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3 reasons why growth investors love ELMO Software Ltd

ELMO Software Ltd (ASX: ELO), the high flying small cap tech company has reaffirmed its upgraded FY 2018 guidance in its quarterly update today with acquisitions boosting the company’s performance for the quarter.

The company announced that:

  • Pro forma SAAS revenue for the year is expected to be $30 million, up 89% compared to FY 2017
  • EBITDA for the year of $6 million is expected, which is 368% higher than FY 2017
  • Cash receipts of $7 million for the last quarter are 46% higher than the prior corresponding period

While the above figures include the acquisitions of Sky Payroll and Pivot Software, growth investors will still be excited by Elmo for the following reasons.

  • Founder led. Co-founder Danny Lessem owns a significant portion of the company and his interest are likely to be aligned with shareholder interests.
  • Scalable business model. The company’s cloud based HR and payroll software can be replicated to more clients at a lower marginal cost which drives up profit margins.
  • Strong growth. The company has achieved strong organic growth which has been supported by the bolt on acquisitions of Sky Payroll and Pivot Software

Risks

Despite the strong growth, there are some risks to investing into Elmo. One risk is that the market tends to build in expectations of further growth into the share price which can result in the share price dropping when those expectations are not met.

One mitigating factor is that Elmo has very little debt and significant amounts of cash to back up its operations.

Foolish takeaway

I think Elmo would be a good addition to a diversified growth portfolio along with  SEEK Limited (ASX: SEK)Xero Limited (ASX: XRO) and Bravura Solutions Ltd (ASX: BVS).

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of and has recommended ELMOSFTWRE FPO. The Motley Fool Australia owns shares of Bravura Solutions Ltd and Xero. The Motley Fool Australia has recommended SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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