ELMO Software Limited

ELO Details

Record Annual Recurring Revenue in FY19: ELMO Software Limited (ASX: ELO) is a cloud-based HR and Payroll software provider that helps in streamlining processes for HR and manage payroll. As at 30 September 2019, the company had 6 offices throughout the ANZ region with a headcount of 349. In the ANZ region, the company has a vast addressable market with around 23,813 organisations and a total addressable market worth ~$2.4 billion. In FY19, the company reported record annualised recurring revenue that rose by 47.8% on the prior corresponding year. The period saw record annual cash receipts amounting to $45.1 million and the trend continued through Q1FY20, with the company recording the largest Q1 cash receipts of $12.0 million in its history. In addition to the robust financial performance, the company also invested significantly during the year to enhance its technological capabilities, sales & marketing resources, expansion of product suite, etc., to promote long-term, sustainable growth for the business.

The company expects to report a decent growth in ARR and revenue in FY20. In addition, the company will continue to deliver on its growth strategy of investing in its capabilities and fully utilise the potential of the large market opportunity. The company is planning to increase its headcount and invest in its R&D capabilities to generate strong, long-term returns for shareholders.

Over a period of four years covering FY15 – FY19, the company witnessed strong growth in its customer base, which rose from 254 customers at the end of FY15 to 1,341 at the end of FY19. 4 year- CAGR stood at 51.6%, demonstrating a large opportunity for growing customer base. To further attract new customers and retain the existing, the company expanded its product suite from 7 modules focusing on talent management at IPO in June 2017 to 13 modules that also include HR Admin, Payroll, Rostering/ Time & Attendance. The enhanced product suite provides the company with a competitive edge, increased potential of sales to new customers and additional cross-sell opportunities from existing customers.

Customer Base Growth (Source: Company Reports)

Q1FY20 Highlights: During the quarter ended 30 September 2019, the company reported record cash receipts of $12.0 million, representing an increase of 17.0% on the prior corresponding quarter. At the end of the period, the company had a cash balance of $67.8 million, excluding the capital raise of $15 million through a Share Purchase Plan in October 2019. The period saw some of the key investments by the company in areas like Research & Development, sales & marketing, headcount expansion, etc. Another highlight of the period included the strategic partnership with the University of Technology Sydney for the development of an Artificial Intelligence driven predictive analytics platform. The partnership will help ELO to generate additional revenue streams and increase its competitive advantage. Net cash used in operating activities during the quarter stood at $3.67 million, net cash used in investing activities stood at $9.14 million and cash generated from financing activities came in at $52.76 million.

FY19 Financial Highlights: Annual recurring revenue for the year ended 30 June 2019 came in at $46.0 million, representing an increase of 47.8% on prior corresponding year’s ARR of $31.1 million. The company generates 95% of its revenue from subscriptions, which are recurring in nature. In FY19, customer retention in dollar terms, arrived at by dividing the incremental ARR in FY19 by the ARR spend in FY18 of the same customer cohort, which came in at 110.8%. This depicts the strength of the company’s loyal customer base, which enhances its cross-sell potential. Statutory revenue came in at $40.1 million, up 51.2% on FY18. Sustained sales momentum during the year increased the customer base to 1,341, representing an increase of 30% on the previous year.

Performance Summary (Source: Company Reports)

During the year, the company significantly invested in its sales & marketing resources and technological capabilities to lay the foundation for long-term, sustainable growth. The total addressable market opportunity in hand increased from ~$1.7 billion to ~$2.4 billion, depicting increased visibility on the opportunities in the lower mid-market that covers companies with less than 200 employees and an increase in the product suite of its convergent solution.

Acquisitions in 2019: The company’s organic growth strategy is accelerated through selective acquisitions, aimed at enhancing its customer base or bringing in complementary technology to enhance its current suite of modules. In January 2019, the company completed the acquisition of HROnboard, which provided a boost to its customer base in the human capital management (HCM) space and offered good scope to cross-sell its extensive SaaS offering. Another acquisition in January 2019 was of BoxSuite, a rostering/time & attendance solution (RTA), that increased the company’s modular product offering to 13 and enhanced the market opportunity to ~$2.4 billion.

Acquisitions Since 2016 (Source: Company Reports)

The company has made a good start to FY20 with record levels of cash receipts and enhanced market opportunity for its convergent solution. Going forward, it seeks to execute on its strategy to increase customer share in the lower mid-market organisations, that have limited HR solution options. With its broad product suite, the company aims to grab a substantial share of the large underserviced market, which is continuously growing as organisations realise the importance of adopting efficient and scalable HR & payroll solutions.

Recent Updates:

• Issue of Performance Rights: The company recently provided an update regarding the issue of 72,504 unlisted Performance Share Rights to some members of the Management under the ELMO Equity Plan.

• Recent Investment: On 2^nd December 2019, the company informed the market regarding an investment in Hero Brands Pty Ltd, a software development house having operations in Melbourne and Eastern Europe. The company has invested an amount of $1.18 million to acquire 50% ownership in the development house. In addition, upon fulfilment of some set criteria, the company has also agreed to pay an additional contingent amount of $0.5 million. The above investment has helped the company to enhance its Research & Development capability through highly skilled software engineers.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 64.58% of the total shareholding. Jlab Investments (No. 2) Pty. Ltd. is the entity, holding maximum shares in the company at 18.22%. Immersion Capital Master Fund Ltd. is the second largest shareholder, with a holding of 16.16%.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, the company had a gross margin of 86.5%, which is higher than the industry median of 83.7%, representing strong revenue generation capabilities. As discussed above, the company reported record recurring revenue in FY19 on the back of high customer retention. ELO is continuously working towards enhancing the capabilities of its platform to boost its already growing customer base, while taking advantage of cross-sell opportunities across its existing customer base. ARR for FY19 was also benefitted by the acquisitions of HROnboard and BoxSuite, that helped enhance its product suite and market opportunities. Both current ratio and debt-to-equity ratio for FY19 stood at decent levels. While the current ratio came in at 1.06, debt-to-equity ratio for the period stood at 0.22, depicting decent levels of cash and debt.

Key Metrics (Source: Thomson Reuters)  

Outlook & Guidance: The foundation for 2020 is laid upon the investments made in 2019. Going forward, the company is planning to further expand its investment to increase its headcount capabilities, technology development & sales and marketing resources. Moreover, it seeks to avail strategic investment opportunities for complementary adjacent technology or customer lists, providing cross-sell opportunities. The above initiatives are directed towards achieving long-term, sustainable growth for the company and promising returns for shareholders. To support its growth strategy, the company also raised an amount of $55 million through institutional placement and Share Purchase Plan (SPP). In FY20, Annual Recurring Revenue is expected to be in the range of $61 million - $63 million. Revenue for the year is expected to be between $53 million - $55 million. In addition, the company expects to report an EBITDA loss in the range of $1 million - $3 million.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Enterprise Value to Sales Multiple Approach

EV/Sales Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Stock Recommendation: The stock of the company generated returns of -2.22% and 0.16% over a period of 1 month and 3 months, respectively. Currently, the stock is trading above the average of its 52-weeks high and low of $7.740 and $4.450, respectively. From a financial perspective, the company has been delivering well with record cash receipts reported both in FY19 and Q1FY20. Annualised Recurring Revenue, that forms a major performance metric, also stood at a record level in FY19 with a substantial increase over the previous year. On the operational front, the company continuously worked on expanding the business through acquisitions and investments, that have laid the foundation for long-term returns for shareholders. Considering the aforesaid factors, we have valued the stock using EV/Sales Multiple based relative valuation method and arrived at a target price depicting lower double-digit upside in % terms. Hence, we give a “Buy” recommendation on the stock at the current market price of $6.180 on 20 December 2019.

ELO Daily Technical Chart (Source: Thomson Reuters)