There are a number of software as a service (SaaS) ASX shares that could be worth considering as quality additions to a portfolio.
Businesses that provide software as a service to clients can usually rely on attractive, regular cashflow and high gross margins because of the software nature of the service.
These two companies could be ones to think about:
Class Ltd (ASX: CL1)
Class describes itself as the leading cloud-based SMSF administration software. It also has other services including Class Portfolio which can be used for investment portfolio accounting, administration and reporting. It also offers Class Trust, which is a service for accountants to automate significant parts of the trust administration process.
The company has also made acquisitions to provide different services including ReckonDocs, NowInfinity and Smartcorp. Management are pleased with the ReckonDocs acquisition because it provides Class with another high margin and customer acquisition business to further scale and grow revenues.
The SaaS ASX share recently announced its FY21 half-year result which revealed that revenue was up 27% to $25.9 million, earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 29% to $10.4 million and the EBITDA margin was maintained at around 40%.
Class' customer base increased by 183% to 4,456. The Class board decided to declare an interim dividend of 2.5 cents per share.
The company also announced that one of its main clients, Findex, had signed up to use the NowInfinity documentation suite for its national accounting network. Findex uses Class' SMSF, portfolio, NowInfinity trust register and corporate compliance software. It's also the cornerstone pilot for Class Trust. Class said that Findex is an example of how the Class multi-product offerings are resonating with customers.
Broker Ord Minnett liked the ReckonDocs acquisition and the positive sign of Findex signing up to so many products.
The broker pointed out that Class only has a market share of around 10%, meaning it has a lot of potential growth. It also likes that Class has a very high client retention rate.
It has a share price target of $2.40 for Class.
ELMO Software Ltd (ASX: ELO)
ELMO is a cloud-based human resources and expense management provider. The company offers a combined platform of its different products to help organisations with their people, processes and pay. The ASX share operates on a SaaS model, receiving recurring revenue.
It recently announced its FY21 half-year result which showed that revenue was up 29.3% to $30.6 million, which was helped by annualised recurring revenue (ARR) rising by 42.8% to $74.2 million. Cash receipts for the period were up 25.5% to $34.4 million.
It made an EBITDA loss of $0.8 million, which was an improvement of $1.8 million compared to the prior corresponding period.
ELMO's customer base continues to grow. Its mid-market customers total rose 95.7% to 2,892, whilst it finished the half with 7,146 Breathe small business customers. The mid-market gross profit margin increased to 88.5%, up from 84.6%. New customers purchased an average of four models.
Breathe is a business that it acquired in the UK to expand its growth potential in that market. Management believe that this acquisition places the company as the leading provider of HR solutions to small businesses in the region. It also acquired Webexpenses in the UK, which has a mid-market customer base. ELMO believes the small business market segment is a $2.2 billion opportunity.
The SaaS ASX share may be on the hunt for more acquisitions because it says it "remains well capitalised to fund growth initiatives."
In FY21 it's expecting ARR to finish between $81.5 million to $88.5 million. ELMO is expecting to generate $65 million to $71 million of revenue for the year, whilst an EBITDA loss of $2.4 million to $7.4 million is expected in FY21.
