Asure Software: Bracing For More Impact

Summary

• COVID-19 has hit the business hard given the company's focus on SMBs. We expect no growth for the rest of 2020.
• We expect any potential M&A, by which the management expects to deliver an additional 10% growth in 2020, to be put on hold.
• The long-term issue regarding weak positioning remains.

Overview

We will remain neutral on Asure Software (NASDAQ:ASUR), considering the current pandemic-related headwinds that have severely impacted its business and its SMBs client base. The stock is down ~24% from last December when we published our first coverage on the stock. Back then, we discussed our view of the company’s limited upside potential despite the shift to pure HCM SaaS business. Today, we still hold the same view of the outlook, which is even worsened by the COVID-19.

Risk

Given the company’s focus on SMBs in tier 2 and 3 cities, the COVID-19 will continue to hit the business really hard and present ongoing uncertainties. For starters, the company implemented salary cuts and benefit reductions to some of its employees in Q1, which amounted to ~$3 million in Q1. The company also reduced its headcounts to 411, down from ~423 at the beginning of the year.

(source: company’s 10-Q earnings call slide)

The rest of the business does not look good as well. The company reported Q1 revenue of $18.9 million, which was better than expected, though still down 1.6% YoY. Given the uncertainty around the timing of reopening, the company also does not have enough visibility. However, we believe the outlook for Q2 and beyond will remain quite similar. There will be very little to no growth going forward, considering ~20% of the company’s clients alone may go out of business. In Q1, bookings already declined by 2.7% YoY, while ~1,000 of its clients decided to temporarily shut down their operations in just over a month between March and April.

(source: company’s Q4 2019 earnings call)

The situation will be more difficult considering Asure’s recent divestiture and transition to SaaS, which have taken a lot of the management’s focus and energy to complete. The management expected no organic growth at all last year, though it expected to drive up to 10% growth from a potential acquisition in 2020. We thought that the M&A move would be wishful thinking at the time, and could even potentially be a tailwind, considering the track record in the recent corporate actions. Due to the COVID-19 situation today, the acquisition that will hopefully improve its near-term outlook will certainly not happen.

The main long-term issue in Asure, moreover, is its vague positioning in the SMB and mid-size market. While COVID-19 impacts all of the HCM (Human Capital Management) players to some extent, Asure will struggle in competing against the leading SaaS players in the SMB space with a more efficient self-serve go-to-market and stronger brand awareness.

(source: gusto.com)

Gusto, for instance, is one of the leading SaaS players in the SMB space. Considering its strong growth and estimated $100 million revenue in 2018, this private company is most likely already twice as much as Asure in terms of revenue. Having raised a $200 million Series D funding last year, it has recently aggressively priced its product at $25/month to anticipate for further COVID-19 impact.

(source: zenefits.com)

Another very strong SMB SaaS player, Zenefits, is even offering its payroll product for free this year. In terms of revenue size, it is also larger than Asure and more similar to Gusto. With all these aggressive pricing schemes, Zenefits and Gusto will be well-positioned to get their foot in the door with more untapped SMB clients, which belong to Asure’s primary target market.

Catalyst and Valuation

The growth outlook will be lackluster for Asure for now, though the +10% insider ownership means that there is an alignment of interests with shareholders. The CEO himself, Goepel, still owns 5.3% of the business as of today. It also has adequate liquidity in its balance sheet with a low debt-equity ratio.

(ADP vs PAYX vs PAYC vs PCTY vs ASUR. source: stockrow)

Many of the larger HCM companies with enterprise clients, such as Paychex (PAYX) and ADP (ADP), maintain its modest P/S as their businesses are less affected by the COVID-19. The faster-growing and more diversified players like Paycom (PAYC) and Paylocity (PCTY), are also maintaining their premiums to-date. As expected, Asure has been the lowest-valued stock in its peer group with ~1.4x P/S. Back when we covered the stock last December, the business was still at the early stage of transition to the SaaS model upon the divestment of its workspace management business and had a ~1.7x P/S. given the situation today, we still think that the stock can even trade at a lower P/S beyond Q2. As of today, the share price has already been down ~30% from YTD-high in February and has not recovered since. While the price may be attractive for some investors, we will continue to remain on the sidelines and maintain our neutral rating for now.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[TheGryphon]

Yawn - uninspiring and regurgitive