seem expensive at 11 times FY2024 estimated profits. However, remember these are non-GAAP projections. I like the company’s potential and vision, but its business could be vulnerable in a recession given small businesses almost always get hit the hardest in economic contractions. I also want to hear more details about Asure’s recent balance sheet machinations.

Fortunately, a fresh set of data points will soon become available when the company reports Q3 results in early November (expected post-market November 7th). Provided it is a “clean” quarter and clarity is provided around the balance sheet, the stock seems to merit a small “watch item” holding at that point.

The avoidance of taxes is the only intellectual pursuit that still carries any reward.” — John Maynard Keynes.