ELMO Software share price sinks lower on weak half year result

In morning trade the ELMO Software Ltd (ASX: ELO) share price has been amongst the worst performers on the market and is down almost 8% to $6.00 following the release of its half year results.

Here’s how ELMO performed in the first half in comparison to the prior corresponding period:

  • Total half year revenue up 62.9% to $18.1 million.
  • SaaS revenue increased 65.4% to $17.4 million.
  • Annualised recurring revenue (ARR) up to $36.4 million.
  • Lifetime value of customer base up $40 million since June to $470 million.
  • EBITDA down 272% to a loss of $2.5 million.
  • Outlook: EBITDA loss of 1.6 million.

Overall, I thought this was a disappointing half from ELMO. Although its top line increased significantly on the prior corresponding period, an even sharper jump in its expenses led to its loss.

Sales and marketing expenses increased 85% to $8 million, R&D expenses rose 473% to $1.4 million, and general and administrative expenses jumped 106% to $8.6 million. This ultimately led to a 106% increase in total operating expenses to $18 million.

This large increase in operating expenses was due to management accelerating its investment to capitalise on a market opportunity estimated to be worth $1.7 billion per annum.

This included the deployment of a new sales team focusing on the lower mid-market, the expansion of its account management to unlock cross-selling opportunities, and the ramping up of its client services team to manage the anticipated growth.

In light of this increase in expenses, management has downgraded its full year guidance. Although it has maintained its revenue guidance of $39.5 million ($42.4 million including acquisitions), it has cut its EBITDA guidance from $1.1 million to -$0.8 million for the ELMO business and -$1.6 million including recent acquisitions.

Should you invest?

Whilst this was a disappointing result, I still feel that there’s a lot to like about ELMO. It is growing its SaaS revenue at an impressive rate, has a sizeable market opportunity, a strong product offering, and a solid retention rate of 93.6%.

I think this could make it worth sticking with the company during this investment stage as it could set the company up perfectly for strong long-term earnings growth.

But if you’re not sure about ELMO at this point then I would suggest you check out these fast-growing tech shares Bravura Solutions Ltd (ASX: BVS) and Megaport Ltd (ASX: MP1).

Alternatively, these growth shares could be even better options right now according to one analyst.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ELMOSFTWRE FPO. The Motley Fool Australia owns shares of Bravura Solutions Ltd. The Motley Fool Australia has recommended ELMOSFTWRE FPO. 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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