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Asure Software, Inc. (NASDAQ:ASUR)

Q3 2013 Earnings Conference Call

November 13, 2013; 11:00 a.m. ET

Executives

Pat Goepel - President & Chief Executive Officer

Jennifer Crow - Chief Financial Officer

Cheryl Trbula - Investor Relations

Analysts

Jeff Houston - Barrington Research

James DeYoung - Goudy Park Capital

Matthew Paul - Sidoti & Company

Operator

Good day ladies and gentlemen and welcome to the Asure Software’s corporate conference call. My name is Kate and I will be your coordinator for today.

At this time all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today’s presentation. (Operator Instructions)

I would now like to turn the call over to Cheryl Trbula of Asure Software. Please proceed.

Cheryl Trbula

Good day and welcome everyone to Asure Software’s conference call. Before we start, I’d 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. 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 risks and uncertainties that could affect their outcomes.

You are urged to consider the risk factors relating to the company’s business contained in our latest periodic reports on file with the Securities and Exchange Commission. These risk factors are important and they could cause actual results to differ materially.

This call is also being recorded on behalf of Asure Software and is copyrighted material. It cannot be recorded or rebroadcast without the company’s expressed permission and your participation implies consent to the call’s recording. After we’ve completed our review of the quarter, we’ll open up the call for questions from the financial analyst community.

I would now like to turn the call over to Pat Goepel, CEO of Asure Software. Pat.

Pat Goepel

Thank you Cheryl, and I would like to welcome everyone to our third quarter conference call, all our clients, employees, investors and interested third parties. The third quarter was an investable quarter for Asure Software and we are continuing our great progress this year in our business.

Notable accomplishments this quarter: First of all in the third quarter, this was the first quarter in the last two years that we didn’t have the effects of an acquisition. We achieved 14% organic revenue growth this quarter and that is very much notable accomplishment. We are continuing to make progress with our sales, our bookings and our products and 14% revenue growth is very notable.

It’s also the first quarter in two years that we made money and making money is always a good thing. And with Asure Software we’ve been pointed to future growth and opportunities. We are largely getting through all the acquisition noise and organically we made money this quarter.

Our EBITDA of $1.46 is the highest that we’ve had since I’ve been at Asure Software and the quality of the EBITDA was very, very sound. And the reason for that, we had very little one time cost in our EBITDA, with one times number and so that was very, very good for the business.

Our year-over-year SaaS bookings was up 10%, and our quality of sales since we’ve acquired PeopleCube is improving every quarter. Very, very happy with the quality of sales and notable wins this quarter were Thomson TUI over in the UK, H&R Block, Cornell Medical College, IDT, all really good customers and very, very good relationships that are starting here with Asure Software and our clients.

New products this quarter that we introduced, a version of GeoPunch and SmartView, which allows our clients to have a hoteling strategy where they can desk share or hot desk with their clients which also leads to very efficient real-estate scheduling.

We had some one-time events this quarter. First of all we consolidated our debt and we are very happy with our partnership with Deerpath and we accomplished that this quarter. We also sold a product line WebEvent and we were happy with that minor gain this quarter. It allows us to focus on our core products in the business.

And finally we settled a working capital dispute with the PeopleCube acquisition. It was net $540,000 to Asure and then finally we are reaffirming our revenue and EBITDA guidance for the year and so I think all in all, a very, very solid quarter and I’m going to turn over the specific accounting information to Jennifer Crow, our CFO for the specific results.

Jennifer Crow

Great. Thanks Pat. Good morning everyone. I’m going to take a few minutes here to go over the third quarter financial highlights and then Pat and I will happy to answer any questions during the Q&A period at the end of this morning’s call.

In the third quarter revenue was at $6.5 million, a 3% increase from the $6.3 million in the second quarter of 2013 and a 14% increase from the $5.7 million reported for the same period last year.

Year-to-date revenue was at $18.7 million, up 34% from the $14 million reported for the same period last year. The quarter-over-quarter increase in revenue was due to an increase in our cloud SaaS-based revenue of $92,000, our hardware revenue of $103,000 and as well as addition increases in professional services revenue.

The year-over-year increased revenues were driven by the an increased in our cloud, SaaS base revenue of $433,000 an increase in our professional service revenue of $206,000, as well as an increase of maintenance and support revenue of $145,000.

Our non-GAAP revenue for the quarter was $6.5 million and $19.1 million year-to-date. The difference from the GAAP and non-GAAP revenue for the quarter is $40,000 and year-to-date it’s $403,000 and this represents the amounts incurred as a result of the business combination accounting rules that will require a fair market valuation of the PeopleCube deferred revenue.

The remaining haircuts were amortized, which represents a future reduction in revenue of approximately $11,000. This amortization will occur in the fourth quarter and will eliminate any differences in GAAP and non-GAAP revenue as related to the PeopleCube acquisition.

Recurring revenue for the second quarter increased by $9,000 or [0.18%] percent over the second quarter to $4.9 million. Recurring revenue as a percentage of overall revenue slightly decreased to 76% as compared to 78% last quarter, and remained consistent at 77% year-over-year.

New annual cloud bookings decreased by 3% as compared to the previous quarter, but increased by 10% year-over-year. The quarterly decrease is due to primarily our customer demand still being split between traditional on premise solutions versus our on-demand cloud SaaS based solution.

EBITDA excluding one-times for the quarter as Pat mentioned was $1.46 million, up from the $1.15 million reported in the previous quarter. We incurred $104,000 in one-time items, which consisted of $224,000 in legal and professional fees, offset by a gain of $72,000 on the sale of the WebEvent customer base and $48,000 of interest received on the settlement of the PeopleCube working capital dispute.

EBITDA excluding one-times year-to-date was $3.3 million, up from the $2.5 million reported for the same period last year. We incurred $652,000 in one-times, which consisted of $534,000 in legal and professional fees, $160,000 in severance and other related employee costs that can be attributed to the acquisition and other one-time expenses of $78,000, offset by a gain of $72,000 on the WebEvent customer base and $48,000 received in interest in the settlement of the PeopleCube working capital dispute.

Net income excluding one-time items for the quarter was $0.04 a share. GAAP earnings per share amounted to a net income of $0.02 per share. The difference of the $0.02 is related to the one-time items. Net loss excluding one-time items year-to-date was a loss of $0.16 a share, GAAP loss per share amounted to $0.28 per share. The difference of $0.12 per share is due to one-time items.

Gross margin this quarter was $4.9 million or 76% consistent with the $4.8 million or 76.5% in the second quarter as compared to $4.7 million or 83% in the third quarter of 2012. Gross margin year-to-date was $13.9 million or 74% as compared to the $11 million or 78% for the same period last year. We attribute the change in gross margin to a full year of ADI and Legiant revenue and the acquisition PeoeplCube in July of 2012.

Cash flows from operations for the quarter was $383,000 and $1.18 million year-to-date. Net capital expenditures were $102,000 for the quarter, $143,000 year-to-date. Free cash flow in the quarter was $485,000 and $1 million year-to-date. As indicated in today’s press release, we are reaffirming our earnings guidance for the rest of the year. For 2013 we are predicting revenues between $25 million and $26 million and EBITDA excluding one time of $4.8 million to $5.5 million.

At this time I’d like to turn the discussion back to Pat Goepel, our CEO for closing comments and then we’ll open it up for questions. Thank you for your interest in Asure Software.

Pat Goepel

Thanks Jennifer. Hope you agree, we’re made some great progress this year. If you think balk to the first quarter, we hired some sales people and really had some cost initiatives following the acquisition. First quarter results where, 59 and change in revenue, and 7.27 with one times. Coming here into the third quarter, we have improved in the second quarter, improved in the third quarter. We are going to improve in the fourth quarter.

So feel like we are making really good progress in the business. Every area has a focus right now. We are focused on growing sales and bookings. I would say fourth quarter activity is brisk, and feel good about the position we are in.

We still have to execute, which is always very important, but feel like we’ve got a nice pipeline. From revenue growth, we are continuing to grow each quarter and that’s been positive. EBITDA and net income, I’m very pleased with the progress and the way we are controlling costs.

I also think they are setting us up, while for next year and then finally we are continuing to look for acquisitions. We want to be opportunistic, to find the right product set and we look to enhance our current base. We are not looking to introduce a new lime of business with a more build on what we have.

We re very pleased with the European operation. We think we have some good opportunities there and then finally just to note, we settled the working capital lawsuit with PeopleCube and we do have an ongoing suit with them around your developing issues and there is no change in that and that’s an ongoing settlement. Hopefully it will be solved in some time in 2014, but we’ll continue to be active on that and we feel that the charges against us are with our merit.

That’s what we have for the business update today. I would like to turn it over for any questions that anybody might have on the business.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Jeff Houston with Barrington Research; your line is open.

Jeff Houston - Barrington Research

Hi guys. Thanks for taking my questions.

Pat Goepel

Sure.

Jennifer Crow

Sure.

Jeff Houston - Barrington Research

Yes to begin with, it was good to see that the SaaS revenue was up about 15.5% in the quarter. Could you talk a little a bit about the dynamics with the SaaS bookings? I noticed that in the press releases you said that SaaS bookings declined 3% sequentially, while SaaS revenue increased 3% sequentially. I assume it has something to do with the SaaS deferred revenue, but any color that you would provide would be great.

Pat Goepel

Yes, no thanks for the question Jeff. First of all SaaS bookings sequentially were second quarter over third quarter. We install a customer and sometimes that can take, 60, 90 days and then bookings are one aspect of SaaS revenue.

You have client retention, which has been very, very strong client add-on growth where they might add a location or add another product; price increases also are in the mix. So the revenue component includes much more than just SaaS bookings and the year-over-year of 10% growth was positive. The revenue growth has been positive.

But really with our clients, we’ve been able to have some pricing power; we have been bale to expand our services; we’ve been able to increase prices when appropriate and utilization of our services has increased within our clients. So we are very proud of that metric.

Jeff Houston - Barrington Research

Great, and then also, I noticed in the press release you mentioned a few of your clients, including Sirius moved from the on-premise to SaaS version. Could you talk a bit about how long that transition takes place for them to move over and also how the pricing and maybe the contract agreements differ between the two?

Pat Goepel

Yes, really from a movement perspective it can vary. It could be immediately or it could be within a quarter typically, and it depends on how much history or data that they want to move over, what version of software they are on, but in general it’s almost the next month versus the next quarter, let’s say.

As far as contractual relationships, it is a new contract. Many of the same terms and conditions, but obviously within SaaS we actually host the data, so the description around that process is contained in that contract, but very, very kind of simple generic terms that we use for our clients, their standard contracts predominantly and we’ve been very pleased with the movement of some of our on-premise customers to SaaS.

Jeff Houston - Barrington Research

Great, and one last question for me. Just backing into guidance for the fourth quarter, it seems like a pretty broad range for revenue guidance. It looks like 5% to 22% growth in revenue guidance. I’m just curious though why that range is so wide and maybe does it have something to do with the [inaudible] GAAP and non-GAAP revenue. Just some color there would be great.

Pat Goepel

Well, I think at this point, and I appreciate the question Jeff, and I think from the guidance for year end, with the acquisition that we did previously, many times there might be a year end adjustments or etcetera. We felt like the extra cushion was warranted.

We do acknowledge that it’s a wider range, but by the same token we feel that we’re within that range and we also have some activity that we feel warrants that range, because there’s been some large account activity, etcetera and we want to make sure we give you the most accurate guidance we can and we will execute the business properly, but we feel that’s the year end guidance and rather than splitting hairs at this point in time, we feel like we can meet that guidance and that extra cushion is warranted.

Jeff Houston - Barrington Research

Okay and that’s good detail. Thanks for taking my questions.

Pat Goepel

Thank you.

Operator

Our next question comes from the line of James DeYoung with Goudy Park Capital. Your line is open.

James DeYoung - Goudy Park Capital

Hey, good morning. Congratulations on some nice progress this quarter. Just want to ask a couple of questions here. Can you give a little bit more granularity on SaaS bookings up double digits that have been down slightly or flat over the last couple of quarters? Is it a better product offering or change in competitive market place or just deals you’ve been working hard on for a period of time that just came together. If you could shed some more light on that, I’d appreciate it.

Pat Goepel

Yes Jamie, thank you. I think on bookings, 10% year-over-year, we are pleased with it. I think it’s a combination of all the above. First of all we’re seeing no change in the competitive market place. I think we feel like we have a good ability to compete. What we are seeing is, we hired 12 new reps early in the year. Those reps are getting more mature, they are getting more seasoned, they are getting more effective and we think that position is well into the fourth quarter.

And then I think our messaging and our marketing, I think it’s improved dramatically. When we have had some acquisitions in the past, many times the brand name of that product was in the legacy acquisition. We are now One Asure and we spend a lot of time with the Asure Software brand name and really marketing to those products and services.

We are coming out with new products and services which will help us and I think 10% bookings is a nice metrics, but I also think we’re at the beginning here in the fourth quarter. We are hopeful that will improve. We have a lot of stuff in play and then position us for growth next year.

So I think it’s just an evolution of the business, nothing more and nothing less at this point.

James DeYoung - Goudy Park Capital

What’s your anticipation in terms of hiring additional sales people for next year?

Pat Goepel

Great question Jamie. Literally we have a planning cycle in the next couple of days here with the management team and we’ve planned with the Board and that will take place in early December, so my estimation will be headcount and sales will go up. It won’t go up dramatically. We’ll take advantage of opportunities, but we’d still have to get through the planning process.

James DeYoung - Goudy Park Capital

Okay, and then in terms of leverage on the operating side, we should see some improvement on that over the next 12 months as your reps become even more productive, the 12 you’ve hired in the last year, given that all these reps are inside sales reps, correct.

Pat Goepel

Well, I think we are very pleased with the EBITDA one times at 22% operating leverage. We think that’s grown throughout the year quite a bit. We’re growing at $300,000, $400,000 a quarter in operating leverage. So we’ve been pleased with the progress of that and we do think the model works. We think there is operational leverage in the model. We also think that there is growth opportunities and there is no reason to think why we can’t continue to grow leverage, but by the same token, 22.5% is not too shabby.

James DeYoung - Goudy Park Capital

And my last question is, you mentioned you had some large customers migrate over from on-premise to SaaS in the quarter. Earlier in the year that was something that was taking longer than you had anticipated. What changed with getting more customers to migrate and there’s a significant increase in profitability for you and where are you at this stage in terms of migration of those on-premise. What do you think the opportunity in the installed base still is going forward from here?

Pat Goepel

A lot of questions in there Jamie. I would say just from an on-premise perspective, I think consistency of messaging has helped us. If you’re a larger client, sometimes you have to wait for the right time to move and we’ve been very pleased with our client retention all year, whether they stay with the on-premise solution or they migrate.

Typically when they migrate its more money for Asure, its more operating leverage and its better quality for the client. I think many times the client sees that and would like to move to the SaaS offering, but sometimes they have to wait and line up their resources or their technical help in order to do that and from our perspective we scheduled some of these things out, sometimes as much as the year.

So its just consistency and messaging, lining up with the resources, lining up with the improvement in our products and we’re continuing to drive new products everyday to entice our clients to be with the current solution. So I think you will see progress and continue to see it and that will happen every quarter over every year.

James DeYoung - Goudy Park Capital

Thank you.

Pat Goepel

Thank you Jamie.

Operator

(Operator Instructions) Our next question comes from the line of Mathew Paul with Sidoti & Company. Your line is open.

Mathew Paul - Sidoti & Company

Hi Pat, hi Jen. In respect to your existing accounts, can you provide a little bit of color in how much you’ve been able to grow those accounts followed by charging for additional headcount or by cross selling new or existing products to them.

Pat Goepel

So I think in general our price increases are somewhere in the four-ish range or so. I think from a retention perspective we’ve been around 90%. Our base sales have been about 115% of planned or so, so we’ve been able to grow locations or grow additional controls or more products and services.

The higher end we don’t measure. I think you can see payroll data sometimes where hiring is up 1%, 2%. So those are the elements that have to deal with kind of our current client base and we’ve been very pleased with our client activity this year.

Mathew Paul - Sidoti & Company

And the last question, could you provide any update for the success of GeoPunch in the quarter or anything additional in the pipeline.

Pat Goepel

Some very interesting things in the pipeline. I think a lot of work still to do, but we’re getting into bigger deals and clients increasingly are trying to figure out how to help measure and communicate with mobile employees, whether that’s AsureForce or AsureSpace. We’re taping into some of those opportunities and having some very interesting discussions.

As far as sales and install, I think we’re now about 20 or so installs into GeoPunch, so we made really good progress and then I would say activity or prospecting activity and some pre sale activity has been brisk and I think that would bode well for 2014 and beyond.

Mathew Paul - Sidoti & Company

Okay, thank you.

Operator

And I’m not showing any further questions at this time. I’d like to turn the call back over to management for closing remarks.

Pat Goepel

I’d really like to thank everybody for participating on our third quarter conference call. I’m very, very pleased with the progress of the business. I think we’re getting in a rhythm here. I’m very pleased with the cadence. Hope you share in our enthusiasm and I think we’ll continue to make progress in the fourth quarter.

I appreciate all your interest in Asure and Jennifer and I are also available for questions as needed. Thanks again and have a great day.

Jennifer Crow

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. Thank you and have a great day.

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