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FY20 result: ELMO (ASX:ELO) delivers 25% revenue growth

The ELMO Software Ltd (ASX: ELO) share price is falling today after the software company released its full-year FY20 results. Despite delivering strong growth in annualised recurring revenue (ARR), revenue, cash receipts and customers, ELMO shares have dropped nearly 4% in early trade.

Founded in 2002, ELMO is a cloud-based HR and payroll software provider for businesses. The idea is that it offers a single platform for organisations to unify and streamline the HR processes whilst also managing payroll, rostering and attendance. It sells its software on a recurring subscription model.

What did ELMO announce?

Despite the impacts of COVID-19, ELMO reported 19.7% growth in ARR to $55.1 million. The company said this was driven primarily by organic growth from new and existing customers.

Revenue rose by 25% to $50.1 million and more than 97% of this revenue was subscription-based, which is recurring in nature.

ELMO’s business model affords for impressive gross profit margins, which came in at 85.3%. However, this was slightly down by 1.3 percentage points on FY19 due to further investment in client services to support an enlarged and growing customer base.

Speaking of customer base, ELMO signed up 337 organic new customers in FY20, taking its customer base to a total of 1,682 organisations. The company believes its market opportunity in Australia and New Zealand is 23,813 organisations, meaning it has around 7% market penetration. ELMO also has its sights set on the ~$6.8 billion UK market, where it currently has less than 1% penetration.

The reduction in gross margin and an increase in costs extended ELMO’s EBITDA loss to $4.2 million, compared to a loss of $2.5 million in FY19.

The company’s lifetime value to customer acquisition cost (LTV-to-CAC) ratio also deteriorated, coming at 8.1. This means that ELMO estimates it gets $8.10 back for every $1 it spends to get a customer paying for its products. Although an impressive result, it is down from a ratio of 10 in FY19 due to an increase in churn and the reduction in gross margin.

Finally, in terms of balance sheet strength, ELMO had a closing cash balance of $139.9 million at the end of the period following a $73 million capital raising back in May. This puts the company in a strong position to continue investing in both organic growth and strategic acquisitions. Importantly, ELMO remains debt-free.

Management commentary

Commenting on ELMO’s results, CEO and Co-Founder Danny Lessem said: “Despite some of the challenges associated with COVID-19, FY20 has been another year of robust growth for ELMO.

Particularly at this time, businesses are recognising the benefits of cloud-based technologies to deliver flexible and innovative workplace solutions.

ELMO’s overall strategy remains unchanged: delivering organic growth supplemented with strategic acquisitions, continuing our growth trajectory into FY21 and beyond. We are well placed to capitalise on anticipated tailwinds in the adoption of cloud-based business tools, including HR-technology.”

Outlook

Despite the uncertainty of COVID-19, ELMO provided some guidance for FY21. It expects ARR to land between $65 million and $70 million in FY21, which would represent 18-27% growth, while revenue is expected to grow by 14-22% to be in the range of $57 million to $61 million.

Once again, ELMO is set to deliver an operating loss as it continues to invest for growth, guiding for an EBITDA loss of between $4 million and $7 million.

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Disclosure: At the time of publishing, Cathryn does not have a financial or commercial interest in any of the companies mentioned.

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