Here’s why the ELMO (ASX:ELO) share price is surging 6% higher today

The ELMO Software Ltd (ASX: ELO) share price is surging higher on Tuesday morning.

At the time of writing, the cloud-based human resources and payroll platform provider’s shares are up 6% to $6.70.

Why is the ELMO share price surging higher?

Investors have been buying ELMO shares this morning following the release of its half year results. Those results revealed that ELMO has once again delivered another six months of strong growth.

For the six months ended 31 December, the company reported a 29.3% increase in statutory revenue compared to the prior corresponding period to $30.6 million.

Things were even better for its Annualised Recurring Revenue (ARR), which now stands at a record $74.2 million. This is an increase of 42.8% compared to a year ago. This strong ARR growth was driven by a combination of both organic growth and acquisitions.

Driving this strong growth was a large increase in mid-market customers. ELMO now has 2,892 mid-market customers, up 95.7% on the prior corresponding period. From this cohort, it generates ARR of $67.3 million. This represents almost 91% of its total ARR.

The company’s small business segment is supporting its growth as well. The newly acquired Breathe business grew its customer base to 7,146 customers by the end of December.

As expected, ELMO posted a small operating loss of $0.8 million. Despite this, the company is well capitalised with a $71.3 million cash balance and a new $34.5 million debt facility with Commonwealth Bank of Australia (ASX: CBA).

Delivering on its growth strategy

ELMO’s CEO and Co-Founder, Danny Lessem, was pleased with the half and notes that the company is delivering on its growth strategy.

This growth strategy is underpinned by three pillars: segment expansion, module expansion and geographic expansion.

In respect to its segment expansion, he commented: “With the acquisition of Breathe, ELMO now services two distinct market segments, the small business market (<50 employees) and the mid-market (50 to 2,000 employees). The small business market segment is a new $2.2 billion opportunity.”

Commenting on its module expansion, Mr Lessem said: “We continue to broaden ELMO’s all-in-one solution, offering new modules to our new and existing customers. These new modules create additional revenue streams and increase our competitive moat. In the half, we were able to add an expense management module to the suite through the acquisition of Webexpenses, providing a significant cross-sell opportunity.”

And finally, the CEO spoke about its geographic expansion. He said: “In 1H21 we also laid important foundations to build out ELMO’s business in a new geography, the United Kingdom (UK). The acquisitions of Breathe and Webexpenses are powerful examples of ELMO expanding its market opportunity in line with its growth strategy. Both businesses are based in the UK. Breathe places ELMO as the preeminent provider of HR solutions to small businesses in the region and Webexpenses provides a solid operational and mid-market customer base there.”

Outlook

ELMO has reaffirmed the guidance it provided to the market in January.

It continues to expect FY 2021 ARR of $81.5 million to $88.5 million. This will be an increase of 47.9% to 60.6% year on year.

Management has also reiterated guidance for revenue of $65 million to $71 million and an operating loss of $2.4 million to $7.4 million. 

Chat with management

I was fortunate to have the opportunity to chat with management following the release of the results.

Mr Lessem was pleased with the result and notes that its operating leverage is starting to show. ELMO’s EBITDA improved by 69.5% during the half compared to revenue growth of 29.3%.

We also spoke about the UK and the impact that COVID-19 was having on its expansion there. Positively, the company’s UK operations are growing strongly despite the country being locked down since the beginning of January.

Management believes this reflects the resilience of the business model. It also appears optimistic that its growth could accelerate in a post-COVID environment when businesses return to normal and there is an upswing in procurement.

Another question I posed to management was the operating loss guidance. Given that ELMO recorded a first half operating loss of $0.8 million, I was curious what might lead to a potential operating loss of $7.4 million.

Mr Lessem explained that the company has worked through a wide range of scenarios that reflect the current environment and that a $7.4 million operating loss is a worst case scenario. He is hopeful that as the second half progress, ELMO will be in a position to narrow its guidance ranges.

All in all, management appear confident on the future and its aforementioned three pillar growth strategy.

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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. owns shares of and recommends Elmo Software. The Motley Fool Australia has recommended Elmo Software. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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