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ELMO Software share price on watch after posting more explosive ARR growth

James Mickleboro
Man holding tablet with sharemarket chart showing growth shares

The ELMO Software Ltd (ASX: ELO) share price will be one to watch on Wednesday.

This follows the release of its half year results and the announcement of a new acquisition this morning.

How did ELMO perform in the first half?

During the six months ended December 31, the cloud-based human resources and payroll solutions provider delivered a 33.9% increase in half year revenue to $23.6 million. ELMO’s annual recurring revenue (ARR) climbed 42.8% to $52 million.

This was driven partly by an increased investment into its sales and marketing team, which led to an expansion in its customer base to 1,478 organisations. This was a 30.9% increase on the prior corresponding period.

Also supporting its strong top line growth was its high customer retention rate of 92.9%, contributions from acquisitions, increasing brand awareness, and investment and traction in new and existing modules. The latter resulted in increased cross-sell and upsell opportunities.

ELMO’s first half EBITDA came in at a negative $2.6 million, compared to a loss of $2 million a year earlier. This was largely the result of a 33% jump in operating expenses to $26.2 million for the half. This was driven by its continued investment in resources to underpin future growth.

The company finished the period with a cash balance of $78.1 million and no debt. This follows a successful institutional placement and share purchase plan during the half which raised $67.8 million net of costs.

Acquisition.

This morning ELMO also announced the execution of a binding sale agreement to purchase 100% of the shares in Vocam, which is a leading provider of cloud-based HR and safety video content. It has offices in the UK and Australia.

The two parties have agreed a total consideration of $3.5 million, to be funded by $2.5 million cash and $1 million scrip. The latter is subject to a 12-month voluntary escrow.

Vocam generated $1.5 million of revenue over the 12 months to December 31 and was EBITDA neutral. Subscription revenues accounted for over 95% of these revenues.

ELMO notes that the acquisition provides the ability to both cross-sell ELMO modules to Vocam’s customer base and cross-sell Vocam’s e-learning video library to ELMO’s customers.

Outlook.

The company has lifted its FY 2020 guidance to reflect the acquisition of Vocam.

It now expects ARR in the range of $62.5 million to $64.5 million and revenue of $53.3 million to $55.3 million. Its ARR guidance represents growth of 36% to 40% on FY 2019’s ARR of $46 million. ELMO’S prior EBITDA guidance of negative $1 million to $3 million remains the same.

I spoke with the company’s CEO, Danny Lessem, after the release, and he was confident in the company’s future.

He noted that ELMO has an addressable market worth ~$2.4 billion in the ANZ region, which means ELMO is only scratching at the surface of this sizeable market opportunity.

Mr Lessem advised that the company is aiming to make its platform the default choice for HR stakeholders in the region and is targeting slow and steady market domination.

And while today’s acquisition gives the company a foot into the UK market and its platform is largely jurisdiction agnostic, ELMO won’t be rushing in without fully evaluating the market opportunity first. For now, ELMO is focused on growing its ARR by continuing to increase its share of the lucrative ANZ market. 

The post ELMO Software share price on watch after posting more explosive ARR growth appeared first on Motley Fool Australia.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Elmo Software. The Motley Fool Australia owns shares of and has recommended Elmo Software. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020