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ELMO makes $32.4 million UK acquisition

ELMO Software Ltd (ASX: ELO), the HR and payroll provider, has announced an acquisition called Breathe worth $32.4 million in the UK.

What’s the acquisition?

ELMO announced that it’s buying Breathe, a UK HR platform business which services the small business market with less than 50 employees.

It’s described as a fast-growing, scalable and self-service. It currently has annual recurring revenue (ARR) of £3.6 million which has been growing over 30% annually. Its customer retention rate is more 85%. The company is currently EBITDA neutral (click here to learn what EBITDA means)

This acquisition will expand ELMO’s UK footprint with more than 6,700 customers and access to a A$1.5 billion market segment.

The Breathe platform will be launched in Australia and New Zealand, a new A$660 million market segment for the company. ELMO modules will be integrated into the Breathe platform for cross sale.

The purchase price is an initial $32.4 million with a combination of cash and share. There is also an earnout consideration of around $7.2 million if Breathe reaches financial targets.

As a result of the acquisition, ELMO has updated its FY21 guidance and organic guidance is reaffirmed. Annualised recurring revenue is now expected to be between $72.5 million to $78.5 million (up from $65 million to $70 million). Revenue is expected to be between $61 million to $66 million (up from $57 million to $61 million). EBITDA is expected to be a loss of $3.5 million to $7.5 million, previously the guidance was a loss of $4 million to $7 million.

Summary

This seems like a smart bolt-on acquisition and if it can continue its strong growth rate then it could be a really strong buy. The UK (and the world) is moving to digital, so it’s a good idea. I’m not sure if ELMO is a buy, though there’s other ASX growth shares I like such as Pushpay Holdings Ltd (ASX: PPH).

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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