Asure Software, Inc. (ASUR) Earnings Call Transcript

Good afternoon, and welcome to Asure's Third Quarter 2026 Earnings Conference Call. Joining us for today's call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Vice President of Investor Relations, Patrick McKillop. [Operator Instructions] And I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead, sir. Thank you.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Third Quarter 2026 Earnings Results Call. Following the close of the market, 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 our investor presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors in understanding our business and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non-GAAP measures to the 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. I'll hand the call over to Pat in a moment, but I wanted to take a moment to remind people of some upcoming investor relations activities. On November 17, we will participate in the Craig-Hallum Alpha Select Conference in New York. On November 18, we will attend the Stephens Annual Investment Conference in Nashville, Tennessee, as well as the ROTH Conference in New York. On November 19, we will participate in the Seventh Annual Needham Virtual Tech Conference. And finally, on December 16, we will attend the Northland Capital Markets Virtual Growth Conference. Investor outreach is very important to Asure, and I would like to thank all of those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thank you, Patrick, and welcome, everyone, to Asure's Third Quarter 2026 Earnings Results Call. I'm joined on this call by our CFO, John Pence, and we will provide a business update for third quarter 2026 results as well as our updated outlook for the remainder of the year. Our third quarter revenues came in at $40 million, representing a growth of 10% compared to the third quarter of 2025. Growth was strong and broad-based with payroll benefits and HR compliance among the key contributors, and we're reaping the benefits of the investments we have made in the business over the last few years. Our organic growth rate for third quarter 2026 was 9% compared with 4% in the third quarter 2025, an increase of 500 basis points and up 5% in second quarter 2026. Organic recurring revenue growth for the third quarter was 14%, which is a continued acceleration driven by the launch of Asure Central a year ago and continued payroll tax management momentum. The positive feedback for our products continues to grow, and this is supported by our recent G2 awards announced this fall, where we were rated a high performer in several categories as well as a momentum leader and a leader in the small business segment. Building on the 9% organic growth and the 14% reoccurring organic growth we delivered this quarter, we continue to intensely focus in driving double-digit organic growth in the future and increased cross-sell activities while continuing to grow the embedded tech business. During the third quarter, we meaningfully expanded the distribution of our Payroll Tax Management solution, which already represents nearly 20% of Asure's revenue. In August, we announced the co-selling arrangement for our Payroll Tax Management solution on the AWS marketplace, and we began to actively co-sell into its 330,000 customers in September. AWS customers can procure sure through the existing purchasing processes, including unused AWS spend and our sales team co-sells alongside AWS sales teams against our ideal customer profile. Streamlining, contracting and private offers can shorten the typically long enterprise sales cycle in September. We also made Payroll Tax Management available on Oracle Marketplace integrated with Oracle Fusion Cloud human capital management. Organizations running Oracle can add multijurisdiction payroll tax filings, funding and money movement without migrating their payroll system of record. They can then use the payroll system of record as we file across federal, state and local jurisdictions on their behalf. Together, the AWS and Oracle marketplaces open up new opportunities for Payroll Tax Management. Indeed, in the Payroll Tax Management business, we have already won approximately 30 major enterprise accounts for payroll tax management and these partnerships will continue to help grow that segment of the business. In September, at our annual reselling training event, we launched Asure Central to our reseller network and took our first resellers live on the platform, which we believe will unlock significant cross-sell for our human capital management suite as we have done in the direct business. Asure Central brings single sign-ons, whose are provisioning will base access together with payroll, tax, HR, recruiting, time and attendance, 401(k) benefits in Luna all-in-one environment and resellers can white label the experience with their own logo. The number of clients purchasing multiple products has increased by 7% versus the third quarter 2025. With the increase in attach rates, we're also experiencing an uptick in our retention rates versus the second quarter. And we will share updated retention metrics in our 1-year year-end 2026 release. We remain focused on moving clients from an average of a little more than 2 products per client relationship towards 4 or more products for clients over time. Now a brief update on Asure Works, our administrative services outsourcing offering, which lets clients delegate key payroll and HR compliance processes to Asure. The momentum we saw at launch continued into the third quarter. Our pipeline and new clients continue to grow and set new records. The reception across the target buyers includes small hotel chains, restaurants, HVAC companies, as an example, and remains very, very strong. These are main street businesses that need payroll and HR compliance support, but lack the internal resources to manage it themselves. We are continuing to train more reps for Asure Works every day and build out that effort. Clients who adopt Asure works typically represent up to 5x the revenue of payroll-only clients. And because it is not a PEO model, there is no co-employment risk, which makes it a compelling and flexible alternative for clients constrained by the cost and rigidity of a traditional PEO. On the sales front, we made significant progress in hiring reps we're confident in hitting our target of 150 by year-end. The efforts of our recruiters and our sales managers really have paid off, and we're excited to have these new reps on board. These are full solution sellers who can sit down with a business owner and present our entire product suite and that consultative needs-based approach is central to driving both new logo acquisition and multiproduct cross-sell within our existing base. The new type of rep we hire, typically ramps faster than when we have experience with prior reps. Our existing to new customer logo split in the third quarter was approximately 47% to 53%, an improvement versus a year ago of 36% to 64%, but similar to the second quarter of this year, where we continue to drive towards our 35% new logo, 65% base expansion mix over time. Our contracted backlog is now $86.6 million, and we expect to convert approximately 46% of that backlog over the next 12 months. We continue to operate in a positive selling environment as small and midsized businesses need the products and solutions to share offers to help them navigate the complex world of payroll and compliance in our forecast. We conservatively model flat head count growth for our clients. We haven't seen any dramatic shifts in the sales cycle process. On the M&A front. After quarter end in October, we acquired a human capital management payroll processing company based in the Southeastern United States for an aggregate purchase price of million. The company serves mid-market organizations with cloud-based HR, payroll and talent tools, expanding our exposure to the small and mid-market segment and adding a developed technology that will be used to update some of our product offerings. We have an active pipeline of potential reseller acquisitions, and we'll continue to pursue those opportunities. Also, in October, we closed a new credit facility, which gives us some more flexibility to pursue our strategy, and John will share more details in a moment. On AI, our view hasn't changed. Payroll and HR compliance isn't software a generic AI can replace. We hold money transmitter licenses interface directly with the IRF state and local agencies and manage compliance where the margin of error is effectively zero. That makes Asure a system of record and our expertise are real mall. At the same time, AI is a meaningful accelerator for us. Luna conversations grew about 25% in the quarter to more than 26,000. And in her first year, Luna has completed more than 15,000 AI actions for our customers. At the start of fourth quarter, we released the time import agents, bringing Luna directly into the payroll run with humans in control at every decision point. I also want to take a moment to recognize congratulate our Chief Technology Officer, Yasmine Rodriguez, a pioneer in payroll tax technology and the compliance infrastructure behind it who has been named to Women, We Admire, Top Women Chief Technology Officers in 2026. Yasmine, congratulations, and thank you for everything you do for Asure and our clients. So with that, I'd like to turn the call over to John to discuss our third quarter financial results in more detail and provide an update on our 2026 guidance, along with our outlook for 2027. John?

Thanks, Pat. As Patrick noted, several figures discussed today are on a non-GAAP or adjusted basis. Reconciliations are available in our earnings release and our investor presentation at investor.asuresoftware.com. Third quarter total revenues were $40 million compared to $36.3 million in Q3 of 2025, representing growth of 10% year-over-year. Recurring revenue for Q3 2026 was $36.9 million compared to $31.8 million in Q3 of 2025, an increase of 16% year-over-year. Recurring revenue represented approximately 92% of total revenue in the quarter versus 88% a year ago. Professional services, hardware and other revenue was $3.1 million in Q3 of 2026 compared to $4.4 million in Q3 of 2025. The decline versus prior year was primarily due to reduced professional services provided as part of large tax deals in the prior year. Gross profit for Q3 2026 was $27.8 million compared to $23.5 million in Q3 2025. GAAP gross margin for Q3 2026 was 70% compared to 65% in Q3 2025. Non-GAAP gross margin for Q3 2026 was 75% compared to 70% in Q3 2025. Net loss for Q3 2026 was $0.6 million compared to net loss of $5.4 million in Q3 2025. EBITDA for Q3 2026 was $7.9 million compared to $3.9 million in Q3 2025. Adjusted EBITDA for Q3 2026 was $10.5 million compared to $8.1 million in Q3 2025, an increase of 29% year-over-year. Adjusted EBITDA margin for Q3 2026 was 26% compared to 22% in Q3 2025, an increase of approximately 400 basis points. We ended the third quarter with cash and cash equivalents of $16.8 million and total debt of $64.7 million as of September 30, 2026. Subsequent to quarter end, on October 15, we closed a new senior credit facility of up to $115 million with a syndicate of 5 banks led by the MUFG Bank Ltd. The facility has an $85 million term loan, all of which was drawn at closing, a $10 million 5-year revolving credit facility and a $20 million delay draw term loan facility. Term loan currently carries a rate of SOFR plus 3%. This suggests periodically based on our consolidated net leverage ratio and could be as little as SOFR plus 2.75% and will not exceed SOFR plus 3.5%. We used $62.6 million of the gross proceeds to repay in full our existing credit agreement with MidCap Financial Trust. Turning to the Southeastern U.S.-based payroll acquisition. Pat mentioned. The aggregate purchase price was $26.5 million, paid as follows: $13.5 million in cash at closing, a promissory note in the amount of $3 million to secure the indemnity applications and other adjustments and the issuance of shares valued at $10 million. The purchase price is subject to customary working capital adjustments. Based on the current positive momentum in our business, we are updating our Q4 2026 and full year 2027 guidance. Please note that the guidance incorporates the recent acquisition we completed in October 2026. We anticipate revenue of $42 million to $44 million and adjusted EBITDA of $10 million to $12 million for Q4 2026. This implies full year 2026 guidance of $162 million to $164 million in revenue and adjusted EBITDA of $40 million to $42 million. Next year, our preliminary guidance for 2027, we anticipate revenue to be in the range of $183 million to $187 million, and adjusted EBITDA margin to be in the range of 26% to 28%. We expect our cost structure, including capital expenditures and capitalized software development costs to remain relatively stable on a dollar basis. With that, I will turn the call back to Pat for closing remarks.

Thanks, John. Stepping back, I think the third quarter tells a clear story. We grew revenue 10% to $40 million, and adjusted EBITDA grew 29% to $10.5 million with adjusted EBITDA margin expanding approximately 400 basis points to 26%. Recurring revenue organic growth continues to accelerate, reaching 14%, and we forecast it to be in the double digits again in the fourth quarter. We're really starting to hit our stride, but we're not slowing down. Our sales team is larger and more productive. Our clients are buying more of our core payroll and human capital management products, our unified technology platform enables us to cross-sell, which drives improved retention, and we can scale organically. We have a very active pipeline of opportunities for Payroll Tax Management and the new distribution capabilities of Oracle and AWS will help build further opportunities. Asure works, is gaining traction. And our recent Q2 awards reflect the positive feedback our clients have about our products. Just a few years ago, we laid out a goal of $180 million to $200 million in revenue and with today's forecast for 2027 of $183 million to $187 million, we are close to crossing the goal line. We've worked hard and executed and all of our metrics are trending up. Margin expansion and improving profitability are 2 important characteristics of our model and AI is helping us lower our cost to serve while improving the client experience. We're proud of the progress this quarter and even more excited about what's ahead. Thank you for your continued support and for joining us today. Before we open the call for questions, I want to take a moment to acknowledge the recent loss of Dick Strong, a longtime supporter of Asure and a good friend. Dick was a very smart, talented kind person, and he'll be greatly missed. On behalf of everyone at Asure, we offer our heartfelt condolences to his family and Dana. Thank you for your continued support and for joining us today. I will now turn the call back to the operator for questions and answers. Operator?

[Operator Instructions] The first question comes from Jeff Van Rhee with Craig-Hallum.

Congrats on nice posting here guys. A couple for me first. Pat, maybe on the employee per month, where are you now is a full suite purchase right now tally to? And where do you think that can evolve to over time?

We publish the art as a possible, which is $100-plus per employee per month. A specific number, we'll start to get a little bit more color in 2027. But if you add brokerage and you add all those kind of products and services as much as 180, we're continuing to sell more products and services, and we're training for that. And then we have Asure software through Asure Central or we'll do it for you with the sure work. So we're still in the middle of a movie, and there's different sample sizes with different training. We'll lay out probably a metric around that in 2027. But right now, suffice to say, it keeps going up this past quarter. revenue per unit in the payroll business was somewhere up 57%. And which was really a nice progression of what we're trying to do. I think in 2027, as we get more mature, I think we can establish that metric and publish that.

Okay. Got it. And then the Southeastern reseller, a bit larger than your typical reseller purchase. I heard in the script, there's maybe some incremental capabilities there as well that might stand up. Maybe just a second more on what you're getting there with that purchase.

Yes. First of all, the technology is obviously like a reseller acquisition, so very simple in integration, et cetera. They had some kind of unique front ends that we think will help us advance the whole business on some verticals. So we're excited about that. We think that there's some growth in selling. We also think from an integration perspective, this is what we do. So we think we could add scale and capability, add to growth. And frankly, we thought it was a pretty attractive acquisition for us to do.

And then maybe, John, just a couple of quick numbers questions. And as I look at Q4 and the '27 outlook, what organic growth is embedded in those 2 numbers? And then this reseller, can you give us a little dial it in a bit closer in terms of what reseller itself brings in terms of Q4 revenue and next year's revenue?

Yes. I say when we bought the business, it was probably at about around $10 million run rate. So I would expect a couple of million in this quarter to be realized. We think, obviously, there's some upside to what they were doing historically when we put our sales team behind it and when you start to maximize some of the technologies they've built out. So in terms of next year, I think the guide kind of in the midpoint implies kind of 13%, 14%. I would say right now that majority of that is going to be organic just in terms of the guide for next year.

Okay. And if I could sneak one last in there. Just on free cash flow. I appreciate the '27 outlook. Is there just a real quick bridge? I keep a close eye on. Just curious what that guide implies in terms of free cash flow for '27.

Well, again, we have a little bit of this, and we can talk about it off. But the way we think about it, Jeff, is always thinking about the adjusted EBITDA less the cost of finance. So I think with this new loan, we're expecting probably around $8 million of interest costs for the year, roughly $2 million a quarter, I think. So if you factor that off and then, again, if you want to take software cap off the table, that's going to be really consistent. So I think we'll probably be in about the $14 million range next year on that. So I think midpoint of what we guided towards is in the 40s, mid-40s. So back up the software cap back off the -- and I think we're in the low 20s, what it's also done from our perspective.

The next question comes from Richard Baldry with ROTH Capital.

If I look year-over-year, and I add your cost of goods sold in your OpEx, the number are very flat, while revenues were up decent. Can you talk about the pieces of that sort of cost savings? Is it integration, AI or just scale leverage efficiencies, sort of break down, seeing a lot of companies across my space, noting that AI can drive material cost savings? Sort of wondering how far along that spectrum you feel like you are.

I'll give you my perspective first, Rich, and then Pat will obviously have his. I think we're just in the early innings. We've always said really consistently as long as I've been here, that this is a scale business, and we're now starting to see the benefits of it. So that was pre-AI. So I think what you're seeing right now is the pre-AI scale part of the business, we are implementing AI throughout the business. We've got it in ops with our call centers. We're using it in the finance area. Our sales guys are going into it as well with gone and just some of the other tools that they're using. So I think early, early stages of us getting AI benefits. I think what you're seeing right now is just a pure scale part of the business. So that's my perspective. And I think there's a lot of opportunities in the future to take more cost out.

Yes. I would echo what John exactly that. I think the next wave here is a lot of -- I always say that the end-end process starts with the customer goes to our office and then comes back to the customer. I think in the area of workflow, we still have a lot of AI opportunity to take cost out and improve all the way around. I think there's some other things around marketing, where marketing and sales and customer acquisition, again, with workflow the work that we're doing internally, I think we're just getting a productivity factor here every quarter. So we'll continue to work in those areas in 2027. And I would say a lot of it's come with scale, but definitely AI is top of mind in how we do business and how we become a better company.

Yes. And I didn't even touch on Luna just in terms of the customer experience, right? So -- and their ease of use of the software. So I think there's just, again, lots of opportunities still.

Okay. Then if I look at the fourth quarter specifically, the adjusted EBITDA guide of $10 million to $12 million, at the low end of it, it'd be actually down a little bit sequentially obviously, the upper end would step up pretty good. Can you talk about sort of the variables to do that? The acquisition and organic growth in tend to drive some sequential top line growth. So how do we look at that range and where we'd expect to end up?

I think from my perspective, Rich, we've talked about it throughout the year. We've been running behind in terms of where we want to be in the sales headcount. I think we're finally starting to catch up. So that's one of the headwinds. Headwinds good, bad in terms of we were finally getting fully staffed on that team. I do think that there's going to be a little bit of integration work to with the acquisition. So I'm not I'm expecting really good fall-through from that acquisition in terms of EBITDA contribution, but not necessarily in the front end. So I do think there's going to be some work rationalizing that business. So I think I feel good about the guide, and I do think that there's a little bit of headwind just with some of the things I mentioned in the fourth quarter.

I'm sorry, John. Yes, if I look at it around fourth quarter, first of all, there's a jumping off point on continued spend in the sales and marketing area. We feel like we've done a lot of work with technology in the operations. And from a sales marketing perspective, we're close to the 150 target of salespeople. We're going to go up again next year in salespeople. So fourth quarter implicit in that is some ramp costs in sales for '27. Then the other thing is if you look at the mix in the guide, reoccurring revenue is growing over nonrecurring revenue to the tune of a little over $2 million in the fourth quarter. So the quality of your revenue is super high. And then the integration that John spoke of operationally, we're continuing to sell more and more products per customer. And we're spending some calories on integration between departments and workflows and customer products that we think will benefit in '27 and beyond. And -- but in the immediate quarter, we want to make sure we get those processes right, so we're spending money.

Yes. And just to put a finer point out, I mean, I think midpoint of the guide is about 10%, a little under year-on-year growth for next quarter. It's going to be, I think, a similar story as this quarter in terms of the mix of recurring and recurring. We're adding a lot more recurring. We had a lot of pro services last year as it relates to some of the big tax deals. So we're not expecting that same volume of nonrecurring. But we're really excited about the mix in terms of the organic growth that's outpacing the nonrecurring that's falling off.

The next question comes from Jared Levine with TD Cowen.

I was hoping to get an update in terms of the SMB HCM demand environment more broadly here. What are you seeing? Has there been any macro impacts or changes as you kind of look at over the course of this year in terms of a demand progression in terms of what you're seeing on pipeline volumes or even sales cycles?

Yes. Pipeline is really good. Pipeline has gone up, and we anticipate a really good fourth quarter, first quarter sales. Pipeline is strong. I would say the multi product continues to be a focus, whether it's the managed service or software. A small business want fewer vendors, a little bit more simplicity. They want a partner that they can hang their hat on with multiple products and services. So those trends, I think, will continue. As far as staff, ,clearly, they want access to capital. They want access to people. They want the easy button, so they can focus on growth and a vendor that can provide more and more of those services. And then, also, they want the vendor to have a point of view. So in the area of compliance, we're seeing that broader pipeline of HR, payroll, compliance, all the way through the stack. And then where there's more pressure with the Secure 2.0 Act around 401(k), especially in the states that have legislated that. We see that as a big demand focus as well.