ASUR - NASDAQ

Greetings. Welcome to Asure Software's Third Quarter Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I'll now turn the conference over to Patrick McKillop, Vice President. Patrick, you may now begin your presentation.

Thanks, operator. Good afternoon, everyone. And thank you for joining us for Asure's third quarter 2023 earnings call. Following the close of the markets, we released our financial results. The earnings release is available on the SEC's Web site and our Investor Relations Web site at investor.asuresoftware.com, where you can also find the investor presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures, can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and, as such, involve some risks. We use words such as expects, believes, and may, to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. I will hand the call over to Pat in a moment, but I just wanted to take a moment to remind folks of some upcoming investor relations activities. We will be participating in the TD Cowen HCM Conference, tomorrow, November 14, with virtual one-on-one meetings. On November 15, we will be attending the ROTH MKM technology conference, in New York. And on November 16, we will be attending the 14th Annual Craig-Hallum Alpha Select Conference, in New York, plus participating in the 13th Annual Needham Virtual SaaS 1x1 Conference. The management team will use a split squad to cover both events on November 16 to make sure we can accommodate all investors' meeting requests. This outreach is very important to Asure, and I would like to think all of those that assist us in our efforts to connect with our investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our Web site. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thank you, Patrick, and welcome, everyone, to the Asure Software's third quarter 2023 earnings call. I'm joined on this call by our CFO, John Pence. And we'll provide a business update for the quarter, and our outlook for the remainder of 2023, plus our guidance for 2024. Following our remarks, we'll be available to answer your questions. As you can see from our reported results our strong momentum continued into third quarter, with strength coming from solid execution across the business. Our revenue growth in the third quarter was 34% versus the prior year period, which was almost entirely organic. Reoccurring revenues grew 19% versus the prior-year period, and our non-reoccurring revenues were up by $3.6 million versus the prior-year period, once again driven by ERTC revenue strength. We will discuss more detail on ERTC once we get to our updated guidance which we gave in today's press release. Our HR Compliance revenues and AsureMarketplace revenues both showed very strong growth during the quarter versus the prior-year period. And we're very excited about the future for these business lines. Over time, we believe that the AsureMarketplace could become 30%-plus of our total revenues. And it is a high-margin business, as is the HR Compliance business. Additionally, interest revenues contributed to the growth in the quarter, and we're able to benefit from the rise in the yield curve. Plus, we benefited from consolidation of bank accounts which drives higher investable balances. We continue to build on our momentum by advancing our technology through leading partnerships and launching strategic sales initiatives, such as the bundling of our 401(k) products with Payroll to drive new client addition. This particular initiative was launched a short time ago, and the reception we have received thus far has been very enthusiastic. Many small businesses traditionally have not had the resources to offer 401(k) retirement solutions, but approximately 22 states in the United States have mandated 401(k) plans for small businesses. And we expect more to pass similar mandates. The U.S. Government SECURE Act 2.0 aims to increase employee participation in retirement plans by funding the setups of employer-based retirement plans while providing the funding they need to do so. And Asure has the solutions employers need to set up the plan. Our sales efforts in the third quarter produced a 26% increase in new sales bookings over and above the 91% increase we delivered last year. We've expanded our sales force during the year, and been very pleased with the quality of the new hires we made. We're supporting our sales efforts with digital marketing, which is driving a higher level of sales leads and productivity in 2023. Based on our performance and our current expectations, we're guiding for fourth quarter revenues to be in the range of $25 million to $27 million, which excludes any potential revenues from ERTC filing. We are expecting our 2024 revenues to be in the range of $125 million to $129 million, with EBITDA margins between 20% and 21%. Our '24 guidance also excludes any potential contributions from ERTC filing, but does include our plan to resume acquisitions in earnest. As many of you are aware, the IRS placed a pause on the processing of ERTC claims, back in September, to clamp down on some bad actors that were filing claims which should not have been filed. Asure is a processor of claims only, and we refer our clients to their tax advisors to see if they qualify for the ERTC credit. We continue to await further clarification from the IRS, and expect the program will likely be resumed. However, given the uncertainty, we want to be conservative in our assumptions on ERTC revenue going forward. Now, I would like to hand it off to John to discuss our financial results in more detail. John?

Thanks, Pat. And as Patrick mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. Reconciliations themselves are also included in our most recent investor presentation posted in the Investor Relations section of our Web site, at investor.asuresoftware.com. Now, on to the third quarter results, revenue reached $29.3 million in the third quarter, rising by 34% relative to prior-year period. Recurring revenues rose 19% relative to prior-year period, to $24 million. Third quarter recurring revenues grew on the strength of our HR Compliance solutions, AsureMarketplace, and increased interest revenues, with the average client balance exceeding $200 million in the quarter. ERTC revenues were recorded in professional services, hardware, and other category in the current and prior year period. Non-recurring revenues saw an increase of $3.7 million on the strength of ERTC processing activity. Net loss for the third quarter was $2.2 million, a $2.3 million improvement over the prior year's loss of $4.5 million. Gross margins rose by 10 percentage points to 72% in the third quarter relative to the prior period, while non-GAAP gross margin rose 8 percentage points to 76%. EBITDA for the quarter was $3 million, up $1.7 million from prior year period. Adjusted EBITDA rose by $4.4 million relative to prior year to $6.2 million, and our adjusted EBITDA margin reached 21% in the quarter compared with 8% in the prior year period. Margin expansion was driven by growing high margin revenue streams, continued progress with our efficiency initiatives, and scaled benefits from our growth. These gains more than offset the investments we are making in the expansion of our sales and marketing activities. We continue to believe there is substantial margin upside over the longer term as the business scales. We ended the quarter with cash and cash equivalence of $32.8 million. During the quarter, we completed an equity capital raise for net proceeds of $43 million. We also paid off $30.9 million, which we had with structural capital. This payoff substantially enhances Asure's cash flow, and is accretive to earnings, and creates financial flexibility as we execute our stated strategy to deliver double-digit revenue growth by growing both organically and inorganically. Now in terms of guidance, for the fourth quarter 2023-2024, we are guiding fourth quarter revenues to be in the range of $25 million to $27 million, which at the midpoint of the range would equate to 19% growth year-over-year. Adjusted EBITDA for the fourth quarter is anticipated to be between $2 million to $3 million. Revenues for the full-year 2023 are still expected to be in the range of $118 million to $120 million with EBITDA margins between 19% to 20%. Moving on to the 2024 guidance, we expect revenues to be in the range of $125 million to $129 million with adjusted EBITDA margins up between 20% to 21%. As Pat mentioned in his comments earlier, each of these new guidance figures exclude any contribution from ERTC revenues, but assume a resumption of acquisitions. We are awaiting further clarification from the IRS pause that was placed on processing claims in September, and we feel that being more conservative is the best approach. We believe that the program will resume with some modifications to make the application process more stringent, and so there is a possibility that ERTC will contribute to revenues in 2024. The growth from our HR compliance, AsureMarketplace, as well as flood revenues, and our newly introduced 401(k) solution are all expected to continue being strong contributors going forward. Additionally, our payroll tax management product has multiple shots on goal, with the platform being offered as a service to large enterprises, as well as HCM vendors. While the above mentioned are strong contributors to our growth, we also expect to drive growth through inorganic methods by acquiring businesses that we feel are attractive. Our growth profile going forward will be a mix of both organic and inorganic, which with the recent capital raise and debt payoff, we have the flexibility to resume making smart profitable acquisitions. In conclusion, we are pleased with our performance in the third quarter. And the momentum we have built on the strength of product development, technology, and sales. This gives us confidence in our forward-looking guidance. We are excited about the remainder of 2023, and are looking forward to 2024 as a potentially breakout year for Asure, in driving profitable growth and leveraging the initiatives we have implemented across the business to drive sustainable growth and creating shareholder value. With that, I will turn the call back to Pat for closing remarks.

Thank you. Thanks, John. We are pleased to continue to deliver growth in the third quarter, achieving 34% revenue growth. We achieved this growth by investing in products and technologies that make a difference for our clients. It is really gratifying to see the positive reception by our clients to our solutions as it tells us we're creating value for them and enabling them to focus on their core businesses. AsureMarketplace is just getting rolling and it's expected to contribute to our growth for the longer term. Its results to date have been meaningful contribution to our overall performance and there's lots more to come. As I previously mentioned, the Secure Act 2.0 gives small businesses the funding they need to implement 401(k) plans which many states are mandating now and we expect more to pass mandates as well. Our recent sales initiative in bundling 401 (k) with payroll has gotten enthusiastic reception thus far and it's only early days into that effort. We also anticipate demand for HR compliance solutions will continue to be healthy as businesses increasingly seek to supplement their internal capabilities with external experts who can help them navigate the increasing complexity of doing business day-to-day. Our guidance in the fourth quarter in 2024 both reflect our expectations for continued growth which will be delivered with a combination of organic and or inorganic growth. Our margins have continued to improve as the business has scaled and we have focused on improving efficiency across the business which helps improve the cost structure. In 2023 we've expanded the sales force as well as invested in the marketing initiatives and we now feel the business is right size for future success as we enter 2024. We'll continue to provide innovative capital management solutions that help small businesses thrive. Human capital management providers grow their base, and large enterprises streamline tax compliance. Thank you for listening to the prepared remarks. So with that, I will send the call back to the operator for the Q&A session. Operator?

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question is from the line of Joshua Riley with Needham & Company. Please proceed with your questions.

All right, thanks for taking my questions and nice job on execution here in the quarter. I guess maybe starting off with the topic de jure here. Can you help us understand how you're thinking about and preparing for the range of possible outcomes with regards to the ERTC claims that you've already submitted, and the accounting and cash flow ramifications included in the expectations, and maybe some more color on how that [technical difficulty] --

We've -- obviously seen a little bit of a slowdown in terms of cash coming in from the IRS and to our clients since September. We see the [indiscernible] was actually down quarter-over-quarter. So felt we did a good job on the third quarter, at in collecting some of the prior monies that we had recognized for ERTC claims. As Pat has -- I think we've tried to be pretty clear with regard to our guidance for the fourth quarter, we've not included any revenue in the numbers that we guided to in terms of revenue, $25 million to $27 million. And then again, towards the fourth quarter -- 2024, the $125 million to $129 million guide that we gave in terms of revenues also includes incremental ERTC revenues. Now, we think that it's going to get turned back on, so there'll be some kind of upside potentially to that guidance. But we did not take it into account in terms of the near-term just because of the uncertainty as to when it's going to get turned on and how soon it gets turned back on. But that's kind of how we played it in at this point.

Yes, John, and I would say a couple things. One, just I want to point out, in our press release, the guidance was $125 million to $127 million. We -- there was a typo there, it's $125 million to $129 million, and verbally we said that. We'll make that correction as quick as possible. As far as the guidance with ERTC, we're going to follow the IRS' guidance. And we do believe that the program probably will turn on, but we'll for their guidance. And we wanted to take it out of the numbers just so there was no ambiguity, and take a very conservative stance. That being said, there are -- we are filing paperwork as we get it. And we know that, on behalf of our clients, it's in the queue. And when and if that resumes, we'll process according to the IRS regulation.

Yes, [indiscernible] point to these on fourth quarter guidance. If you think about last year fourth quarter, without ERTC, we were roughly $22 million. There was approximately $7 million in fourth quarter last year, $2 million was in recurring, and $5 million in the non-recurring line. So, we're looking at $22 million relative to the 25 to 27 guidance. So, we think the midpoint of that is kind of in the mid teens growth, so it's kind of 14% to 23% is what we're going for in terms of growth quarter-over-quarter from prior year, when we exclude ERTC. So, I think that's the real compare that we would want people to focus on is, if we're going to take it out of the guide we also need to take it out of the prior-year compare. So, we feel [indiscernible], but it is a little bit of a muddy story.

Got it. And then just another follow-up on the Q4 guidance, if you look at the implied adjusted EBITDA margin, it's down sequentially, as you would probably expect with a little bit of loss of leverage from the lower ERTC revenue. But why would it bounce back? Maybe you can help us, in 2024, to kind of that 20% to 21% range? Thank you.

Yes, I think, again, we've been pretty consistent, I think, in this messaging. It's a scale business. And we think if the revenue breaks, that's where we generate the adjusted EBITDA, right? So, we're back in our guidance kind of that -- again, for '24 revenue guidance is $125 million to $129 million. We think that after those revenue breaks, we should be a 20% to 21% adjusted EBITDA company. With this year's guide, I think it was $118 million to $120 million, and towards the year producing 19% to 20% adjusted EBITDA, so that the composition of the revenue is not the key, it's really the absolute number -- the absolute amount of revenues. And so, we're getting a little bit of that impact in the fourth quarter with the decline in revenues as a result of that low ERTC revenue. But we think, in absolute numbers, as that revenue gets back into that size, we can produce that amount of adjusted EBTIDA.

Yes, and just as a footnote to that, we made the decision six months ahead of, in many cases, of where we're going to go. Clearly, with ERTC, and if we think about the summertime, we know we wanted to expand the sales force to 120. We knew wanted to do, potentially, a raise to get more aggressive in replacing ERTC revenue. We had no ERTC at the time, was going to happen so quickly. So, our path doesn't change. The fourth quarter, we made investments in sales people in tax filing, we've made investments in the technology area. And all that was planned investments that we started to make over the summer. When ERTC was halted or paused, on September 14, what we did is continue those investments. And we're really happy with the raise and the ability to play offense. But what that did in the fourth quarter is put a little pressure temporarily on EBITDA. And so, we've called that out now that we've taken ERTC. And as John mentioned, as we get back to the revenue numbers, of the $125 million to $129 million, that EBITDA stamps back very nicely because it is a scale business.

Got it, very helpful color. And I'll pass along the queue. Thank you.

Thank you, Josh.

Our next question is from the line of Bryan Bergin with TD Cowen. Please proceed with your questions.

Hi, guys. Thank you. Appreciate you providing an initial '24 outlook here the middle of the uncertainty. As we try and unpack and apples to apples recurring growth rate implied in that '24 outlook, can you give us a sense of the grow-over pressure combined from the ERTC and the float revenue will be as you turn the calendar from '23 to '24?

Yes, I think from my perspective, float shouldn't have a lot -- it should be kind of flattish. In terms of ERTC for the first nine months of this year, it's roughly $17 million that we have to grow over. So, if you think about what we're doing in terms of the guide in that $17 million of ERTC, we're probably $100 million-$102 million-ish exiting this year in recurring revenue or revenues. And so, that $125 million to $129 million we're talking to literally is that 25% to 29% growth next year. Again, this is -- and as we made the point clear in our prepared remarks, that's going to be combination of both organic and inorganic. So, we've starting putting in some of the raised money to work, and we're going to do some more of that in next year. So, think we've been pretty transparent on that. It's pretty consistent with the model we've been taking about over the years, right? It's in the IR deck. We expect to kind of be an inorganic and organic grower over time.

Yes, and the only think I would say, Bryan, is if you think about the $100 million or so that John mentioned. And then if you think about second quarter was a little over 20% repetitive growth. If you think about lapping in the tough compares around float, you may have about 6% or so kind of headwinds on the float. But as far as momentum in the business, this quarter continued close to that 20%. Float would be a headwind, and the Marketplace might be a little bit of a headwind on lapping growth compares. But we feel really good about the sales motion and the repetitive revenue. And then that's why we've been adding to it, and feel that we can lap the ERTC compares with accommodation of the organic growth engine that we've built, as well as the tuck-in acquisitions that we're in a unique to execute, and that's why we did the raise.

Okay, that makes sense. And I guess as you think that organic versus inorganic, is it relatively even-mixed according to the long-term strategy as you think about that '24 view?

I think so. It'll be lumpy, right. It's not perfectly linear. So, you're never going to see this line up 100% even, because we will spike it once in a while with an acquisition. But I do think it's -- when I think about it, I do think it is a pretty healthy mix of both.

Yes. And we had really good visibility to double-digit organic growth. So, we will -- more reasons we did the raise is we want to get aggressive with inorganic growth. And we feel like we have a pipeline of some pent up demand. So, while it might be lumpy, there's pretty good certainty on the revenue, going forward.

Okay, very good. And if I could just squeeze one more in, can you just comment on how client employment levels trended in the quarter?

Really about flat, it's interesting, small businesses still have more jobs than people. And there are certain industries that cannot get people hired, and even today. What I would say is there is a little bit of a white-collar recession. And there's pressure on that higher end. But I would say, in small business, we've had a mixture of some of pressure around the technology area and some of the higher-end employment. But I would say that blue-collar employment or in the areas of restaurant, in the areas of even trades, they can't get enough people. So, the overall hiring has been about flat. And seasonally, we would have expected maybe a little bit of an increase, but clearly there is a want there to hire more employees if they can get them.

Okay. Thank you.

Our next question is from the line of Richard Baldry with ROTH MKM. Please proceed with your questions.

Thanks. Can you talk about the M&A pipeline, and it seems to be factored in for '24. Are you seeing reasonableness in what sellers are looking for, and the interest levels to take action on it, and just any sort of characteristics around that? And then maybe given we took down a lot of the debt in the quarter, when you look forward, what kind of terms or structures are you really trying to focus on? Would be a lot less on the debt side and more on the cash and stock? How do we think about that in terms of equity dilution? Thanks.

Yes, Rich, lot of questions in that question. So, I'll try to unpack and John will jump in as well. But when I think about, first of all, the environment of small business payroll companies, the environment is pretty tough. First of all, regional banks have stopped lending. So, access to capital is the number one concern, two the payroll industry in general is getting regulated more and more by state money, money transmitter licenses. KYC, which is Know Your Customer, AML/BML, which is anti-money laundering, et cetera, so small businesses have a tough time keeping up legislatively. They have a tough time keeping up with the changing landscape of the laws. They have tough time keeping up with capital needed. And in some cases of ACA, some of the banks are requiring deposits that are tough to fund especially if debt levels are tough to get. So, the backdrop is that what I would say is also when you think about how they're going to grow their business and what they look like and interest rates going up, very often they might be looking for a different exit strategy at this point in time to counter what they're going through. And we're a logical exit strategy for them. So, we've had some conversation over the last couple years we get with our resellers and we get with our trusted partners a couple times a year. And many times, you can telegraph that early on. We did a subsequent acquisition that we put as an extension of the Q in October already. We do believe we have a pipeline as far as multiples, the multiples are reasonable and feel that they're starting to pull in given the backdrop. And then, people are worried about potentially a recession or potentially a slowing down of the economy. So, we think it's the right time to continue to grow. And then, for us, we've been purposeful about, kind of growing this business and calling out it's a scale business. The operational and technology initiatives that we've done to improve the bottom line and really grow margin here 10% over the last couple of years we're ready to handle that volume. And so, many cases, luck is preparation meeting opportunity. We feel it's really a good time to go and be aggressive here. And the passing of ERTC has given us a catalyst as well to do that. So, those are some of the things of how we think about it. And then, as far as your last question around lending or cash or stock, for us, we have three levers. We have cash, we have a seller note, which is important to us because it's a low cost note and it protects us on indemnification. And from a stock perspective, only if we feel that the acquisition could add value to us long-term when we look at stock. Look, we also have a little over $30 million in cash and feel that we have the ability to make some acquisitions. We do think the lending market over time will be more reasonable than it is. So, that's a lever that we could add. But some kind of cash, stock and indemnification of a low-cost loan will continue to be our model.

And maybe flipping back to organic, you posted up, I think it was 26% increase in bookings on top of 91% a year ago. You talk just generally about average 10 years sort of capacity, you feel like your utilization is or what's left, can you continue to grow? Or do you think you really have to focus more on adding headcount to try to keep up the organic growth now? Thanks.

Yes, thanks Rich. And we are adding from 100 sales reps to 120. And one of the reasons we're adding is, we got people successful. We're going to have over 50% of them at the summit that we have would say that, that's a record number for us that are going to go to the summit and they've been successful. The training program we put together, the hiring of people we've been able to attract really good, what I'll call athletes. And to Asure, they've been successful, we also have a culture of mentoring. And it's done a really good job bringing people into the organization. So, there's going to be no slowing down of continue to grow. And then, as you look at the model and we've improved margins here, almost double margins the last couple of years, because we're starting to get scale, we want to not only invest in our talent, but then also add more. And we believe that as we add more and get the more gross dollars, not only from productivity, but new people and the quality of the new people that adds to the bottom line. So, it's a multi-year commitment, but we feel really strong about it and we're fortunate to be in a position to be able to do that.

Thanks.

Our next question is from the line of Brad Reback with Stifel. Please proceed with your question.

Great. Thanks very much. Heading back to 2024, the guide from your commentary, is it correct to assume about $10 million to $15 million from acquisitions? Is it in the 125 to 129?

Yes.

Great. And the employment trends that you're modeling for '24, give it…

To put in, it's just flat. We've not taken anything down. We've assumed our employers are going to stay relatively flat for '24.

That's great. That's all I got. Thanks very much.

Thanks, Brad.

The next question is from the line of Jeff Van Rhee with Craig-Hallum. Please proceed with your questions.

Great. Thanks for taking the questions. Pat, just on the Secure Act, maybe you talked about early traction. Can you put a little behind that? Any quantification, a little more color there would be helpful. And then, on the 26% growth in bookings, does that include or exclude ERTC? If it includes it, what was it ex-ERTC?

Yes, just a couple of things. First of all, your first question, Jeff was around I apologize. Say that again.

The Secure Act, you said you were off to a good start.

Yes, Secure Act, and I'm sorry. Shortly after September 14, which put a pause on ERTC, we've already begun to pivot towards Secure 2.0 Act. And those that don't know about Secure 2.0 Act, it's really a social security is going to be challenged over the future years with retirement funding. There's still many Americans out there today that don't have access to a 401 (k) plan. And already now with the Secure 2.0 Act, the government will provide funding not only to set up a 401 (k) plan, but also provide funding in the area of tax credits to employer matches. And so, we get people starting to save and create some independence in addition to social security. And that sliding scale of a match goes over five years. That program has been adopted by 22 states already. And we anticipate that it will continue to be driven. And if you think about the data that we sit on, which has 401 (k) deduction codes, and it also has forms like the 5,500 to go over the plan, we're pretty visible. And our offering already is around compliance. And from a compliance perspective with whether it's minimum wage, sexual harassment training for those states that require it, HR compliance, or payroll taxes, or payroll wage an hour, compliance is what we do and what we're skilled at. So, we're going after those clients and those prospects in the states that have mandatory 401 (k) plans. We're excited to partner with Vestwell, which is also partnered with JPMorgan Chase, which we're partnered with on another company around our Treasury Management System. And so, we're going to go after 401 (k) in a big way. I anticipate that, we'll do in over 700 plans here next year. We'll already probably do something like 10% this year. We have visibility around 70 plus plans to sell here in the fourth quarter. I wouldn't be surprised if we beat that. The marketing qualified leads, the sales qualified leads, the interest level is really, really high. And we've only been doing this in a little bit over a month. So, people are pretty excited about the program. As far as sales numbers, the 26%, we have ERTC and we'll start reporting bookings ex-ERTC. We'll also do some with ERTC. Some are standalone going forward, if we do book in ERTC deal, it'll be a current client with the current product. So, we'll provide a bigger breakout of that. But suffice to say the 20%, 6% on ARR is really largely without ERTC because and we'll provide bigger breakout of a definition of ERTC, because in of itself, ERTC was more of a one-time event than an ARR event. It did get kind of packaged, and we'll have to kind of have a nuanced breakout for you in future quarters. But the 26% ARR bookings is on top of what we booked in ARR, which implicit in that number did not include ERTC.

Okay, all right, great. And then, on Marketplace, did it ramp as expected? And any more precise thoughts or bounds around what it might do for '24, that's my first question. And the last would be gross margin, John, just how should we think about gross margin for Q4?

Do you want to go first?

Yes, I will go first on a Marketplace. First of all, 401 (k), we were looking at the big category of Marketplace. With the Secure 2.0 Act, we pulled it out of the marketplace and really have it as a separate category with payroll. So, that'll perhaps take from the marketplace, but it's going to be a huge initiative going forward. We announced Lendio in the marketplace this past quarter, because small businesses do need lending options that aren't regional banks. So, that'll be a good one. The Equifax relationship has gone very well into the fourth quarter. And momentum is building across the marketplace. We will provide a more wholesome update because we got a lot of partners that we're working on right now. And as we speak into the first quarter of the following year, but suffice to say, we're starting to lap some tougher compares by the same token. And we're going to grow the marketplace and pretty excited about it. And then, 401 (k), we're going to take as a full category and we'll take that out of the marketplace just because we think the traction level is going to be pretty high pretty quickly.

On margins, I would say the way I think about it would be to think about just kind of the cost of goods sold. I believe that fourth quarter cost of goods sold will be in line with the previous three quarters. So, if you take a blend of that, I think we did like 8.7, 8.4, 8. So, it's going to be in that range, right some of them coming at 8. and 8. So, I think that's a fair way to think about and that the revenue will just generate the gross margin based on that cost of goods sold.

Yes, got it. Okay. Great. Thank you.

Thanks, Jeff.

Our next question is from the line of Eric Martinuzzi with Lake Street. Please proceed with your questions.

Yes, you gave us the nine months on the ERTC. Curious, can you give us the Q1 and Q2 revenue contribution?

Yes, so you're talking about this year '23?

Yes.

Yes, I'm going from memory. I can figure out my notes here, but it was roughly, I believe, $5 million in the first quarter and $7 million in the second quarter and then about $5 million in this quarter. So, that's a total of $17 million. So, I'm testing my memory.

And a lot of the one-time revenue or professional services revenue in Q1 and Q2 a vast majority of it was ERTC.

Okay. So, was there any recurring revenue in Q1 and Q2? I know there was in Q4, but didn't you --

I think there might have been a couple hundred grand in Q1. But, yes, it was -- we had a contract that we changed early in Q1 of this year that was going to look like a recurring contract, and then it morphed as we modified it.

Got you.

So, the real -- the big quarter that we had, that the ERTC was in the fourth quarter, reoccurring to the tune of about $2 million. As we changed that contract, there might have been a couple hundred thousand that bled into Q1, but the vast majority of ERTC is in the professional services line.

Okay. And, John, you said $5 million for Q3, but I had $3.7 million from your prepared remarks. Is that -- did I have that --

That's the increase year-over-year, I believe. So, I think we did $1.4 in Q3 of last year. So, the $3.7 is just an increment.

Okay. Got you.

5.5, absolutely.

Okay. And then, last question. The sales headcount, I know you're targeting 120 by year-end. Where are we now?

About 110 or 112. Let's say we have commitments to 112, I think, as of today. So, that's where we're at.

Got it. Thanks for taking my questions.

Thanks. I appreciate it.

The next question is from the line of Vincent Colicchio with Barrington Research. Please proceed with your questions.

Yes, Pat, I'm curious, did direct sales productivity meet your expectations in the quarter?

I would say slightly behind, but all-in-all, it was a good quarter. Obviously, when the IRS paused ERTC on September 14, it caused a little bit of pivoting and just understanding and sales cycle disruption. By the same token, we were already well on our way to pivoting and working through the Secure 2.0. So, maybe we lost a couple of weeks in that area, but all-in-all, we were very pleased with the quarter. We've been very pleased with the sales staff and the organization we think that we have the right leaders and the right people in play, showing the -- pretty excited about the pipeline going into the Q4. So, maybe uplift that we had some change management, but all-in-all, I was very pleased.

And any changes in the competitive environment, particularly interested in pricing?

No, I would tell you, first of all, I think we're focused on ARR and repetitive revenue. Getting a customer is tough. We have good companies that we compete with, and we get after it. I'm very pleased in how we position and how we get clients. I think we're winning our share, which is important. And we're getting to clients with value propositions that are probably more valuable than our competitors, and broader in some respects, especially around compliance and legislation, so I feel really good about where we are in general. It's a tough sales environment. People, depending where -- if you're bullish, or not, are you seeing a recession and all that kind of stuff, but we block out the noise and we have a value proposition that we feel is very, very robust, and we're getting our share of business. And I get excited and energized talking to our salespeople because they're successful, and they're going to stay that way.

Thanks, Pat.

Thanks, Vince.

Our next question is from the line of Greg Gibas with Northland Securities. Please receive your questions.

Hey, Pat and John. Thanks for taking the questions. I wanted to follow up on assumptions with occurring versus other revenue in 2024 guidance, and maybe what could ERTC contribute next year if not excluded? Like how much did you take out from guidance reflecting that uncertainty?

So, I think the majority of that guidance for '24 is recurring. We've not forecasted an inordinate amount of non-recurring. How much ERTC could it be? That's kind of speculative. We were running a pretty nice clip, as you can tell, historically. I don't know what was going to keep at that clip going into '24. So, I think if you were going to ask me that question maybe two or three months ago, I probably would have said maybe $10 million or so for the year. I don't know what that looks like now, just based on all the uncertainty. Again, that's why we didn't put it in the guidance. But to answer your first question, the current guide, the 125, the 129, assumes almost all of that being recurring.

Yes, and Greg, just if you look through even our past numbers, less ERTC, we're somewhere around 1.5 million professional services or so, if that. So, and that's a quarter. So, let's say if you want to include that or straight line it as a number that's 4 million to 6 million maybe of professional services. Mentally, I was coming into this year over the summer saying, I had to replace 8 million to 10 million of ERTC. the program is going to change a bit. I think it's going to be more stringent, which is actually good, and we support that. Because I think there'll be a flight to quality around vendors, et cetera. But that's what I had kind of thinking that we would replace. So, if that's kind of mentally where our head's at, and then what is to come? We hopefully have taken a conservative stance, and as we get revenue, great. But by the same token, we've got to run our business in a way that we can optimize and get the best value proposition to our clients, and this is what we're going to do.

Great, very helpful. And, yes, I think it makes sense to exclude it. Just great to get a sense of that potential upside or how you were thinking about it. So, I wanted to follow up, too, it sounds like leads still remaining strong. Like, are you seeing any slowdown there? And maybe anything, if you can comment on retention, any trends you're seeing there as well.

Yes, we meet every morning, and we talk about retention, and our retention numbers have been pretty positive really since COVID. We probably had an improvement around 2% that was strictly related to COVID, and then probably a 2% improvement that wasn't related to COVID. So, our retention numbers have been very positive. Our cross-out components around HR compliance and tax and some of the other products and services that we're able to layer on have been very positive. So, we feel like the things that we can control, we're doing a great job, and we'll continue to build on momentum. As far as the economy, I think if you turn on the TV, sometimes there's doom and gloom and recession this and recession that. But when you talk to Main Street America, they still they want access to capital. They want to grow their businesses. They want to provide a value proposition to get better employees and more employees. And there's still more jobs than people. And some of that might change over time, but even if it does change, I think it will bring more people to the workforce. With COVID, about 5 million Americans dropped out of the workforce. I don't think we're fully back there yet. And if you think about where we are in a cycle as a country where you have people retiring maybe faster than people coming into the workforce and very little immigration, there's going to be there's going to be pressure to bring people to the workforce. If you do have a slight kind of recession, if you will, it'll bring more people back to work. And I actually think that's good for small business America. So, we're pretty bullish, pretty excited. I'll tell you we're going to grow over ERTC here. And when you look at a repetitive revenue company that's at $100 million that's talking about guiding to 125 to 129 next year and do that and not include any ERTC revenue. You feel really good about your business. And we think we have a lot of momentum. And we think the value proposition that we have on behalf of our clients will stand the test of time. So, thanks for the question. And but that's how we're thinking about it right now.

Thanks. That's helpful. Thank you.

At this time, we've reached the end of our question-and-answer session. I'll hand the floor back to management for closing remarks.

Yes, I was just thinking about it. Fourteen years I've been here, I started people got, we had to do pay cuts and we had less than 50 employees and we're 10 million losing 10 million and $0.10 cents of share. And what I would say is when I look forward to turning a page on the calendar year, I couldn't be more excited about what we're building and what we're doing. We're starting to get capacity and scale in this business. We have access to people that are phenomenal. We have access to clients that we couldn't get in our early days. We're growing as a business and we're growing by leaps and bounds. And I'm very optimistic in the future. Yes, there might be some uncertainties here and there on the economy or ERTC or what have you. But the things that really matter at the end of the day is growing your business, helping your clients, helping your employees succeed as they build families. And we think we have a lot of momentum. So, as investors, sometimes the scoreboard is the share price, and I get that. But I also believe that as we've done over time, is build value in the share price. And, yes, when you look at the scoreboard, it can be frustrating at times. But the best days of Asure are the best days that are going to happen here in 2024. So, appreciate you listening in and look forward to seeing you next time. Thank you.