ELMO's HR cloud play

Danny Lessem is the CEO and Founder of ELMO Software, the HR software as a service cloud-based provider.

It's growing fairly rapidly and it’s still, I suppose, burning a bit of cash, making acquisitions, and growing as fast as it can in a very competitive, very fragmented business, which is currently capitalised at $160m.

Here’s Danny Lessem, the CEO and Founder of ELMO Software. 

Danny, just looking at your business, it seems to me that the problem potentially is how fragmented this business is. I mean, I Googled HR software and got hundreds of search results, and lots of software magazines do ratings of them. And although ELMO is usually near the top there’s dozens of providers of HR software, so it seems to me to be a very competitive, fragmented industry, is that correct?  

Just in terms of it, yes, there is a lot of apparent competition vying for the automation potential in the HR payroll market, but therein lies the opportunity. It’s an area which is highly automated, particularly in Australia and New Zealand it’s very, very new to the SAAS market and of course it’s a real honeypot attracting any vendor across the globe. The point of difference or the competitive advantage ELMO has in the market place is, number one – our length or duration of working with businesses in Australia and New Zealand.  We have a lot of brand equity, so we’re founded in 2002, so we’re not new to the market. 

Number two, is that we are a software as a service provider, so we have very new cutting edge cloud technology and it’s really an opportunity to disrupt the older on-premises type solutions. And then number three, which is probably the most important differentiator, is we have a very wide or broad convergent solutions. We’ve got modules for all aspects of automating the employee lifecycle from hire to retire, added to a payroll, added to automating rostering and time in attendance, so we have a broad convergence of frictionless solution which puts us in a unique position in the marketplace and we are attracting most companies that are new to automation or who are looking to consolidate their platform or their cloud platform technology with one provider.

Are you saying you’re the only one that does the full suite of HR modules, as you put it?

No, I’m not saying we’re the only one but we’ve got the broadest platform and particularly if we look at the mid-market which is organisations up to 1,000 employees and particularly the low mid-market, we are rarely uniquely placed in terms of that broad convergence solution. It’s a combination of brand equity and saturation in the marketplace and also the breadth of that solution which puts us in a unique competitive situation. 

I noticed you’ve been making a lot of acquisitions. Are they kind of mop-up acquisitions of competitors or are they adding to your suite of products? And if it’s a mop-up situation, are you finding that every time you take something over, something else pops up to take its place?

No, it’s definitely not a mop-up situation. We have a two-fold acquisition mandate. On the one side of the mandate we’re looking at complimentary technology, working into that premise that there’s an appetite for broad convergence solution. We’ve been adding on additional functionality, so that’s the one side of the mandate, is additional modules to assist in broadening that suite. On the other side of our acquisition mandate, we’re looking at good quality SAAS providers that have a sticky client list and perhaps they only have 1 or 2 modules in the market and it gives us the ability to cross-sell our very broad suite into. So, it’s really a question of very highly disciplined acquisitions that meet our acquisition mandate. 

Can you give us an insight into the sales process that you undertake when you go into a mid-market company – what decisions do they make? What drives their decision? Is it simply to save on staff costs or is there more to it?  

Yeah, look, there is more to it. Just in terms of, of course, the cost of investing in the platform technology, there’s real benefits on the cost base in terms of automating the process. The average annual spend by our customers is around $30,000 and it’s replacing a lot of manual processes. So, there is a very big cost driver in automating or implementing the platform technology in human resources, payroll and rostering and time in attendance. But there are other drivers as well. Some of the other drivers are, risk mitigation in terms of incorrect data going through that workflow process, so to ensure that people are paid accurately and on time, that you meet your compliance trading requirements and that you ensure the optimal performance of people. 

Their other drivers, which either can be compliance orientated or just in terms of just giving the organisation the competitive edge by being, I suppose, a lot more responsive to employee needs. Just in terms of the move to automation, it probably can be compared to the move in automation with financial systems. Every organisation uses financial software to automate their process or every sales department uses a CRM.  It’s the same with HR stakeholders, is that it’s becoming a requirement for HR professionals to utilise a platform technology to automate the whole HR process.  

The customers who obviously are spending $30,000 per year on average with you, how many people does that tend to save companies? How many people can they lose?

Well, if we look at it, it’s a question of eliminating the data entry.  If we look at just in one of the processes, let’s take for instance leave management, it becomes highly automated. People, at the point they are sick, they can just pick up their mobile phone, they can take a photograph of their medical certificate, it can automatically transmit into the platform, alert their manager, alert payroll, etcetera, for their many, many hours. Just to quantify it, obviously it varies from industry to industry and according to the extent of their investment across the platform, but it does save a lot of the data entry.  

And just with the sales process, how do you get leads and what’s your conversion rate of a lead to a customer?

The process – firstly, we are really in the pole position in terms of brand equity in the market place amongst HR stakeholders because of our longevity in the market and the fact that we have very long, established relationships with the peak HR bodies in the region. Just in terms of, we participate in a lot of the industry events and we augment that with our own roadshows across Australia and New Zealand where we bring together our customers and prospects. We do between 40 and 50 face to face events each year and we meet a lot of new prospects and continually touch base with our existing clients. 

That’s our face to face strategy, we also have a very evolved digital strategy, so just in terms of reaching the market using Google Ad Words, LinkedIn, webinars, blogs, etcetera. And we do a lot of lead nurturing using leading tools like Salesforce and Marketo.  It’s just a combination of touching stakeholders over and over again which enhances our brand equity in the market. Again, because we have over 1,100 customers here, we get a lot of referrals from happy users as well. 

When you’re signing a customer up, are you typically engaged in a beauty parade? Are they comparing you with a handful of others?

Yes, just in terms of, as you highlighted at the beginning of our call, there are a lot of competitors in the marketplace, but most of them are what we call point solution vendors. They only have a solution for one of the functions in HR, payroll or rostering and time in attendance. The point of difference with the ELMO pitch is that we’re a broad convergence solution, so we remove the friction of integrating between the various modules. There’s a single user ID and the information flows through the whole system. There’s an automatic attraction to ELMO because of that reason. Also, just in terms of our localisation, the fact that we’ve got goods on the ground and Australia and New Zealand we host here, that gives us a real advantage over the global players that are looking at winning deals in the Australian marketplace. If you call it a beauty parade, then we’re the princess and we convert a lot of the deals!

[Laughs] I asked before whether you’re the only one that does the integrated suite of solutions that covers everything, HR, payroll, rostering, time in attendance, and you said you were not, there were others. But you’re implying there that when you go in to do the pitch, you were sort of implying, I think, that you were the only one offering everything. Are you or are you not?

Certainly in the mid-market we’ve got the broadest solution. There are other convergence solutions, global names like SAP Success Factors, Oracle, Workday – Cornerstone Ondemand. But they mainly compete in the enterprise space, so for much larger companies. Just when we talked about our sweet spot, which is the mid-market and low-mid-market, so organisations under 1,000 employees, we certainly are the broadest solution. The large convergence solutions, these global companies compete more in the enterprise space. 

The reason I’m hammering this point is because you’re kind of talking about, you’ve got 9.4 per cent market share in Australia and New Zealand, with a market potential of 12,000 and 29 organisations. For investors looking at the company, it’s a question of what your potential market share can be, what can you grow to? And to a large extent, that seems to me, comes down to competition. Could you take us through what you think your potential market share is in this market?

Yes, Alan. We rarely look at it more broadly in terms of our revenue growth potential. There’s two areas where we can grow our revenue.  One is in terms of engaging new customers. As you correctly said there, they’re roughly 12,000 organisations with 100 employees and above in the region, which is Australia and New Zealand. We’ve only touched roughly 9-9.5 per cent of the addressable market. There’s still heaps of headroom to engage new clients, so a lot of the organisations, particularly at the smaller end, they’re quite late to automation, they’re still using manual process or they use a combination of manual process and point solution, so there’s still a lot of growth potential there.

But on the other side we’ve got at the half-year we reported over 1,100 existing customers. We’ve only saturated an average of 2.2 modules out of the potential 30 for the existing client cohort. The revenue growth will come from both areas. One, from acquiring new clients in terms of the marketplace.  But, two, is from adding value or cross-selling additional modules to existing clients. Coming back to your question, is there still a lot of potential to grow at our historical average which we’ve been growing at just with the organic ELMO, backing out acquisitions at around about 30 per cent on the recurrent revenue level.  Historically, we do believe that with the combination of revenue sources, there is the potential to continue that high growth for multiple years to come. 

The $30,000 average revenue per customer, that’s on two modules is it?  

2.2.

2.2 modules?

Out of the potential 13.

Is each of the modules roughly the same price? As you increase per module, is it another $15,000 or so per customer?

They’re all within a narrow band, pricing, yes, they have similar prices. 

Are any of your customers taking all 13?

Just in term of it, we continuously add modules. We just added rostering and time in attendance through an acquisition which completed on the 31^st of January this year. Whilst no one’s taken all 13 yet, we do have increasing instances of new customers taking between 5 and 10 modules in that first hit. 

The thing about SAAS businesses is that once you hit breakeven, it mostly goes to the bottom line, is that the case for you? I note that in the year to 31 March, receipts revenue was about $30 million and overheads, $26-27 million, and then there was advertising and marketing of $3 million, so you’re kind of roughly breaking even. Is there any variable cost as you grow revenue?

Yes. Just in terms of it, if we look at it as a SAAS business, firstly, we see ourselves as a growth company very early in the growth cycle, so we are investing in market share and in product, etcetera. If we look at our GP line, our gross profit sort of swings between 85 per cent and 90 per cent, so there’s a real opportunity as we mature and one day when we hit steady state to have a great operating profit margin there.

If your growth profit line was roughly 85 per cent, are you saying that there’s a 15 per cent variable costs so it doesn’t quite all go to the bottom line but mostly it does, 85 per cent does?

Yes, so not all 85 per cent, but what I’m suggesting is there’s a great potential to exact profit margin by slowing down the investment in sales and marketing, or in R&D, or in the general and administration bucket. We are investing there just to accelerate the growth, but as we mature the proportion of investment as a ratio to revenue certainly can drop and we can do that at any time, but we do elect to continue spending on product process and people to actualise the growth potential at this point.  

And you had $26 million in cash at the end of the quarter, do you think you’ll need to raise more at any point? Have you got that money earmarked for acquisitions?

Yes, we still have our acquisition mandates in place.  Again, as I said, we have a very disciplined approach to acquisitions. They have to be good quality, native cloud or SAAS companies and either one or other side of our mandates, so either complementary technology or very sticky client lists. We continue to pursue opportunities and if we actualise them then there might be the potential of either raising more capital or debt.

But you’re not sure about that obviously?

Again, I can’t really talk to the opportunities until we release that to market.

I think you started the business 2002, has it changed much in that time, 17 years?

Yes, it has changed. Particularly, we started off as a learning points solution vendor, so we just were automating one aspect of that employee lifecycle. The big pivot came around 2013 when we, as a result of feedback from the market place, we saw ourselves as moving towards a broader convergent vender. We wanted to automate and manage the whole employee lifecycle from hire to retire. That was the big pivot point in the business and that probably has been really significant in terms of meeting the needs or the requirements of the market as we sit today where there is that appetite for that single vendor relationship, the single dashboard and the single user experience. I think that was the most significant pivot of the business and we’ve been focusing on meeting that requirement ever since by broadening the solution either by build or by buy and focusing on the region to meet the requirements of our customers.

Do you have any plans to expand into overseas markets? 

Just in terms of it, we focused on the local market because we do believe there is still heaps of room for growing our revenue through acquisition of new clients as well as increased revenue from existing clients and we also have very good brand equity in this market. This is our focus but if we were to move into new geographies it would be probably by an opportunistic acquisition if the target had operations in those geographies that would certainly be a mitigant in terms of entering into a new geography. 

Speaking of opportunistic acquisitions, what’s the experience in the US of businesses like yours that are going after the mid-market for HR software solutions, cloud-based software, do they just kind of grow organically and sort of end up with larger and larger customers?  Or do they get mopped up themselves?  Do they get bought by big companies like Oracle and SAP?  What’s been going on?

It’s an area of high growth, particularly organisations like ourselves that are focusing on under enterprise or mid-market/low-mid-market, similar to ourselves they’re experiencing high growth because of the rapid automation in company sizes, those segments of the economy. The experience is both, there’s some that are growing super-fast either through building out their solutions or a combination of building and buying or acquiring other point solutions. And there are instances of a convergence where larger organisations are buying them out and using that to grow their market share, so instances of both. 

Great to talk to you, Danny, we’ll have to leave it there, but thanks very much for your time this morning.

Yeah, great speaking to you again, Alan. Thanks so much.

Thank you.  That was Danny Lessem, the CEO of ELMO Software.