Asure Software, Inc. (ASUR) Earnings Call Transcript & Summary

Good afternoon, and welcome to Asure's Second Quarter 2026 Earnings Conference Call. Joining us for today's call are Chairman and CEO, Pat Goepel, Chief Financial Officer, John Pence; and VP of Investor Relations, Patrick McKillop. [Operator Instructions] I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Second Quarter 2026 Earnings Results Call. Following the close of the market, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find our investor presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors in understanding our business and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements. And we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I'll hand the call over to Pat in a moment, but I just wanted to take a moment to run people of some of our upcoming investor relations activity. On August 26, we will attend the 3-part advisers Ideas Conference in Chicago. On September 10, we will attend the Lake Street Conference in New York. On September 22, we will participate in the 19th Annual Barrington Research Virtual Fall Investment Conference. On November 17, we will participate in the Craig-Hallum Alpha Select Conference in New York. On November 18, we will attend the Stephens Annual Investment Conference in Nashville, Tennessee as well as the ROTH Conference in New York. On November 19, we will participate in the seventh Annual Needham Virtual Tech Conference. Investor outreach is very important to Asure and would like to thank all of those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thank you, Patrick, and welcome, everyone, to Asure's second quarter 2026 Earnings Results Call. I'm joined on this call by our CFO, John Pence, and we will provide a business update for second quarter 2026 results as well as our updated outlook for the remainder of the year. Our second quarter revenues came in at $37.1 million, representing a growth of 23% compared to second quarter 2025. Our growth was broad-based across our business lines, and our past investments in technology products and AI are showing real returns. Our organic growth rate for second quarter 2026 was 5% compared with 1% in quarter 2, 2025, an improvement of 400 basis points and down slightly sequentially compared with 7% in quarter 1, 2026 due to seasonality. We continue to receive positive responses to our platform, and we believe we will deliver double-digit organic growth as we move through the remainder of 2026, by driving expanded cross-sell of our products and go lives of previously booked business on our enterprise payroll tax management platform. On the enterprise payroll tax management platform, we're pleased to share an important milestone that was recently achieved. As you recall, we signed an agreement with Venture Employer Services, and we are glad to announce that 2 million of their supported employees are now live on our payroll tax management platform. Our pipeline of opportunities remains robust, and we're excited about the future. However, for competitive and confidentiality reasons, we are limited in our ability to share details. Asure Central continue to progress nicely during the second quarter. We now have a majority of our 30,000 direct clients on the platform as we forecasted on our prior call. We are increasingly well positioned to accelerate cross-sell and attach rates through the second half of 2026 and beyond. The number of clients purchasing multiple products increased by 6% versus quarter 2 of 2025. We remain focused on moving clients from an average of 2 products per client relationship towards 4 or more products per client over time. Now a brief update on AsureWorks, our administrative services outsourcing offering, which allows clients to delegate key payroll and HR compliance processes to Asure. The positive trajectory we saw in launch has continued to grow into the second quarter. Our pipeline keeps growing. We've added new clients and the reception across our target buyer types, small hotel chains, restaurants, HVAC companies, among others, remains very strong. These are main street businesses that need payroll and HR compliance support but lack the internal resources to manage it themselves. We're training additional sales reps on AsureWorks every day and building out the dedicated team beyond our original pilot group. AsureWorks to remain strategically very important, clients who adopt manage payroll and compliance services typically represent up to 5x the revenue of a payroll-only client. And importantly, AsureWorks is not a PEO model. We're not taking on co-employment risk for clients constrained by the cost of rigidity of traditional PEO, we believe, AsureWorks is a compelling and flexible alternative. On the sales force front, we are working very hard towards our goal of 150 reps by the end of 2026. But this isn't just about headcount, we're being deliberate about the types of sales reps we hire. We want full solution sales reps. People can sit down with the business owner and sell the entire product suite, not just a single point solution that's a fundamentally very different skill set than traditional single product selling. And it's core to how we drive both our new logo acquisition and multiproduct cross-sell within our existing base. Historically, we hired more transactional, small business sales professionals suited the selling point solutions. Now that we're selling the broader platform and especially with AsureWorks, it's a more consultative needs-based sales and we've been disciplined about bringing in sales reps who fit that profile. The good news is those reps are ramping faster than what we've historically seen. Today, our existing to new customer logo split is approximately 53% to 47%, which is an improvement from last quarter. And we're still targeting a 35% new logo, 65% base expansion mix over time. On the M&A front, we did not complete any reseller acquisitions in the second quarter, but we continue to actively evaluate opportunities and I would expect to see us complete a few deals in the second half of 2026. Our new sales bookings for core human capital management payroll grew 14% in -- over quarter 2, 2025, and our contracted backlog remains at approximately $80 million. We expect to convert approximately 41% of that backlog over the next 12 months. Our client base, primarily small and midsized businesses in payroll intensive, compliance-driven industries remains strong. we continue to conservatively model for our clients to have flat headcount growth in our forecast. We haven't seen any meaningful shifts in sales cycle length or competitive intensity during the second quarter. I also want to take a moment to reiterate our thoughts on AI and what it means for our business. We've discussed this on prior calls, but we feel it's important to remind investors of our view here. Payroll and HR compliance isn't the type of workflow software as a generic AI can replace. We hold money transmitter licenses across the country, interface directly with the IRS and state and local tax agencies and manage compliance obligations where the margin for error is effectively zero. That regulatory complexity, combined with high switching costs and a consumption-based revenue model is what makes Asure a system of record and our expertise with enormous malls. At the same time, we continue to see AI as a meaningful accelerator for us as we are already far along in the AI evolution journey. We witnessed an over 30% increase in platform adoptions with Luna, our AI agent since the first quarter. And the number of interactions with Luna has increased by approximately 38% versus the first quarter. Additionally, 147,000 voice mail calls have been transcribed and about 196,000 e-mails have been screened for sentiment analysis, extending our capability to capture sentiment analysis from both voice into e-mail. We continue to replicate the automated Luna powered model that is generally available to -- for our Canadian tax solution across U.S. payroll, U.S. tax and HR compliance, bringing our AI capabilities into the flow of work and from human check to AI verified. The same foundation underpins AsureWorks and continues to sharpen our sales intelligence and our support operations. We remain confident in both the durability of our system of record model and the opportunity AI creates for us going forward. So with that, I'd like to turn the call over to John to discuss our quarter 2 financial results in more detail and provide an update on our 2026 guidance. John?

Thanks, Pat. As Patrick noted, several figures discussed today are on a non-GAAP or adjusted basis. Reconciliations are available in our earnings release and our investor presentation at investor.asuresoftware.com, Second quarter total revenues were $37.1 million compared to $30.1 million in Q2 of 2025, representing growth of 23% year-over-year. Recurring revenue for Q2 2026 was $34 million compared to $28.6 million in Q2 of 2025, an increase of 19% year-over-year. Recurring revenue represented approximately 91% of total revenue in the quarter. Professional services hardware and other revenue was $3.2 million in Q2 2026 compared to $1.5 million in Q2 of 2025. The increase was mostly driven by increased hardware sales from our Latham acquisition. As a reminder, we are in the early stages of transitioning Latham to our hardware as a service model, and we are forecasting a headwind of approximately $600,000 to revenue during the first half of 2027. As that shift progresses, you'll see more of this revenue move into the recurring line with some of the corresponding pressure on the nonrecurring line. A mix shift is good for the long-term health of the business, which should enable us to deliver better customer experience while improving total customer value. We speculate Latham will continue to have hardware-only customers for the foreseeable future. Growth revenue was relatively flat in Q2 2026 compared to Q2 2025, and we no longer are forecasting any further rate cuts this year based on current market sentiment. Gross profit for Q2 2026 was $25.1 million compared to $19.9 million in Q2 of 2025. GAAP gross margin for Q2 2026 was 68% compared to 66% in Q2 2025. Non-GAAP gross margin for Q2 2026 was 73%, unchanged versus Q2 of 2025. Net loss for Q2 2026 was $4.4 million compared to a net loss of $6.1 million in Q2 of 2025. EBITDA for Q2 2026 was $4.6 million compared to $1.4 million in Q2 of 2025. Adjusted EBITDA for Q2 2026 was 7.1 -- I'm sorry, $7.7 million compared to $5.2 million in Q2 2025, an increase of 48% year-over-year. Adjusted EBITDA margins for Q2 2026 was 21% compared to 17% in Q2 2025, an increase of 400 basis points. For the full year, we continue to expect to generate positive levered free cash flow in the mid- to high teens range, which we calculate by taking adjusted EBITDA at the midpoint of our guidance range, less software capitalization of approximately $15 million and approximately $6 million in cash interest expense. We ended the second quarter with cash and cash equivalents of $19.7 million and total debt of $68.9 million as of June 30, 2026. Based on the current positive momentum in our business, we are updating our full year 2026 guidance and providing Q3 guidance. We expect revenue of $159 million to $163 million for the full year of 2026 and adjusted EBITDA margins of 24% to 25%. For Q3, we anticipate revenue of $38 million to $40 million and adjusted EBITDA of $8 million to $10 million. We expect our cost structure, including capital expenditures and capitalized software development costs to remain relatively stable on a dollar basis. With that, I'll turn the call back to Pat for closing remarks.

Thanks, John. Stepping back, I think quarter 2 tells us a clear story. We're growing. We're becoming more profitable as we grow, and we're doing it on the back of a platform strategy that's all coming together. Asure Central has reached the majority of our client base. Luna is doing real work for us and orchestrating real work on behalf of our clients, AsureWorks is gaining good traction in its early days. and we're being disciplined about building a sales force that can sell the whole solution, not just a piece of it. We have truly leveled up from a year ago. In quarter 2, we grew revenue by 23% in the second quarter and adjusted EBITDA, an impressive 48%. We also expanded adjusted EBITDA margin by 400 basis points with increased scale in AI efficiencies. We did all that while continuing to invest in the platform and the team. That's the model working the way we designed it to. As you know, we will typically receive revenue tailwinds in the second half and we expect that trend to continue with continued acceleration from this point through the rest of 2026 and into 2027. We are increasingly optimistic about 2027 as our initiatives continue to take hold with increasing adoption of ASO Luna enabled automation of U.S. payroll and tax and more. We remain on track for our medium target of $180 million to $200 million in revenues with adjusted EBITDA margins of 30% or better. And our long-term vision, which we have discussed with investors reflects the potential for margins to expand well beyond 30% as we achieve scale. AI continues to reduce our cost to serve, while simultaneously expanding our revenue opportunities. We're proud of the progress this quarter and even more excited about what's ahead. Thank you for your continued support and for joining us today. I will now turn the call back to the operator for questions and answers. Operator?

[Operator Instructions] Our first question today will come from Richard Baldry with ROTH Capital Partners.

In your wrap-up comment, you sort of hit on what I wanted to go a little deeper on in terms of the ability of AI to cut costs and drive revenue. So could you maybe break that into the 2 pieces and talk about where you feel you're at now in terms of the cost cutting or efficiencies you can gain with it and how much still lies ahead? And then also in terms of your ability to monetize either new features, tools or modules built upon these AI abilities that previously wouldn't have been available.

Yes, Rich, I think, first of all, I'll start on the revenue side. As we get more to intent data and trigger data, AI is really helping us quite a bit and just having customer data available and then Luna and/or the data is available to us to help cross-sell. So a couple of examples, and I brought this out before, when a company has 20 employees versus 19, they're now subject to have COBRA and they have to have COBRA while we can now, with that intent data, ask them if they'd like us to provide corporate services on their behalf or it can be an employee that has a new hire. Would they like to have a 401(k) savings and/or continue to when there's a raise, invest more in the 401(k). So all of this intent data with AI, with Luna is going to really tee up those opportunities for revenue. The other aspect of it, if you think about the marketing to sales motion, there's a whole series of kind of data available that would lead it to be very predictive where they use AsureWorks where they want a system done for them, but maybe they're not ready to go into a PEO. So we think there's a lot of revenue opportunities. I just talked about that are really -- we're putting them in the use cases as we speak. On the cost side, where we see opportunity and Luna has been very active on it, is Luna already taking some of the calls or some of the data that would go to people. And some of those easy answers or some of those what-if questions are being answered with Luna as opposed to getting into a queue or getting into customer service. And what that allows our customer service folks is to build a much more strategic relationship with the customer as opposed to a transaction one. John, I don't know if you have some ideas on this, but those are some, Rich, that we have in place right now.

Yes, I think you're asking kind of where we are in the journey. And I would say really, really early, early days. but it's pretty interesting stuff. Here's an example of 1 use case that the ops team is using right now with AI. They've done sentiment analysis on all the calls coming into the customer service center, and they can tell based on -- and they transcribe them and then they have key trigger words and they can tell you, "Hey, here's a customer that somebody needs to reach out to because they had a really -- they were amplified and they're a language." And so we can proactively go out and deal with customers that might have had that experience. And again, early days. Is that a cost cutting? Not necessarily cost cutting, but it's definitely going to -- I would think, hopefully, impact retention over time and customer satisfaction over time. So early days of the cost out, but obviously, you can start to see some of the examples on implementation and some of the other areas of the business where we're going to get a lot more efficient.

Great. Last for me be if you think about you've been adding the sales on a pretty steady basis, can you talk generally about your overall sales productivity levels. How good you think they are now, how much they could improve? and what do you think that the implication for that for, let's say, a medium-term sustainable growth rate for the company on an organic basis?

Yes, Rich, as I even look at the second half, we believe there will be double-digit reoccurring revenue on an organic basis and some on that is laying the foundation of salespeople that we've already done. But that being said, if you look at productivity, our productivity around attach rates about having more dollars available to sell at getting at the right level with a software model or we'll do it for you model, we think we're in the early innings. We've had some really good success productivity. I would think that next year, we'll be targeting 25% plus productivity, especially in those year 1, year 2 sales reps that will work through an overall productivity at a later date. But those are the things that really excite me. And I think what's happening, if you look at it, you have an area of bringing all these products together with the Asure Central, layering out AsureWorks, adding salespeople, adding training to that and getting up to the business owner as opposed to an office manager. All those things are really good for productivity. And then from a growth rate perspective, we're going to be relentless on getting to double-digit organic growth. We think that's really important part of the model and then layering in tuck-in acquisitions, where we already -- especially where we already own the platform.

Congrats on a good quarter.

Next to hear from Jared Levine with TD Cowen.

First, I want to dig into some of your commentary in terms of expectations of hitting double-digit organic growth in the second half. But I guess if you look at the midpoint, it's just closer to 7%. I guess, would you attribute that to conservatism or anything else to note here?

Yes. So what we're trying to say, Jared, is if I were to look at last year and the composition of the revenue, I think we had some pretty healthy nonrecurring professional services, specifically with some of the large tax deals. So the way we've got the back half of the year currently forecasted and modeled is those are going to be negative from a compare so we're going to lose some of that nonrecurring revenue on a compare basis, but we think that that's going to be offset by the growth in recurring organic side of the business, which again, it's healthier, it's better. But yes, we have a little bit of a compare on the nonrecurring from prior year that's causing that overall overall revenue growth to be a little bit muted because of that.

And Jared, a lot of the -- I'm sorry, Jared, just a lot of the motion is already in place. So we feel real confident in getting to those kind of outcomes.

Understood. And then I was hoping you could dig into some of the ASO offering traction here. We have seen a number of your competitors roll out managed service offerings, too. And I guess how you expect to differentiate versus some of the competitors out there in terms of these ASO managed service offerings as well?

Yes. And I think if you think about our history, we really had managed payroll as part of our core offering before competitors thought it was cool. And so I think we have that opportunity in what we've been layering in to Asure Central is really we have the software to run a business and keep them compliant, keep them efficient, et cetera, but we can also do it for them. And then if you think about Luna, we introduced Luna a couple of years ago and for her to really do a lot of the work around workflow and and AI, but then also not only due to work but orchestrated from a team approach, whether it's payroll benefits, general ledger interface, et cetera, there's a lot of things that get coordinated. So we built AI into our product and into Asure Works. We also if you think about our core customer base, the average maybe company hires an HR professional at about 80 employees or so. We're there every day, helping people do work where we've already done it at the payroll manager level. Now we're extending it out through managed services. So we feel that this is really a core offering where we have quite a bit of a lead in. And we think the competition kind of looking at that model will really help us because they're starting fresh and they'll draw more attention to the space, and we feel that this is right in our core competence [indiscernible].

Next, we'll hear from Vijay Holman with Craig-Hallum Capital Group.

This is Vijay on for Jeffrey Van Rhee. Just kind of First question on the sales heads. I know you guys have set the goal, I think, to be at 150 by the end of the year. I was wondering just can you give any update there, whether you're on trend? I know last quarter, I think you had been a little bit below.

Yes, I'd say just we're at 150 for the year here, and we're probably still about 10 where we want to be. If I look at kind of the bridge in a number of cases, we've top skilled or upskilled the sales leadership, and those leaderships bring people along in many cases. So about half our kind of resources are manager-led versus, let's say, a recruitment. The recruitment we have kind of added a couple of recruiters in that space, and I think we have a really good traction from a pipeline. And then from a selectivity perspective, we are building an efficient kind of adding who we want to select, et cetera, with the criteria. But also we're in a position where it can be a bit choosy and we're in a position as well that we're selling the whole solution as opposed to a point solution. So some of those muscles are different than historically. We feel like we're doing a really good job in getting the salespeople we want. We can see the productivity, and we feel confident that we'll be at 150 by the end of the year.

Got it. That makes sense. And then just as far as the multiproduct kind of attach rates you talked -- you guys have obviously had success getting customers to kind of 2 products. I guess what's kind of thinking in the way of getting people to 3 or 4 that you kind of alluded to there in the remarks.

Yes. I think -- well, first of all, we're getting a lot of traction in our HR area combined with payroll and 401(k). We see just increasingly confident both of them are really building up units each and every quarter that, in a lot of cases, are records for us. So that's really positive. Those two, obviously, time with the acquisition of Latham and the integration, we feel those 4 products will really be the core to some of payroll, tax filing is always part of the offering. So then when you think about depending where you are in the cycle of hiring our recruiting solution, from a benefit perspective, we've invested in broker record as well as HSA, FSA, COBRA. So we're really rounding out the offering, but I'll tell you just the 2 to 4 simply put time and attendance, HR and 401(k), we have really good line of sight to those being added to our core offerings.

And we'll move on to Joshua Reilly with Needham & Company

Maybe just starting with the 5% organic growth number in the quarter. Would you say that it's fairly balanced in terms of the contribution across product lines? Or did the large enterprise tax deal have an influence a little bit outsized influence on that. And then along with that, you mentioned that the seasonality impacted the quarter-over-quarter change in organic growth from 7% to 5%. Can you just give us some more color on what that dynamic was there?