Elmo posts record Q1 result and reiterates guidance

Elmo Software (ASX:ELO), a cloud-based human resources and payroll software as a service (SaaS) company, today announced a quarterly update which was seemingly in line with investor expectations. 

One thing worth noting is that, as previously announced in the recent full year result, the company’s annual recurring revenue (ARR) has grown significantly to $46 million. Encouragingly, this ARR has been coupled with a 12 month customer receipt sum of $46.8 million in the first quarter of FY2020, implying a prudent reporting structure for recurring revenue (which isn’t, sadly, always as timely for other SaaS companies). Past yearly results have shown a similar relationship.

Source: Elmo investor presentation

In the current quarter, cash receipts of $12 million were below the $15.5 million recorded in the preceding three months, but were nevertheless a record result for the usually slow first quarter. 

This quarter, Elmo also commenced a partnership with the University of Technology Sydney to develop new predictive analytics and AI products for HR and payroll professionals. This development should see an increase in product value and potential for up-selling and cross-selling opportunities.

Management have reaffirmed guidance for ARR of $61-63 million by FY20 as they continue targeting low- to mid-market sized organisations. Revenue and EBITDA guidance for FY2020, was also reaffirmed at $53-55 million and $1-3 million, respectively.

Elmo is currently unprofitable, with cashburn for the quarter at $3.7 million. Additionally, investors were heavily diluted earlier this year when the company raised $55 million through institutional investors and a further $15 million through a share purchase plan. Thus, at the current market capitalisation of $420 million, Elmo is trading at about 9.1x its current ARR, and 6.8x forward ARR.

In comparison to the industry average of about 8x ARR for SAAS companies, this may seem a rather ‘full’ valuation. Nevertheless, given the impressive rate of top-line growth, low churn, high gross margins and a total addressable market (TAM) of $2.4 billion, it is certainly plausible.

Ranked at #54 on Strawman and trading 20.1% below community consensus, Elmo Software may be an interesting company to add to your watchlist.

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