Description

I believe Asure Software is a short. It masquerades as a HR Software-as-a-Services (SaaS) company. In reality, it is a roll-up of outdated payroll processing technologies and labor intensive/low margin payroll service bureaus. My due diligence with former employees and analysis of its SEC filings indicate a host of red flags: low to no organic growth, deteriorating gross margins, intense competition, lack of product development and integration, lack of cash flow, alarming debt level, excessive share dilution, high management turnover and an unbalanced board. Asure currently trades at 24x TTM EBITDA and 15x 2018 consensus EBITDA.  I believe the stock should trade closer to $10/share (42% downside) at 17x TTM EBITDA and 10x 2018 consensus EBITDA. I believe my target multiples are generous given the company has little organic growth and does not generate cash.

Company background

Asure calls itself a provider of Human Capital Management (HCM) and Workplace management software. The company had a colorful history prior to 2008 when it was known as Forgent Networks, which was derided by critics as a patent troll and acquired a number of small software companies along the way.

The current version of Asure began in 2009 when activists at Red Oak Fund replaced the board and installed Pat Goepel as CEO. At the time the company was doing $10 million in revenue and primarily sold conference room management and workforce management software (time and attendance, HR benefits). Googie974’s VIC write-up of Asure in December 2010 provides a good summary of the proxy battle.

After taking over the company, Red Oak and Goepel decided to embark on a growth-thru-acquisition strategy, initially focused on its core products of time & attendance and facility management. Since 2016, the pace and size of acquisitions have accelerated as Asure shifted to payroll/HCM service bureaus who are existing resellers of Asure’s products. (See Appendix at the bottom for a list of Asure’s acquisitions since 2011). Today, the company generates $80 million in annualized revenue and $15 million in “reported” annualized EBITDA.

Products and revenue model

Asure has two software product lines:

·        AsureForce (est 70% of rev): time tracking, payroll/tax, recruiting, benefit, HR consulting. Competitors include ADP, Paychex, Paycom, Paylocity, Ultimate, Paycor, Ceridian, Kronos, Replicon and Time Simplicity. AsureForce targets SMB customers. This product segment is where Asure has been the most acquisitive, snatching up small payroll processors (service bureaus).

·        AsureSpace (est 30% of rev): hot desking, room booking, mobile scheduling, asset management, move management, video conferencing. Competitors include Microsoft (Outlook), Dean Evans & Associates and Agile Quest. AsureSpace competes in a slower growing niche market.

Asure’s revenues consist of software-as-a-service (SaaS) offerings, hardware, on-premise software license, maintenance/support and professional services. Like many software companies, Asure has been migrating towards cloud/SaaS revenue (70% of total revenue), away from on-premise license.

Myths (bull case)

Promoters of Asure contend that it is a SaaS company and therefore deserves a high SaaS multiple greater than 5x forward revenue. The bulls also argue that Asure is a 10%+ organic grower with a “solid clip of acquisitive growth on top.” Furthermore, these acquisitions are supposedly highly accretive and low risk purchases.

Red flags (why it’s a short):

Asure is NOT a true SaaS company: Goepel initially focused on workspace management software. When he realized that category was too small to juice up growth, Goepel turned to payroll/HCM. Specifically, he began targeting payroll service bureaus that provided bigger revenue but also more labor intensive/lower margin businesses than software. These acquired service bureaus also happen to be existing reseller of Asure’s payroll/HCM software.

Low to no organic growth: Goepel likes to brag about Asure’s organic growth rate being greater than 10%. On the most recent earnings call, he said “we’re in that 10-12% kind of space” in response to multiple sellside analyst questions about organic growth rate. Asure is not very transparent when it comes to reporting organic growth, but the MD&A section of its 10-Ks and 10-Qs provide sufficient clues. As shown in Table 1, Asure organic growth rate has never crossed 10%, contradicting Goepel’s claim of 10-12%. In fact, Q1 2018 organic growth rate was significantly lower at 1.8%. Simply put, Asure has to keep making acquisitions to mask low to no organic growth.

Table 1: Reported vs. Organic Revenue Growth

Source: MD&A sections of Asure’s 10-Ks and 10-Qs.

Gross margin deterioration: Asure’s gross margin had hovered in the high 70s. However, as Asure began binging on lower margin payroll service bureaus in 2017, its gross margin deteriorated. Over the past five quarters, Asure’s gross margin has declined from 78% to 73%. On its most recent earnings call, Asure warned that gross margin could dip below 70% if more service bureaus were acquired.

Intensely competitive landscape: Asure competes against a number of large and well-capitalized companies in payroll and HCM. These include ADP, Paychex, Paylocity, Paycom, Ultimate Software, Ceridian, Paycor, Kronos, among many others. I find it difficult to believe that Asure, with just $26 million in cash, $117 million in debt, $80 million in annualized revenue and under $6 million in annualized R&D spend, can compete effectively against these competitors that have multiple times the revenue and resources (see Table 2).

Table 2: Asure R&D Spend vs. Competition

Buyer of struggling companies: My due diligence with former employees indicates that Asure often acquire competitively challenged businesses. In particular, Mangrove and Evolution, Asure’s two payroll/HCM software acquisitions, do not scale, have outdated technologies and need millions more in product development expenditure. After completing acquisitions, Asure makes little effort to enhance the products or integrate them.

Lack of cash flow conversion from EBITDA: Asure claims to generate significant amount of EBITDA.  Management’s reported EBITDA figures back out “one-time” acquisition-related expenses, which are actually recurring charges. Regardless, very little of the reported EBITDA drop into cash flow (see Table 3).  In fact, operating cash flow has been negative for the past 2 years.

Table 3: Reported EBITDA vs. Operating Cash Flow

Source: Asure earnings release

Acquisitions are NOT accretive: Goepel and bullish investors like to tout the company’s M&A strategy as highly accretive. According to Needham, Asure claims to do deals at 1.5-2x EV/revenue, with purchased companies generating individual EBITDA margin in the 40-50% range post transactions. Since 2010, Asure has spent over $175 million (cash, stock and notes) in acquisitions. While EBITDA has increased from $1.3 million in 2010 to $15 million annualized today, the $14 million increase in EBITDA over 7 years is not exactly an attractive return on $175 million in M&A spending. (I did not even adjust the EBITDA increase for organic growth). Most important, the dizzying number of acquisitions has not resulted in any positive cash flow.

Highly levered: Asure borrowed heavily to fund its acquisitions.  As a result, the company’s net debt to TTM EBITDA ratio now stands at an astonishing 6.9x. And this is before subtracting the $20 million in cash they just spent for the three acquisitions in April 2018.

Excessive share dilution: Asure not only borrowed but it also issued massive amount of equity to fund its acquisitions. From 2011 to Q1 2018, shares outstanding rose from 5 million to 13 million, or 19% CAGR.

Management turnover: A CFO’s departure typically sets off an investor’s alarm bell. Under CEO Goepel, Asure has made CFO turnover a biannual event. Current CFO Brannon is Goepel’s fourth handpicked finance chief (see Table 4). Our due diligence suggests that Goepel is a difficult CEO to work with, and there has been high turnover at other senior executive positions.

Table 4: Asure CFO Tenure

Lack of operator experience at Board: The current Asure board is comprised largely of the activists who took over the company in 2009 (see Table 5). What is disturbing is that, outside of the CEO, none of the board members has experience operating a software or HR company. This confirms our due diligence that Asure is solely focused on financial engineering at the expense of product development and acquisition integration.

Table 5: Board of Directors

Risks

Takeout: I do not believe there is sufficient interest to acquire Asure. Its technologies are outdated for strategic buyers, and it does not have the cash flow or balance sheet for private equity.

Acquisition magic: The biggest risk for short sellers is if the market believes Goepel is the next “Outsider”, thereby giving him cheap capital to make more acquisitions.

Appendix: Asure Acquisition History

·        Oct 2011: acquired ADT Time (time and attendance software) for $6m cash and $1.1m note

·        Dec 2011: acquired WG Ross/Legiant (time and attendance software) for $1.5m cash and $2.5m note

·        Jul 2012: acquired Meeting Maker/PeopleCube (facility management) for $9.8m cash and 255k shares valued at $750k, $3m in note

o   Dec 2012: demanded PeopleCube price adjustment, reduced earnout by $540k

·        Jul 2014: acquired FotoPunch (time and labor tech) for $1.5m cash and $3m earnout

o   2016: 3rd party expert determined FotoPunch earnout = zero; in 2015, Asure projected $2.2m and $3.9m in revenue in 2017 and 2018; in 2016, projection revised to $228k and 251k for 2017 and 2018

·        Aug 2014: acquired Roomtag (move management) for $1m cash, $750k in note

·        Mar 2016: acquired Mangrove (HR and payroll processing) and Mangrove COBRAsource for $12.3m cash, $6m note

·        Jan 2017: acquired Personnel Management Systems (HR consulting) for $3.875m cash, $1.125m note

·        Jan 2017: acquired Corporate Payroll (service bureau/reseller of Mangrove HCM) for $1.5m cash, $500k note, 112k shares valued at $1m

·        Jan 2017: acquired Payroll Specialties (service bureau/reseller of Mangrove HCM) for $3m cash, $600k note

·        May 2017: acquired iSystems (Evolution HCM) for $32m cash, $5m note, 1.5m shares valued at $18m

·        May 2017: acquired Compass HRM (service bureau/reseller of Mangrove HCM) for $4.5m cash, 1.5m note

·        Oct 2017: acquired ADS (service bureau/reseller of Evolution HCM) for $1.8m cash, 45k shares valued at $528k, $1.1m note

·        Jan 2018: acquired TelePayroll, Pay Systems of America and Savers Admin (service bureaus/resellers of Evolution HCM) for $25.3m cash, $5m in notes and stock

·        April 2018: aqcuired payroll processing services from Wells Fargo (service bureau/reseller of Evolution HCM) for $10m cash, $450k note

·        April 2018: acquired Austin HR (HR consulting) for $3.1m cash

·        April 2018: acquired Occupeye (workspace tech) for $6.4m cash, $700k note

Catalyst

Equity issuance: Given its acquisition strategy and debt burden, I expect Asure to continue to issue equity and dilute existing shareholders, especially if debt financing becomes more difficult.

Rising interest rate: Asure depends on the largesse of its bankers to fund further acquisitions. As interest rate rises, I expect Asure to have more difficulty obtaining cheap financing. The company may need to slow down acquisitions and service its heavy debt load, of which $50 million carries 10.55% interest rate as of Q1 2018.

Missing own guidance: Even with acquisitions, the company has a history of negative earnings surprise. According to Bloomberg, Asure has missed revenue estimates in 6 out of the last 12 quarters. The most recent revenue miss came in Q4 2017.