ASUR - Asure Software: Probably Some Short-Term Pain Ahead

Summary

• Asure Software, Inc. share price jumped over $5.00 per share in a little over two months, pointing to it being overbought.
• Some of the numbers were decent in its latest earnings report, but Asure Software, Inc. still continues to operate at a loss.
• Asure Software, Inc. says it hasn't seen any recessionary pressure on its business, but small- to mid-sized businesses are likely to cut spending the quickest if the economy gets worse.

Asure Software, Inc. ( ASUR ), which provides cloud-based human capital management solutions to underserved small and mid-sized businesses, has been on a roll lately in regard to its share price. It has soared from a 52-week low of $4.87 on October 10, 2022, to a 52-week high of $10.52 on December 21, 2022, before pulling back to trade at $9.50 per share as I write.

I think Asure Software, Inc. stock has gotten ahead of itself. While management believes it has brought various pieces of the company together to the point it's going to continue to perform at high levels heading into calendar 2023, I tend to think at this time that is far too positive of an assumption based upon the impact of a slowing economy.

From comments in its earnings report, Asure Software, Inc. seems to think recessionary pressures will have more of an impact on large businesses, which are outside the markets it competes in. On the contrary, when things get economically tough, it's usually smaller businesses that tend to cut back on spending in order to survive the tough economic conditions. As for mid-size businesses, I think it could go either way.

So, depending how 2023 economically plays out, the company could either outperform or underperform. But in relationship to its share price, it looks to me like an assumed improved performance has already been priced in, so I don't see a lot of upside for Asure Software, Inc. stock in the near term.

Most recent numbers

Revenue in the third quarter was $22 million, up 22 percent or $4 million from the $18 million in revenue generated in the third quarter of 2021. For the first nine months of calendar 2022 ASUR generated revenue of $41.3 million, up $8 million from the $33.3 million in revenue generated in the first nine months of calendar 2021.

Net loss in the reporting period was $(4.53) million or $(0.22) per share, down almost $10 million from the net income of $5.32 million or 0.28 per share in the third quarter of 2021. For the first nine months of 2022 the company had a net loss of $(16.2) million or $(0.67) per share, down approximately $9 million from the $7.2 million in net income or $0.39 per share in the first nine months of 2021.

Adjusted EBITDA in the reporting period was $2.1 million, up 71 percent year-over-year, primarily from revenue scale and improved operating efficiencies. Adjusted EBITDA in the third quarter of 2022 was 9.6 percent, an increase of 280 basis points compared to the third quarter of 2021.

Management believes the business has scaled to the point where, along with improvements in its technology, more revenue will have a positive impact on its adjusted EBITDA margins.

At the end of the third quarter of 2022, Asure Software, Inc. had cash and cash equivalents of $10.9 million, and debt of $34.4 million.

In revenue and adjusted EBITDA, Asure Software, Inc. has produced consistent growth from full-year 2020 to 2022, but it's still operating at a loss, and I think with economic conditions likely to worsen in 2023, its projection to grow revenue by another 10 percent and adjusted EBITDA by $3 million to $5 million could be too optimistic.

Asure Software, Inc. has some pieces in place that could organically grow at those levels in both financial categories, but there simply isn't enough clarity to know whether or not it's achievable over the next year or so.

No guarantee momentum will or can continue

In its earnings report management was very optimistic on the performance of the company over the next year based upon momentum in some parts of its business.

Among the positive catalysts it listed were growth in new sales bookings, which were up 91 percent year-over-year, with some categories like HR compliance and tax solutions enjoying growth of approximately 200 percent. Others are bundled sales, payroll, and the introduction of its integration marketplace.

It's so confident in its integration marketplace that it believes over the next couple of years it could account for 30 percent to 40 percent of total revenue.

It was also noted that its pipeline and backlog are healthy, suggesting demand for the solutions offered by the company in the current economic environment should result in momentum continuing on and probably increasing over the next year.

After some acquisitions the company now expects growth in the near term to be mostly organic, which if it plays out that way, could result in improvement in adjusted EBITDA margin and overall general margin improvement in 2023. If revenues to increase and scale brings about the improvement, the company should improve on the earnings side of the business, bringing it closer to profitability. Combined with improved efficiencies, Asure Software, Inc. management believes it will be able to convert a significant portion of increased revenue to adjusted EBITDA. The impression I got from its latest earnings report is numerous initiatives it has put in motion are coming to fruition at this time, and the momentum from them is going to carry into 2023.

My problem with that is I couldn't find any caveats in the earnings report that would offer any caveats to the optimistic outlook. I've seen a number of companies and their management teams get humbled when they're looking at things that way.

Conclusion

Asure Software, Inc. has had a decent period of growth over the last couple of years, but I think it's facing headwinds that it thinks it can mitigate based upon various pieces of the company puzzle coming together at once.

Combine that with the idea that it is larger firms that are going to have an economic slowdown hit them harder than the small and mid-size companies it serves, and I think this could be a humbling experience for Asure Software, Inc. in 2023, if all doesn't play out as well as it seems it will now.

I think the market rewarded the share price of Asure Software, Inc. over the last 10 weeks or so because of the positive outlook for the business. However, I think that's more than priced in at this time and expect the company's share price to reverse direction when the market takes that into consideration and starts taking profits.

And if 2023 turns out to be harder on ASUR than management thinks it'll be at this time, it's going to go through a steep correction.

However it works out for investors who like the long-term prospects of ASUR, a correction would be a great time to take a position in Asure Software, Inc. or add to an existing one.

I do think the future looks bright for Asure Software, Inc., but at this time I don't see how the company can avoid the effects of an economic downturn in 2023, as management teams are forced to reprioritize spending for the year.

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