Why the ELMO Software (ASX:ELO) share price is on watch today

The ELMO Software Ltd (ASX:ELO) share price will be on watch this morning after it announced a major acquisition…

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The ELMO Software Ltd (ASX: ELO) share price will be on watch today after the announcement of a major acquisition after the market close on Wednesday.

What did ELMO announce?

The cloud-based human resources and payroll software provider announced the acquisition of UK-based Breathe for an initial payment of 18 million pounds (A$32.4 million) using a combination of cash and scrip.

In addition to this, an earnout consideration of 4 million pounds (A$7.2 million) is payable in cash subject to the achievement of certain financial targets.

Founded in 2012, Breathe is a fast-growing, scalable human resources platform for small businesses. Management notes that the acquisition provides ELMO with entry to a new market segment, the small business market, while at the same time expanding its footprint in the UK.

Breathe's self-service business model is highly scalable and makes it fast, easy, and cost-effective for small businesses to digitise critical HR processes.

Its annualised recurring revenue (ARR) as of 31 August 2020 stood at 3.6 million pounds (A$6.5 million) and has been growing at over 30% annually. Its revenue is 100% subscription-based and recurring in nature.

Management advised that Breathe has a large and growing customer base in the UK with over 6,700 customers and customer retention at over 85%. It is earnings before interest, tax, depreciation and amortisation (EBITDA) neutral at present following investments in its growth.

ELMO's CEO and Co-founder, Danny Lessem, commented: "The acquisition of Breathe is an important step in ELMO's evolution as a provider of cloud-based HR solutions. Strategically, Breathe is a very compelling, fast growing business. It provides ELMO with access to a new and attractive customer segment, complementary technology, and a significant UK footprint. The strategic crossovers and revenue opportunities are very meaningful, and our market opportunity has significantly expanded."

"We are now able to transform the way people are managed, either in office or remotely across all market segments, improving productivity, performance and overall wellbeing of millions of workers across Australia, New Zealand and also the United Kingdom," he added.

Founder Jonathan Richards will continue on as CEO of Breathe UK.

FY 2021 guidance update.

As a result of this acquisition, the company has upgraded its guidance for FY 2021.

ELMO's ARR is now expected to be in the range of $72.5 million to $78.5 million, up from $65 million to $70 million.

Similarly, revenue in FY 2021 is now expected to be in the range of $61 million to $66 million. This compares to $57 million to $61 million previously.

Finally, EBITDA is forecast to be -$3.5 million to -$7.5 million. Previously ELMO was forecasting -$4 million to -$7 million.

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 and recommends Elmo Software. The Motley Fool Australia has recommended Elmo Software. 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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