Why all eyes will be on the ELMO Software (ASX:ELO) share price on Thursday

Here's why the ELMO Software Ltd (ASX:ELO) share price could be one to watch on Thursday morning…

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The ELMO Software Ltd (ASX: ELO) share price will be one to watch on Thursday following the release of a big announcement after the market close today.

What did ELMO announce?

This afternoon ELMO announced that it has made another acquisition in the United Kingdom.

This follows the acquisition of UK-based human resources platform provider, Breathe, in October for an initial payment of 18 million pounds (A$32.4 million).

On this occasion, ELMO has announced the acquisition of Webexpenses, a high growth, cloud-based expense management solution.

Management notes this acquisition provides ELMO with highly complementary technology, as well as a large customer base, accelerating its mid-market expansion in the UK.

Furthermore, the transaction adds to ELMO's revenue, customer base, and its market opportunity.

What is Webexpenses.

Webexpenses is a cloud-based expense management solution with annualised recurring revenue (ARR) of £4.5 million (A$7.9 million) at the end of November.

It has a large and growing customer base in the UK, with over 1,000 customers and a high customer retention of 90%.

The business has a gross profit margin of over 90% and generated EBITDA of £0.6 million (A$1.0 million).

Webexpenses' owner and Chairman, Michael Richards, will continue on as a strategic advisor to the UK business. The company's CEO, Adam Reynolds, will continue on in his current role.

According to the release, this acquisition increases ELMO's Total Addressable Market (TAM) by A$1.4 billion to A$12.8 billion across the UK and ANZ markets.

It also opens up a significant two-way cross-sell opportunity for ELMO. The expense management solution will be sold to new and existing ELMO customers in Australia and New Zealand, whereas ELMO's existing product suite will be sold to Webexpenses's UK customers.

How much is ELMO paying?

The release explains that the purchase consideration consists of an initial payment of £20 million (A$35.3 million) using a combination of cash (51%) and scrip (49%).

In addition to this, there is an earnout consideration estimated to be £13 million (A$23.0 million). It is payable in cash (51%) and scrip (49%), subject to the achievement of financial targets.

Despite the Breathe and Webexpenses acquisitions, ELMO remains well capitalised and has over A$70 million in cash on its balance sheet.

ELMO's CEO and Co-Founder, Danny Lessem, commented: "The acquisition of Webexpenses is an exciting and significant step in ELMO's growth journey. The Webexpenses platform is highly complementary to ELMO's existing offering. Customers will have the ability to manage employee expenses effectively and efficiently as part of our convergent HR and payroll solution."

"The cross-sell opportunity for ELMO's comprehensive product suite into Webexpenses' large customer base is substantial. ELMO's market opportunity has increased markedly, and our strategic positioning is further strengthened," he concluded.

Guidance upgrade.

In light of this acquisition, the company has lifted its guidance for the full year.

It now expects ARR of $81.5 million to $88.5 million (up from $72.5 million to $78.5 million) and an EBITDA loss of $2.4 million to $7.4 million (compared to a loss of $3.5 million to $7.5 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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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