ELMO Software Limited

Company Overview: ELMO Software Limited (ASX: ELO) is an HR technology company that offers pioneering cloud HR, payroll and rostering/time and attendance technology. The company was established in 2002 and operates on a Software as a Service (“SaaS”) business model based on recurrent subscription revenues. The company has approximately 384 employees as at 30 June 2020, with offices in Australia, New Zealand, and the UK. In the same time span, the company has a customer base of ~1,682 organisations, with total addressable markets of ~$9.2 Bn, as at 30 June 2020.

ELO Details

Higher Customer Base and Buyout Synergies Aid ELO: ELMO Software Limited (ASX: ELO) is an HR technology company that provides innovative cloud HR, payroll and rostering/time and attendance technology. As at 30 June 2020, the company had key offices in Sydney, Melbourne, Perth, Brisbane, Auckland and Christchurch region with a headcount growing to 384. 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 August 2019, the company entered into a strategic alliance with the University of Technology, Sydney (UTS) to build artificial intelligence (AI) driven Predictive Analytics module. The company expects to report a decent growth in ARR and revenue in FY21. 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 three years covering FY17 – FY20, the company witnessed strong growth in its customer base, which rose from 524 customers at the end of FY17 to 1,682 at the end of FY20. 3-year CAGR stood at 47.5%, demonstrating a large opportunity for a growing customer base. Average modules per customer stood at 2.7, up from 2.4 in FY19. The company’s customer concentration remains very low, with the largest customer demonstrating less than 2% of ARR. Also, the company’s 10 largest customers represented less than 7% of ARR in FY20. 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.

In FY20, the company reported record annualised recurring revenue that rose by 19.7% on the prior corresponding year. Of this, more than 97% of the revenue was subscription-based. The period saw record annual cash receipts amounting to $57.5 million and the upward trend continued from FY17, where the company recorded the cash receipts of $18.3 million. 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.

FY20 Financial Highlights: Annual recurring revenue for the year ended 30 June 2020 came in at $55.1 million, representing an increase of 19.7% on prior corresponding year’s ARR of $46 million. The company generates 97.6% of its revenue from subscriptions, which are recurring in nature. In FY20, customer retention in dollar terms, arrived at by dividing the incremental ARR in FY20 by the ARR spend in FY19 of the same customer cohort, which came in at 102%. Moreover, the customer retention rate for FY20 stood at 90.2%. This depicts the strength of the company’s loyal customer base, which enhances its cross-sell potential. Statutory revenue came in at $50.1 million, up 25% on FY19. Sustained sales momentum during the year increased the customer base to 1,682, representing an increase of 25.4% on the previous year. Cash receipts for the period came in at $57.5 million, up 27.6% year over year. Gross profit margin stood at 85.3%, down 1.3% on FY19, owing to higher investment in client services to support an increased and growing customer base. Statutory EBITDA loss came in at $4.2 million, depicting the company’s continued investment to aid the long-term growth implantations.

FY20 Key Highlights (Source: Company Reports)

Acquisitions Synergies: 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. The company has completed seven successful acquisitions since 2016, which enhanced ELO’s value proposition. In February 2020, the company bought Vocam, a leader in HR and video e-learning content. Vocam has its offices in both Australia and the UK and aids ELO to expand its total addressable market from $2.4 billion in 2019 to $9.2 billion, with the inclusion of UK opportunities. 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). These acquisitions lay a strong foundation for long-term, sustainable growth for the company.

Acquisitions Since 2016 (Source: Company Reports)

Balance Sheet & Cash Flow Highlights: The company has also built a decent balance sheet position with total assets reaching $246.3 million as at 30 June 2020. ELO has cash and cash equivalents of $139.9 million, up from $27.7 million reported at the end of June 2019, reflecting the cash generative nature of ELO’s business. Total debt at the end of the period amounted to ~18.7 million. Net cash from operating activities came in at $6.4 million for the period ended 30 June 2020. In September 2019, the company raised ~ $70 million through an equity placement. Again, in May 2020, the company raised an additional $72.8 million of equity. These reserves will support the company to achieve its goal and organic growth initiatives and fund acquisition prospects.

The company remained on track with strong 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.

Balance Sheet Position (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 58.79% of the total shareholding. Jlab Investments (No. 2) Pty. Ltd. is the entity, holding maximum shares in the company at 15.94%. Immersion Capital Master Fund Ltd. is the second-largest shareholder, with a holding of 14.14%.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For FY20, the company reported Gross margin of 84.1%, which is higher than the industry median of 81.1%. The company improved on its short-term liquidity with a current ratio of 3.1x in FY20, as compared to a current ratio of 1.06x in the previous year.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: On the flip side, the company is exposed to credit risk, liquidity risk and market risk, arising from financial assets and liabilities.  The company is also exposed to the risk of changes in foreign exchange rates. COVID-19 led disruptions and stiff competition in the market remains a potential headwind.

What to Expect: The foundation for 2021 is laid upon the investments made in 2020. Going forward, the company is planning to further expand its investment to increase its headcount capabilities, technology development & sales and marketing resources. The company seems well-capitalised to continue investing in both organic growth and strategic acquisitions. In FY21, the company intends to maintain its focus on delivering organic growth supplemented with strategic acquisitions. The company expects its FY21 ARR to be in the range of $65 million and $70 million. Further, the company expects FY21 revenue to be between $57 million and $61 million.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company has corrected by 12.52% in the past one month and is currently trading below the average of its 52-week low and high level of $3.66 and 8.39, respectively. On the technical analysis front, the stock has a support level of ~$4.807 and a resistance level of ~$5.746. 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. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method. For the said purpose, we have considered peers like Integrated Research Ltd (ASX: IRI), LiveTiles Ltd (ASX: LVT), Nitro Software Ltd (ASX: NTO), to name a few. As a result, we have arrived at a target price of an upside of lower double-digit (in percentage terms). Considering the above-mentioned factors, we give a “Buy” recommendation on the stock at the current market price of $5.300, up 5.368% on 25 September 2020.

ELO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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