Elmo Software (ELO.ASX) released an update with their Q1 results a few weeks ago. From their release:

Key Highlights

ELMO business update

• ARR of $111 million with organic growth of 25.4% pcp
• Annualised Recurring Revenue (‘ARR’) closed at $111.0 million, an increase of 25.4% pcp
• 1Q23 Revenue of $27.4 million, up 32.3% pcp
• 1Q23 EBITDA of $2.0 million from $0.7 million pcp
• Year to date cash receipts of $32.9 million, up 18.7% pcp
• Underlying cash burn has reduced to $1.2 million per month
• $43.4 million cash balance at 30 September 2022

The figures released appear to be going in the right direction however I think they don’t necessarily show the full picture. Cash burn has decreased to $1.2m (from -$1.8m)per month which means an outflow of around $3.6m for the quarter but Cash Receipts have increased by $5.2m indicating that cash expenses have actually increased again.

ELO don’t report a 4C report anymore but just doing some simple calculating, cash expenses appear to be around $36.5m ($32.9m+$3.6m. Not including their “non recurring items”). This is up from under $34m in the last few quarters.

Whilst it is good to see an good increase in cash receipts, they need more prudent expense management if they want to aim at cash flow breakeven in the current FY.

I guess here in lies the opportunity for K1 who have tabled a bid for $4.85 per share and the board have recommended share holders to accept the bid. K1 would probably be able to gut out all the excess spending and turn ELO into a cash generating business. From a shareholders point of view it’s probably a little disappointing that this will occur under private ownership with no benefit for some holders who will likely be underwater should the takeover proceed.

Full Announcement here

Disc: Held IRL and on Strawman. Will likely sell closer to the takeover going through

Elmo announced a recommended proposal for the acquisition of ELMO by K1 Investment Management. Cash bid @$4.85

Sorry just getting around to posting some straws on announcements from last week..

Elmo Software responded to media speculation relating to potential takeover offers. From their announcement:

ELMO confirms that it has received approaches expressing interest in acquiring the Company from various parties, including Accel-KKR. The Company is in discussions with selected parties in the context of maximising shareholder value.

No agreement has been reached in relation to any transaction, and there is no certainty that any proposal received will result in a binding offer or that any such offer would be recommended to shareholders.

Full announcement here

This news comes 4 months after they reported to have received a bid for control of the company at $6.10 per share (rumoured to have been from Accel-KKR).

Interesting that PE have come snooping around looking at several tech shares whilst share prices are depressed. I personally feel that ELO have the potential to be a solid cash generator in the future and is starting to look like they are scaling well after being a large cash burner in the past. However, I also think current management don't necessarily have shareholders interest as a priority given the large amount of share-based payments (doubled since FY21).

Disc: Held IRL and on Strawman.

Elmo Software released an update on their FY22 results. From their release:

• Annualised Recurring Revenue (‘ARR’) of $108.2 million, up 29% compared to 30 June 2021
• Revenue of $91.4 million, up 32% pcp
• Cash receipts of $116.9 million, up 46% pcp
• Underlying EBITDA of $7.1 million, up $6.5 million pcp  
• $47.9 million cash balance
• ARR guidance for FY23 $134‐$140 million, organic growth of 24% to 29%
• Operating cash flow breakeven forecast for FY23

They also gave guidance for FY23:

I think overall this is a good step in the right direction for ELMO which has long been known as a company which has bolted on acquisitions to fund its a growth and thus has burnt cash at an alarming rate.

Overall operating cash outflow came in at $17.4m which meant that Q4 operating expenses was around $32.7m (see my previous straw for their info on previous operating cash expenses). This is a good start for a business which is targeting operating cash breakeven in FY23.

Q4 is historically their strongest quarter and so I expect cash flow to still be negative in the next few quarters but management have said that the "Investment phase" of the business has been completed and they are now leveraging their existing customers to continue their growth trajectory. I interpret this as meaning there should be less bolt on acquisitions in the near term.

If ELMO can reach cash flow breakeven in the coming year without having to raise ($47.9m in the bank should be plenty barring any acquisitions) then we may start to see some scale benefits in the coming years.

Currently trading at around 2x fwd revenue.

Full announcement here

Full presentation here

Disc: Held IRL and on Strawman

They are clearly confident enough to splash cash around by sponsoring an NRL team!

not sure I would see this as a good use of advertising given their financials.

Q3 Business Update:

Elmo Software released a business update today. From their release:

• Annualised Recurring Revenue (‘ARR’) closed at a record $101.2 million, an increase of 33% pcp
• Revenue of $67.4 million, up 37% pcp
• EBITDA of positive $2.0 million, up $3.2 million pcp, from negative $1.2 million
• Year to date cash receipts of $84.3 million, up 53% pcp
• $51.4 million cash balance
• Release of two new modules: Hybrid Work and Wellbeing
• FY22 upgraded guidance re-affirmed

Market seems to feel positive towards the update with shares up on early morning trade. I am personally not overly impressed and found this chart particularly interesting.

Cash receipts for the 1HFY22 were $56m which means Q3 came in at around $28.3m. However the cash expenses were still at $34.6 which although they have stated is stable means that they are still burning ~$7m a quarter. This is reflected in their cash balance which has decreased from $58.4m to $51.4m.

Management also stated that Q4 is their strongest quarter, and from their above chart is seems like their cash receipts from Q4 FY21 was $24.7m ($109m - $84.3m). So If I assume that their growth form Q4 is the same as for the first 3 quarters of FY22 (53%) then Q4 cash receipts should come in at around $37m. This means if they can maintain their expense control we MAY see a cash flow breakeven Q4 (which is what they have stated in their update today). I would see this as a minimum for me to hold conviction in this business.

EDIT: Sorry, re-read the announcement and they have stated cash flow breakeven will occur in 2H of FY23.

Disc: Held IRL and on Strawman.

May 2022

ELMO Software Limited (ASX:ELO)

Key Highlights

ELMO business update

ARR now exceeds $100 million, growing organically at 33% pcp and tracking to the top end of guidance

● Annualised Recurring Revenue (‘ARR’) closed at a record $101.2 million, an increase of 33% pcp

● Revenue of $67.4 million, up 37% pcp

● EBITDA of positive $2.0 million, up $3.2 million pcp, from negative $1.2 million

● Year to date cash receipts of $84.3 million, up 53% pcp

● $51.4 million cash balance

● Release of two new modules: Hybrid Work and Wellbeing

● FY22 upgraded guidance re-affirmed

Sydney, Australia 4 May 2022: ELMO Software Limited (‘ELMO’ or ‘Group’) today announced its unaudited business update for the third quarter of FY22 (‘Q3 FY22’), reporting strong growth in annualised recurring revenue (‘ARR’), revenue, EBITDA and cash receipts.

Group financial metrics

Note 1: EBITDA does not reflect non-recurring items

The ELMO Group continues to demonstrate strong growth. ARR surpassed $100 million, growing to a record $101.2 million at 31 March 2022, reflecting a 33% organic increase when compared to 31 March 2021. Year to date revenue increased to $67.4 million, up 37% when compared to the same period in FY21. EBITDA grew to $2.0 million, up $3.2 million pcp. The Group is pleased to reaffirm the FY22 upgraded guidance, provided on 1 February 2022.

 ARR March 2021 to March 2022 ($m)

  Mid-market ARR grew to $89.9 million, a 31% increase compared to Q3 FY21. This highlights the continued strong growth currently experienced in the mid-market. Growth is being driven through securing new customers and the cross sell of modules to existing customers.

Breathe ‐ Small business market:

ARR generated in the small business segment has continued to grow rapidly, recording growth of 47% through the past 12 months. The growth in the small business segment is being driven by the onboarding of new customers and the cross sell of new modules introduced since acquisition.

Capital management and cash flow:

Through the year to date the Group has collected $84.3 million in cash receipts (53% growth on pcp), which included collections of $28.3 million through Q3 FY22 – matching the quarterly record set in Q2 FY22. ELMO remains well capitalised and funded to breakeven with a cash balance of $51.4 million at 31 March 2022.

Capital management and the commitment to operating cash flow breakeven remained a focus through Q3 FY22 as demonstrated by the stable operating cash spend across the last 12 months. This trend is expected to continue through Q4 FY22 and will be complemented by Q4 receipts, which has historically been the most significant quarter.

Note 1: Cash expenses exclude non-recurring items of $2.3m through FY22

ARR - $11.3m

Organic growth of 47%

33%

Organic growth

  ELMO ‐ Mid‐market:

ARR – $89.9m

Organic growth of 31%

Product update:

ELMO released two new modules over the period, Hybrid Work and Wellbeing. Developed in-house, ‘Hybrid Work’ empowers organisations to coordinate their hybrid working model. With the new module, employers can quickly see who is in the office on each day as employees are able to schedule their time in or out of the office in advance.

Through a partnership with Acacia Connection, a specialist provider of employee assistance programs (EAP), ELMO’s ‘Wellbeing’ module provides employees with confidential, professional, short-term and solution-focused counselling. The module leverages the wider ELMO Software suite to improve access to important mental health and wellbeing information (including the Acacia EAP service) via the ELMO dashboard.

Commenting on the quarterly result, CEO and Co-founder Danny Lessem said, “ELMO continues to experience strong growth as small and medium sized businesses adopt cloud-based solutions to manage an increasingly flexible or hybrid workforce. ARR grew 33% in Q3 and I am pleased we are tracking toward the top end of our guidance range which is also translating to the pleasing level of EBITDA.

“The mid-market business performance continues to perform strongly. The small business product continues to generate high levels of growth as small businesses rapidly automate people processes and adopt the new modules that we have launched in the Breathe platform.

“We launched two new modules over the period being Hybrid Work and Wellbeing. The new modules respond to the changing ways work is done and the growing need for businesses to support employees’ mental health and wellbeing. The new modules enhance our competitive edge in the marketplace and provide new revenue streams.

“Finally, we have strong momentum coming into Q4, which is historically our strongest quarter. We expect ARR growth to continue at the high levels we are experiencing. We also continue to leverage our cost base as we expect to cross the cash flow breakeven point in the second half of FY23.”

-ENDS-

Contacts

Investor Enquiries

Darryl Garber

Chief Commercial Officer

+61 2 8405 4600 investors@elmosoftware.com.au

About ELMO

Media Enquiries

Mick Gibb

Media & Communications Manager +61 423 149 494 media@elmosoftware.com.au

 Established in 2002, ELMO Software offers cloud-based solutions for small businesses and mid-market organisations to manage people, process, pay and expenses. Spanning across Australia, New Zealand and the United Kingdom, ELMO operates on a software-as-a-service ("SaaS") business model, based on recurrent subscription revenues.

For more information, please visit www.elmosoftware.com.au

ELMO Software released their 1H FY22 results today. Per their release:

• Annualised Recurring Revenue (‘ARR’) of $98.3 million, up 35% compared to 30 June 2021
• Revenue of $43.1 million, up 41% pcp
• Cash receipts of $56.0 million, up 63% pcp
• EBITDA of $0.3 million up $0.9 million pcp
• $58.4 million cash balance
• ARR guidance for FY22 upgraded on 1 February to $107.0-$113.0 million

Nothing too surprising given they updated the market not too long ago.

Pleasingly, cash flows from operations was positive ($3.7m) which is a good sign as cash generation was always an issue with ELMO.

Profitability is still a while away due to their large investments in acquisitions but EBITDA is positive and they are guiding for EBIDTA of $1.5m-$6.5m for the full year (not sure why there is such a big range) which would mean 2H is expected to be strong.

Disc: Held IRL and on Strawman

EDIT: Looked through the presentation as compared to their Financial Statements and not sure why they have stated Operational cash flow of -$10.9m but in the cash flow statement it has +$3.7m. I'll have another read through or maybe someone could guide me as to the reason for the difference?

ELMO Software H1 FY22 Business Update

• ARR = $98.3m up 35% this half
• Revenue = $43.1m up 41% this half
• EBIDTA = $0.3m
• Cash Receipts = $56m
• Cash on hand = $58.4 (Was $81.9 at start of half)

Updated Guidance:

• ARR = $107-113m (Was $105-111m)
• Revenue = $91-96m (Was $90.5-95.5m)
• EBIDTA = $1.5-6.5m (Was $1-6m)

Personal Thoughts:

Whilst it was pleasing to see impressive growth in ARR and Revenue as well as positive EBIDTA. Cash burn is still high with operative cash outflow of $10.9m for the half, although this has reduced from around $13.2m in the previous half.

My original thesis for purchasing was that it seemed to be growing software company on the verge of becoming EBIDTA positive which seems to be coming along. Valuations also did not seem stretched compared to other companies on the market. However the large amount of cash burn may suggest that they may need to come to the market for further funding to continue on their growth trajectory. This was always a risk with ELMO with their growth by acquisition strategy.

As this remains a relatively small part of my portfolio I am happy to hold and see how this plays out.

Disc: Held IRL and on Strawman.

I'm with you Mikebrisy.  I held ELO in my SMSF for a couple of years and recently sold out with a modest gain.  Who knows, they might be able to get it right but they have a massive sales task ahead in a highly competitive environment and in a market that is slightly loathe to pay for HR platforms in my experience.  It's not an easy sale and at this stage as you point out it's all about getting more growth and they havent proven their ability to make those sales.  I worry that ELO is getting itself stuck in the middle - not really big and scalable enough to compete with the Workdays etc in the large enterpise space but too big and sophiticated for the SME market.  Increasingly I dont see a pathway to significant scale for them

Some have commented on the strong headline ARR growth and the relatively modest valuation for a SaaS company (5-6 x Revenue). But I wonder how many of the valuations are getting anchored on past share price performance?

(Note: Recognising the recent COVID hit, I have done some of the calculations below over two year periods.)

Overall, revenue growth was OK at the headline level. However, over the last two years, 4 acquisitions have contributed $19m of ARR growth at a cost of $104m including earnouts ($72m excluding). So, without this, organic ARR growth over the last two years has been 18-19% p.a., albeit recognising the COVID hit to this especially in the SME sector. Sub-20% revenue growth is underwhelming for a SaaS firm that is still deep in the investment phase. And clearly there is a lot of investment going on. Beyond the acquisitions, the last two years show cash of $52m going into “Intangibles” (software development).

So, the next question is: will ELO generate strong cash flows? Again, I am not sure about this. Look at FY 2020 and FY 2021, cash from customers was $137m over the two years, yielding almost $7m after paying suppliers and employees. They actually did better in FY 2018 and FY 2019, where they generated $9m from $74m receipts. No sign of operating leverage there.

So, the final hope is can they get big enough in the huge addressable market they now have access to in ANZ and UK? I have serious doubts. I have a lot of contacts who work in small and medium enterprises, and they all seem to use different platforms for HR, most of which I’ve never heard of. I went on to Capterra and found that there are 1233 Cloud/SaaS offerings in the HR space. In terms of both the number of reviews and ratings ELO is nowhere to be seen in the top 40 or 50 (I gave up scrolling). Now many of the competitors do not offer the wide range of modules that ELO offers, but equally, many do. I did a Google trends analysis (image attached) for Australia – and that is also not a good picture.

My conclusion is worrying. ELO has not demonstrated a strong ability to generate cash. It is deep in the investment phase, having invested heavily in functionality and market footprint. They are in a highly competitive market with many SaaS alternatives that customers are turning too. It is unclear that they have a differentiated product, which means they are going to have to spend big on marketing and compete hard on price to build share. (Contrast this to the battle between MYOB and XRO in Australia.)

Generally speaking, when we accept SaaS valuations of 10-20x revenue, these are not the characteristics we expect. Even at 5-6x Revenue, ELO could prove to be highly overvalued.

[Disc: I sold my holding of ELO on 28 June at $4.55 taking a -20% hit. I don’t see anything in the latest results to change my view that the investment thesis for ELO is broken. I will put in a $3.50 valuation as a placeholder on strawman until I re-rerun my numbers.]

13-Feb-2020:  Moelis Australia: ELMO SOFTWARE LTD (ELO): HOLD: Executing well across growth opportunity but trading at full valuation

Excerpts:

EVENT:

ELMO has reported its 1H20 results which were in line with expectations given ARR of $52m (+42.9% yoy) & Revenue of $23.6m (+30.3%)  were prereported. EBITDA losses widened to -$2.6m (1H19: -$1.9m) with NPAT of $8.5m (+6.7% vs MOEe: -$9.1m).

Key operational metrics demonstrated strong execution across cross-selling into existing customers and selling the wider integrated, modular platform into new customers.

• ARPU $35.2k (+9.1% yoy)
• Customer revenue retention at 110%
• Average modules per customer of 2.6 vs 2.2 at Dec-18
• Average incoming modules per new customer at 3.9 vs 3.7 in 2H19

Acquisition of Vocam, HR & safety video e-learning content provider for $3.5m consideration, based on $1.5m revenue (2.3x EV/sales) and EBITDA neutral.

Guidance has been updated to include Vocam, with organic guidance unchanged. FY20 guidance now sits at ARR of $62.5m to $64.5m, Revenue of $53.3m to $55.3m and EBITDA of -$1.0m to -$3.0m. 

IMPACT:

We raise our FY20/FY21/FY22 revenue estimates by 0.4%/2.8%/2.0% to $54.0m/$71.4m/$89.6m which primarily reflects the impact of the Vocam acquisition.  

We also increase our EV/FY21e Sales multiple valuation to 7.0x from 6.5x which reflects a re-rating in peer multiples.  

Our target price increases to $7.72 (prev: $7.42) as a result of the changes. 

INVESTMENT VIEW:

We believe ELMO is executing well through cross-selling into existing customers and selling the selling the wider platform into new customers. While we like the ELMO story and believe there is a strong opportunity for the company to capitalise on its positioning as a cloud-based HR & Payroll software platform in the mid-market, ELMO is trading close to our fair value estimate at 7.2x EV/FY21e Sales given that FY21e organic revenue growth of 32% is being generated with an effective free cash flow margin of -30%.  

Maintain Hold, $7.72 target price.

--------------------------------

Disclosure:  I no longer hold ELO, as explained in a previous straw.  Note that ELO is not yet profitable, with minus signs ("-") in front of important numbers such as their EBITDA and cash flow margin.  This is a fairly standard business model - of reinvesting heavilly into the business (at the expense of early profits) to grow market share and relevance in the marketplace in the early years, and can be very successful (look at XRO for a great example of where the strategy worked very well), but if the company has strong competition (as Elmo does) and does NOT have strong and clear competitive advantages and differentiators over their competition (and Elmo MIGHT, but I fail to grasp those at this point), then expecting them to eventually become the leaders in their chosen space is probably more about faith and hope than research and logic.  Xero (XRO) DID have clear competitive advantages and they were different.  Their customers loved the software and found it easy to use.  Even accountants loved it.  It was at the forefront of the migration to the cloud with accounting, billing, etc., and this added to its rapid adoption - and ease of use, from any device, anywhere that has internet.  All of Elmo's serious competition play in the same space - with pretty much the same advantages.  They are all cloud-based SaaS companies, and many have a more complete set of modules than Elmo do (as I have mentioned in a previous straw).  Elmo state that being Australian-based with their servers and data centre here in Australia is a competitive advantage when companies prefer to have their data stored locally rather than on the other side of the world, but Elmo is not alone there either.  There are other small Australian companies (some are private - rather than listed) that do exactly the same thing with respect to local storage and servers.  I'm not saying that Elmo will NOT be the eventual winners here - I'm just saying that I don't see much compelling evidence that suggests that they are the frontrunners to win the majority of the market share in their chosen space, and that is in stark contrast to a company like XRO - which ALWAYS looked like they were going to be the eventual winners.  With XRO, it was the nosebleed valuations that usually kept me away.  With ELO it's just that I don't see enough to make me a believer - yet.

30-Jan-2020:  Moelis Australia: ELMO SOFTWARE LTD (ELO): HOLD: On Track To Meet Revenue Guidance With Strong Investment in Headcount

Excerpts:

EVENT:

2Q19 Quarterly Business Update and Appendix 4C. 

• 1H20 statutory revenue: $23.6m (+33.5% yoy) 
• ARR: $52.0m (+42.8% yoy) 
• Customers: 1,478 (+30.9%), 137 net new customers added in 1H20. 
• ARPU: $35.2k (+9.1% yoy). 
• FTEs: 368 (+66.5% yoy) 

IMPACT:

Our FY20 revenue estimates of $53.8m remains unchanged and our EBITDA estimate decreases marginally to -$3.5m ($3.5m loss) from -$3.1m ($3.1m loss).

INVESTMENT VIEW:

We think ELMO remains on track to meet its FY20 revenue guidance of $53m to $55m with growth typically weighted to the second half.  We think the increasing ARPU reflects that ELMO is realizing the cross-selling opportunity of the wider platform given that an increasing portion of new customers will be from the lower mid-market (50-200 FTE organisations).

The strong investment into sales & marketing and development remains ongoing with an additional 91 staff added in 1H20, with the flexibility to invest supported by the $78m cash balance following the recent equity raise. With the high level of investment, our FY20 EBITDA of -$3.5m remains slightly below guidance of -$1m to -$3m.

We believe ELO is trading close to fair value at 6.5x EV/FY21 Sales.

Our target price increases marginally to $7.42 (prev: $7.14) as we roll our DCF forward and update for a re-rating in comparable peer multiples and we maintain our Hold rating. 

--------------------------------

Disclosure:  I did hold ELO but sold after doing further research and realising that they do have significant competition in the space from both here in Australia and online businesses that are mostly based in the USA and dominate the HR software suite area.  I don't mind competition, but I failed to see a clear differentiator between Elmo's suite of HR software solutions and those of others.  I also noted that in online forums where people rate such software, there was a number of complaints about Elmo not having a "remuneration module" and about some functionality issues and limitations concerning their existing modules.  One example of such a forum is:  https://www.capterra.com/p/161821/ELMO-Talent-Management/

Scroll down and you get lists of pros and cons from people who have used Elmo's software.

In summary, I think they need to do more work to close the loop - to ensure they have a full suite of modules for their chosen area of the market, and then work to be recognised as the best option available for Australian and New Zealand small to medium businesses (Elmo's chosen demographic).  I would also like them to become profitable.  I understand that these SaaS businesses are relatively capital light in their mature years but require a fair amount of capital to be sunk in the early years - you only need to look at Xero (XRO) as an example of where that business model (reinvest back into the businesses at the expense of profits in the early years to build a bigger and better business for future years) has worked very well, but I'm concerned that ELO might be too early in their journey thus far for me to jump back onboard.  I think they need to show why they are going to be the eventual winners in their chosen space, and I don't think they've done that yet.  Just my thoughts, FWIW.

24 October 2019:  In the Livewire Article ("wire") linked to below, after a pretty long preamble about market trends and themes, winners over time (how the makeup of our top stocks has evolved), the need for innovation, value versus growth, different ways to "value" a business, and the traits of a "Quality" growth business (Capital Light, Intangible Assets, Low Churn, High Margins, High Free Cash Flow, and Sacrificing Profitability for Growth), Michael Wayne from Medallion Financial Group discusses Elmo Software, and he makes a pretty good case.

You can read it all here:  https://www.livewiremarkets.com/wires/a-fast-growing-asx-tech-stock-flying-well-under-the-radar

Disclosure:  I don't hold (yet), but I'm getting interested.