Elmo Software delivers 35% organic growth: Updates guidance

Despite the tough love dished out to the IT sector over the last three months, the market gave a distinct thumbs up to Elmo Software (ASX: ELO) in early morning trade with the share price up 2.83% following an updated first half result.

The cloud-based solutions provider reported group annualised recurring revenue (ARR) - the value of the recurring revenue of a business’s term subscriptions - at the end of the first half of $98.3m, representing 35% organic growth on an annualised basis from 30 June 2021.

This result follows a previous upgrade to its full-year ARR guidance to $107-113m from $105-111m.

Revenue for the half was $43.1m, up 41% against full-year guidance for $91m to $96m, and earnings were $0.3m against full-year guidance for $1.5m to $6.5m.

Commenting on the result, CEO Danny Lessem noted that the group is continuing to experience increased demand as more organisations adopt cloud-based technology to manage disparate workforces.

“The COVID-19 pandemic has accelerated the move to hybrid working which has in turn increased adoption by businesses of cloud-based systems to manage their people, allowing us to upgrade our guidance.”

Other highlights included within the first half result were:

• A net loss of $17.5m, widening from $10.9m including equity-based expenses, or otherwise a net loss of $40.3m widening from $12.4m.

• No dividend was declared.

• Cash receipts of $56.0m, up 63%.

• $58.4m cash balance.

• Mid-market revenue for the half grew to $38.0m, up 31.4%.

• Small business solution, Breathe, delivered annualised ARR growth of 41%.

Solid momentum

To respond to the changing nature of the workplace environment, during the half Elmo launched two new modules to market, COVIDSecure and Experiences.

Management also note that UK acquisitions are performing exceptionally well and provide a solid foundation to increase market share in the region.

“We are on the cusp of surpassing the $100m in ARR milestone and have solid momentum to continue this growth going into the second half of FY22," said Lessem.

Next inflection point: Cash flow positive

Morgan Stanley currently rates Elmo a buy with a price target of $7.80 – which is roughly twice what the company is trading at today.

However, despite a strong first half business update, including a rebound in demand and a reduced cash burn rate, the broker wants to see greater transparency into when the company will be cashflow positive.

Consensus on Elmo is Moderate Buy.

Based on Morningstar’s fair value of $5.26, the stock looks to be undervalued.