Company Overview: ELMO Software Limited (ASX: ELO) is engaged in providing cloud-based HR, payroll, expense management solutions, and operates on a Software as a Service (“SaaS”) business model based on recurring subscription revenues. ELO has its offices in Australia, New Zealand, and the UK.

ELO Details

Key Findings from FY21 Performance (Period Ended 30 June 2021): The company witnessed bounced back and increased confidence in its business, owing to higher adoption of cloud-based business tools, including HR technology as people are remotely working from home, given the current global scenario. FY22 is smoothing up to be a good year for the company, across both mid-market and small business segments penetration in Australia, the UK, and New Zealand.

• Rise in Revenues: Revenue stood at $69.1 million in FY21, an increase of 38.1%, where over 96% of revenue was subscription-based, which is recurrent in nature.
• Rise in Cash Receipts: In FY21, cash receipts stood at $79.8 million, up 38.8% on a year-over year-basis, aiding the company to achieve its goal and organic growth initiatives.
• Customer Retention: In FY21, customer retention came in at 95.7%, depicting the strength of the company’s loyal customer base, which enhances its cross-sell potential.
• Increase in EBITDA: EBITDA returned to growth in FY21 and stood at $0.4 million compared to a loss of $2.9 million reported in FY20.
• Strong ARR Growth: The company reported a 52.1% increase in its ARR to a record $83.8 million in FY21, and its organic ARR growth increased to 26%, up from 17.2% in FY20.
• Robust Growth in Small Business Segment: The acquisition of Breathe, led growth of 51.8% in annualised ARR under the small business segment. As at 30 June 2021, the Breathe customer base grew to 9,069 compared to 7,146 customers as at 31 December 2020.
• Increase in Total Addressable Market (TAM): ELO’s TAM increased to A$12.8 billion across Australia, New Zealand, and the United Kingdom in FY21.
• Mid-Market Expansion: ELO’s mid-market business continued to grow sharply by 85.1% year over year to 3,114 customers in FY21. Mid-market annualised recurring revenue increased by 35.7% on pcp. The mid-market gross profit margin stood at 86.4% in FY21, up by 1% year over year.

Revenues Highlights (Source: Company Reports)

Key Developments 

• Acquisition Spree: In FY21, ELO completed two significant acquisitions, namely, Breathe and Webexpenses, which aids the company to expand its market opportunity and propel its growth strategy. The company witnessed robust growth reverting throughout 2HFY21 from the mid-market and in the Breathe segment. The company also bought Vocam, BoxSuite, and HROnboard. These acquisitions lay a strong foundation for long-term and sustainable growth for the company.
• Robust Adoption of New Module: In 2HFY21, the company introduced new modules to the Breathe suite in the UK, and is expecting an uptake in the days ahead. The company also integrated the expense module into its mid-market platform. Notably, As of 30 June 2021, the number of modules per new customer purchased stood at 3.3. 

Balance Sheet & Liquidity Position:

• Cash Rich Company: The company exited FY21 with a cash balance amounting to $81.9 million. The company’s total debt at the end of the period stood at ~$54 million. 
• Rise in Cashflow from Operations: Operating cash inflow in FY21 came in at ~$6.5 million, improving from $6.07 million reported in FY20.

Key Metrics: In FY21, the gross margin of the company stood at 83.1%, higher than the industry median figure of 81.9%.  In FY21, the company’s cash cycle days stood at 67.7 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 59.04% of the total shareholdings, while the top 4 constitute the maximum holding. Jlab Investments (No. 2) Pty. Ltd. is the entity, holding maximum shares in the company at 15.31%. Immersion Capital Master Fund Ltd. is the second-largest shareholder, with a holding of 14.98%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Mounting Losses: The company reported a net loss of $37.6 million in FY21, up from a net loss of $18.6 million in pcp, owing to higher depreciation and amortisation, impairment loss on trade receivables, R&D, and sales and marketing expenses. 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 adds to integration risks.
• Other Key Risks: The company is also exposed to risks associated with general global economic and market conditions. Also, stiff competition from peers and adverse movement in foreign exchange price, may impact the company’s financial performance. 

Outlook: For FY22, the company expects robust growth, with an anticipation to outperform $100 million in ARR. Notably, the company expects annualised recurring revenue to be between $105 - $111 million for FY22, whereas revenue for the same time span is expected to be in the range of $90.5 - $95.5 million. EBITDA for FY22 is expected to be between $1.0 - $6.0 million. The company’s healthy balance sheet and skilled management team, along with its long-term nature of customer relationships, place the company for considerable long-term growth.

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: Over the last six months, the stock went down by ~28.5%. The stock is currently trading close to its 52-week low level of $4.20. The stock has been valued using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average, considering decent liquidity position, high customer retention rates, focus on delivering organic growth, increase in top-line, turnaround in EBITDA numbers, and encouraging outlook. For the purpose of valuation, few peers like Nearmap Ltd (ASX: NEA), Bigtincan Holdings Ltd (ASX: BTH), and Adacel Technologies Ltd (ASX: ADA) have been considered. Considering the robust management focus toward growth, new module adoption, synergies from strategic acquisitions, expansion into new geographies, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $4.80, down by ~1.031% as on 13 August 2021.

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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