Company Overview: ELMO Software Limited (ASX: ELO) offers cloud-based HR, payroll, expense management solutions, to mid-market enterprises and small businesses. It operates on a Software as a Service (“SaaS”) business model based on recurrent subscription revenues and has its offices in Australia, New Zealand, and the United Kingdom. The company was listed on ASX in June 2017.

ELO Details

ELO Continues its Winning Streak with New Modules Expansion: ELO is well equipped to widen its all-in-one solution, thereby offering new modules to its new and existing customers. These new modules are the source of additional revenue streams, which provides a competitive advantage to ELO in the marketplace. The company is also working towards its growth strategies and benefits from the robust adoption of its cloud-based solutions to manage a flexible workforce.

Delve Into Key Operational and Financial Highlights:

• Mid-Market Highlights: The company’s mid-market business skyrocketed by 85.1% year over year to 3,114 customers in FY21. In 1QFY22, ELO’s mid-market ARR business witnessed a rise of 43% on pcp. Portraying continued acceleration in ARR, the company witnessed a mid-market organic growth, which stood at 28%.
• Robust Top-Line Growth: In FY21, revenue came in at $69.1 million, depicting a rise of 38.1% from FY20. Revenue for 1QFY22, stood at $20.7 million, depicting a rise of 52% from prior corresponding period.
• Impressive ARR Expansion: Annualised recurring revenues (ARR) in FY21 went up a whopping 52.1% on a year over year basis, thanks to the rising remote working, adoption of cloud-based HR technology, and recovery in business confidence. In 1QFY22, the company’s ARR grew a whopping 61% on pcp, and its organic ARR grew 35% on pcp.
• Loyal Customer Base: In FY21, customer retention came in at 95.7%, up from2% from FY20, depicting the strength of the company’s loyal customer base, which enhances its cross-sell potential. Presently, Breathe has over 9,000 small business customers, owing to the higher adoption of cloud-based HR technology. Notably, Mid-market solutions, has over 3,000 customers, as the company has added four new modules to the platform, namely Predictive People Analytics, Experiences, COVIDsecure and Expense Management.
• Promising Total Addressable Market (TAM): The company’s TAM increased to A$12.8 billion across Australia, New Zealand, and the United Kingdom in FY21, thanks to the expansion into new market segments, module adjacencies and geographies. Notably, mid-market TAM stood at $10.6 billion, and small business TAM came in at $2.2 billion.
• Geographical Expansion: The company has entered the UK market and expanded its geographic reach, owing to the acquisitions of Breathe and Webexpenses in 2020. ELO was also successful in unveiling Breathe into the Australian and New Zealand markets, and the same is being ramped up in the ANZ region. These acquisitions lay a strong foundation for long-term and sustainable growth for the company.
• Ample Liquidity to Sustain Growth: The company exited FY21 with a cash balance of ~$81.9 million. At the end of the period, the company's total debt stood at ~$54 million. ELO exited 1QFY22 with a cash balance amounting to $75.7 million.

Record Cash Receipts (Source: Company Reports)

Key Metrics:  In FY21, the company’s gross profit margin stood at 83.1%, compared to the industry median figure of 75.2%. The cash cycle days for FY21 stood at 67.9 days compared to FY20 cash cycle days of 78.8.

Profitability & Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 57.35% of the total shareholdings, while the top 4 constitutes the maximum holding. Jlab Investments (No. 2) Pty. Ltd. is the entity, holding maximum shares in the company at 15.17%. Immersion Capital Master Fund Ltd. is the second-largest shareholder, with a holding of 14.85%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Mounting Losses: ELO’s net loss is increasing on a year over year basis. Hence, these mounting losses may throw tough challenges at the company’s overall functioning and may dampen margins in the future.
• Integration Risk: ELO continues to acquire many companies, which add to integration risks.
• Forex Headwinds:Any adverse movement in foreign exchange price may impact the company’s financial performance.

Future Expectation:

Industry outlook: The industry players have witnessed robust demand for SaaS amid the rising need for remote working, online learning, as well as diagnosis software. SaaS proposes an adaptable and cost-efficient delivery method of applications. Additionally, SaaS attempts to provide applications to any user, anywhere, anytime, and on any device. Industry participants have been earning from the ongoing transition from legacy platforms to modern cloud-based infrastructure. Subscription and term-license-based revenue pricing models have gained popularity, and customers are now switching the legacy upfront payment model. As ELO operates on a SaaS business model, a stronger mix of software solutions will continue to boost profitability.

ELO’s Targets: For FY22, the company expects annualised recurring revenue to be in the ambit of $105 - $111 million, depicting a rise of 25% to 33% YoY growth. Revenues and EBITDA for the same period are expected to be in the range of $90.5 - $95.5 million, and $1.0 - $6.0 million, respectively.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: In the past nine months, the stock went down by ~34.61%. The stock is currently trading close to its 52-week low level of $4.2. The stock has been valued using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). The company might trade at a slight discount to its peers, considering mounting losses, loss of key customers, increasing expenditure, disruption in technology, etc. For the purpose of valuation, few peers like FINEOS Corporation Holdings PLC (ASX: FCL), Class Ltd (ASX: CL1), Nitro Software Ltd (ASX: NTO) have been considered. Considering the new module adoption, growth in ARR, higher revenue base, expansion in mid-market segment & small business, buyout synergies, loyal customer base, geographical expansion, decent long-term outlook, current trading level, valuation, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the closing market price of $4.32, up by ~0.465% as on 14 January 2022.

ELO Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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