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ELMO Software Ltd (ASX:ELO) delivers more explosive growth: Should you invest?

In early trade the ELMO Software Ltd (ASX: ELO) share price has edged lower following the release of its first quarter update.

At the time of writing the cloud-based human resources and payroll software provider’s shares are down 0.5% to $6.42. Though, I suspect this is due to the market tumbling lower and not ELMO’s update.

How did ELMO perform in the first quarter?

During the quarter the company continued to deliver on its growth objectives and further strengthened its position as a leading cloud-based, SaaS solutions provider in HR and payroll.

This led to the company once again achieving strong growth in cash receipts during the quarter. According to the release, cash receipts increased 91% on the prior corresponding period to $10.3 million.

While this represented growth of just 4% on the fourth quarter of FY 2018, management believes it is a positive leading indicator given the seasonal peak it typically experiences in the fourth quarter and I agree.

Incidentally, first quarter cash receipts last year grew just 1.3% on the fourth quarter of FY 2017, so this is a decent improvement on the prior corresponding period.

The strong growth in cash receipts means that ELMO is on target to achieve positive net operating cash flow in the second quarter of FY 2019.

It also meant that the company finished the period with a closing cash balance of $41.7 million, making it well capitalised to fund its multi-pillar growth strategy.

ELMO’s CEO, Danny Lessem, appeared to be pleased with the company’s performance during the quarter.

He said: “We are pleased to start FY19 with a positive first quarter. It is encouraging to deliver further growth in cash receipts in Q1, both compared to the prior comparable period and against the typical seasonal peak of Q4 in FY18. ELMO’s growth in cash receipts highlights the Company’s favourable working capital position, strong recurring revenue base and high customer retention rates. In addition, ELMO remains on track to meet its previously provided FY19 guidance.”

Should you invest?

I think this result demonstrated why ELMO is one of the best small cap tech shares on the Australian share market.

I think the quality of its offering and the significant addressable market means that the company has strong long-term growth potential that makes it well worth considering as a buy and hold investment alongside the likes of Citadel Group Ltd (ASX: CGL) and Volpara Health Technologies Ltd (ASX: VHT).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended ELMOSFTWRE FPO and VOLPARA FPO NZ. The Motley Fool Australia owns shares of Citadel Group Ltd. 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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