Asure Software, Inc. Aktie

Good afternoon, and welcome to Asure's Second Quarter 2026 Earnings Conference Call. Joining us for today's call are Chairman and CEO, Pat Goepel, Chief Financial Officer, John Pence; and VP of Investor Relations, Patrick McKillop.

[Operator Instructions]

I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Second Quarter 2026 Earnings Results Call. Following the close of the market, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find our investor presentation. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors in understanding our business and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release.

Today's call will also contain forward-looking statements that refer to future events and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements. And we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations.

I'll hand the call over to Pat in a moment, but I just wanted to take a moment to run people of some of our upcoming investor relations activity. On August 26, we will attend the 3-part advisers Ideas Conference in Chicago. On September 10, we will attend the Lake Street Conference in New York. On September 22, we will participate in the 19th Annual Barrington Research Virtual Fall Investment Conference. On November 17, we will participate in the Craig-Hallum Alpha Select Conference in New York. On November 18, we will attend the Stephens Annual Investment Conference in Nashville, Tennessee as well as the ROTH Conference in New York. On November 19, we will participate in the seventh Annual Needham Virtual Tech Conference. Investor outreach is very important to Asure and would like to thank all of those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thank you, Patrick, and welcome, everyone, to Asure's second quarter 2026 Earnings Results Call. I'm joined on this call by our CFO, John Pence, and we will provide a business update for second quarter 2026 results as well as our updated outlook for the remainder of the year. Our second quarter revenues came in at $37.1 million, representing a growth of 23% compared to second quarter 2025. Our growth was broad-based across our business lines, and our past investments in technology products and AI are showing real returns. Our organic growth rate for second quarter 2026 was 5% compared with 1% in quarter 2, 2025, an improvement of 400 basis points and down slightly sequentially compared with 7% in quarter 1, 2026 due to seasonality.

We continue to receive positive responses to our platform, and we believe we will deliver double-digit organic growth as we move through the remainder of 2026, by driving expanded cross-sell of our products and go lives of previously booked business on our enterprise payroll tax management platform. On the enterprise payroll tax management platform, we're pleased to share an important milestone that was recently achieved. As you recall, we signed an agreement with Venture Employer Services, and we are glad to announce that 2 million of their supported employees are now live on our payroll tax management platform.

Our pipeline of opportunities remains robust, and we're excited about the future. However, for competitive and confidentiality reasons, we are limited in our ability to share details. Asure Central continue to progress nicely during the second quarter. We now have a majority of our 30,000 direct clients on the platform as we forecasted on our prior call. We are increasingly well positioned to accelerate cross-sell and attach rates through the second half of 2026 and beyond.

The number of clients purchasing multiple products increased by 6% versus quarter 2 of 2025. We remain focused on moving clients from an average of 2 products per client relationship towards 4 or more products per client over time. Now a brief update on AsureWorks, our administrative services outsourcing offering, which allows clients to delegate key payroll and HR compliance processes to Asure. The positive trajectory we saw in launch has continued to grow into the second quarter. Our pipeline keeps growing. We've added new clients and the reception across our target buyer types, small hotel chains, restaurants, HVAC companies, among others, remains very strong. These are main street businesses that need payroll and HR compliance support but lack the internal resources to manage it themselves. We're training additional sales reps on AsureWorks every day and building out the dedicated team beyond our original pilot group. AsureWorks to remain strategically very important, clients who adopt manage payroll and compliance services typically represent up to 5x the revenue of a payroll-only client.

And importantly, AsureWorks is not a PEO model. We're not taking on co-employment risk for clients constrained by the cost of rigidity of traditional PEO, we believe, AsureWorks is a compelling and flexible alternative. On the sales force front, we are working very hard towards our goal of 150 reps by the end of 2026. But this isn't just about headcount, we're being deliberate about the types of sales reps we hire. We want full solution sales reps. People can sit down with the business owner and sell the entire product suite, not just a single point solution that's a fundamentally very different skill set than traditional single product selling. And it's core to how we drive both our new logo acquisition and multiproduct cross-sell within our existing base.

Historically, we hired more transactional, small business sales professionals suited the selling point solutions. Now that we're selling the broader platform and especially with AsureWorks, it's a more consultative needs-based sales and we've been disciplined about bringing in sales reps who fit that profile. The good news is those reps are ramping faster than what we've historically seen. Today, our existing to new customer logo split is approximately 53% to 47%, which is an improvement from last quarter. And we're still targeting a 35% new logo, 65% base expansion mix over time.

On the M&A front, we did not complete any reseller acquisitions in the second quarter, but we continue to actively evaluate opportunities and I would expect to see us complete a few deals in the second half of 2026. Our new sales bookings for core human capital management payroll grew 14% in -- over quarter 2, 2025, and our contracted backlog remains at approximately $80 million. We expect to convert approximately 41% of that backlog over the next 12 months. Our client base, primarily small and midsized businesses in payroll intensive, compliance-driven industries remains strong. we continue to conservatively model for our clients to have flat headcount growth in our forecast. We haven't seen any meaningful shifts in sales cycle length or competitive intensity during the second quarter. I also want to take a moment to reiterate our thoughts on AI and what it means for our business. We've discussed this on prior calls, but we feel it's important to remind investors of our view here. Payroll and HR compliance isn't the type of workflow software as a generic AI can replace. We hold money transmitter licenses across the country, interface directly with the IRS and state and local tax agencies and manage compliance obligations where the margin for error is effectively zero. That regulatory complexity, combined with high switching costs and a consumption-based revenue model is what makes Asure a system of record and our expertise with enormous malls.

At the same time, we continue to see AI as a meaningful accelerator for us as we are already far along in the AI evolution journey. We witnessed an over 30% increase in platform adoptions with Luna, our AI agent since the first quarter. And the number of interactions with Luna has increased by approximately 38% versus the first quarter. Additionally, 147,000 voice mail calls have been transcribed and about 196,000 e-mails have been screened for sentiment analysis, extending our capability to capture sentiment analysis from both voice into e-mail.

We continue to replicate the automated Luna powered model that is generally available to -- for our Canadian tax solution across U.S. payroll, U.S. tax and HR compliance, bringing our AI capabilities into the flow of work and from human check to AI verified. The same foundation underpins AsureWorks and continues to sharpen our sales intelligence and our support operations. We remain confident in both the durability of our system of record model and the opportunity AI creates for us going forward.

So with that, I'd like to turn the call over to John to discuss our quarter 2 financial results in more detail and provide an update on our 2026 guidance. John?

Thanks, Pat. As Patrick noted, several figures discussed today are on a non-GAAP or adjusted basis. Reconciliations are available in our earnings release and our investor presentation at investor.asuresoftware.com, Second quarter total revenues were $37.1 million compared to $30.1 million in Q2 of 2025, representing growth of 23% year-over-year. Recurring revenue for Q2 2026 was $34 million compared to $28.6 million in Q2 of 2025, an increase of 19% year-over-year. Recurring revenue represented approximately 91% of total revenue in the quarter. Professional services hardware and other revenue was $3.2 million in Q2 2026 compared to $1.5 million in Q2 of 2025. The increase was mostly driven by increased hardware sales from our Latham acquisition.

As a reminder, we are in the early stages of transitioning Latham to our hardware as a service model, and we are forecasting a headwind of approximately $600,000 to revenue during the first half of 2027. As that shift progresses, you'll see more of this revenue move into the recurring line with some of the corresponding pressure on the nonrecurring line. A mix shift is good for the long-term health of the business, which should enable us to deliver better customer experience while improving total customer value. We speculate Latham will continue to have hardware-only customers for the foreseeable future. Growth revenue was relatively flat in Q2 2026 compared to Q2 2025, and we no longer are forecasting any further rate cuts this year based on current market sentiment. Gross profit for Q2 2026 was $25.1 million compared to $19.9 million in Q2 of 2025. GAAP gross margin for Q2 2026 was 68% compared to 66% in Q2 2025.

Non-GAAP gross margin for Q2 2026 was 73%, unchanged versus Q2 of 2025. Net loss for Q2 2026 was $4.4 million compared to a net loss of $6.1 million in Q2 of 2025. EBITDA for Q2 2026 was $4.6 million compared to $1.4 million in Q2 of 2025. Adjusted EBITDA for Q2 2026 was 7.1 -- I'm sorry, $7.7 million compared to $5.2 million in Q2 2025, an increase of 48% year-over-year.

Adjusted EBITDA margins for Q2 2026 was 21% compared to 17% in Q2 2025, an increase of 400 basis points. For the full year, we continue to expect to generate positive levered free cash flow in the mid- to high teens range, which we calculate by taking adjusted EBITDA at the midpoint of our guidance range, less software capitalization of approximately $15 million and approximately $6 million in cash interest expense. We ended the second quarter with cash and cash equivalents of $19.7 million and total debt of $68.9 million as of June 30, 2026. Based on the current positive momentum in our business, we are updating our full year 2026 guidance and providing Q3 guidance. We expect revenue of $159 million to $163 million for the full year of 2026 and adjusted EBITDA margins of 24% to 25%. For Q3, we anticipate revenue of $38 million to $40 million and adjusted EBITDA of $8 million to $10 million. We expect our cost structure, including capital expenditures and capitalized software development costs to remain relatively stable on a dollar basis.

With that, I'll turn the call back to Pat for closing remarks.

Thanks, John. Stepping back, I think quarter 2 tells us a clear story. We're growing. We're becoming more profitable as we grow, and we're doing it on the back of a platform strategy that's all coming together. Asure Central has reached the majority of our client base. Luna is doing real work for us and orchestrating real work on behalf of our clients, AsureWorks is gaining good traction in its early days. and we're being disciplined about building a sales force that can sell the whole solution, not just a piece of it. We have truly leveled up from a year ago. In quarter 2, we grew revenue by 23% in the second quarter and adjusted EBITDA, an impressive 48%. We also expanded adjusted EBITDA margin by 400 basis points with increased scale in AI efficiencies. We did all that while continuing to invest in the platform and the team. That's the model working the way we designed it to. As you know, we will typically receive revenue tailwinds in the second half and we expect that trend to continue with continued acceleration from this point through the rest of 2026 and into 2027.

We are increasingly optimistic about 2027 as our initiatives continue to take hold with increasing adoption of ASO Luna enabled automation of U.S. payroll and tax and more. We remain on track for our medium target of $180 million to $200 million in revenues with adjusted EBITDA margins of 30% or better. And our long-term vision, which we have discussed with investors reflects the potential for margins to expand well beyond 30% as we achieve scale. AI continues to reduce our cost to serve, while simultaneously expanding our revenue opportunities. We're proud of the progress this quarter and even more excited about what's ahead. Thank you for your continued support and for joining us today. I will now turn the call back to the operator for questions and answers. Operator?

[Operator Instructions]

Our first question today will come from Richard Baldry with ROTH Capital Partners.

In your wrap-up comment, you sort of hit on what I wanted to go a little deeper on in terms of the ability of AI to cut costs and drive revenue. So could you maybe break that into the 2 pieces and talk about where you feel you're at now in terms of the cost cutting or efficiencies you can gain with it and how much still lies ahead? And then also in terms of your ability to monetize either new features, tools or modules built upon these AI abilities that previously wouldn't have been available.

Yes, Rich, I think, first of all, I'll start on the revenue side. As we get more to intent data and trigger data, AI is really helping us quite a bit and just having customer data available and then Luna and/or the data is available to us to help cross-sell. So a couple of examples, and I brought this out before, when a company has 20 employees versus 19, they're now subject to have COBRA and they have to have COBRA while we can now, with that intent data, ask them if they'd like us to provide corporate services on their behalf or it can be an employee that has a new hire. Would they like to have a 401(k) savings and/or continue to when there's a raise, invest more in the 401(k).

So all of this intent data with AI, with Luna is going to really tee up those opportunities for revenue. The other aspect of it, if you think about the marketing to sales motion, there's a whole series of kind of data available that would lead it to be very predictive where they use AsureWorks where they want a system done for them, but maybe they're not ready to go into a PEO. So we think there's a lot of revenue opportunities. I just talked about that are really -- we're putting them in the use cases as we speak. On the cost side, where we see opportunity and Luna has been very active on it, is Luna already taking some of the calls or some of the data that would go to people. And some of those easy answers or some of those what-if questions are being answered with Luna as opposed to getting into a queue or getting into customer service. And what that allows our customer service folks is to build a much more strategic relationship with the customer as opposed to a transaction one. John, I don't know if you have some ideas on this, but those are some, Rich, that we have in place right now.

Yes, I think you're asking kind of where we are in the journey. And I would say really, really early, early days. but it's pretty interesting stuff. Here's an example of 1 use case that the ops team is using right now with AI. They've done sentiment analysis on all the calls coming into the customer service center, and they can tell based on -- and they transcribe them and then they have key trigger words and they can tell you, "Hey, here's a customer that somebody needs to reach out to because they had a really -- they were amplified and they're a language." And so we can proactively go out and deal with customers that might have had that experience. And again, early days. Is that a cost cutting? Not necessarily cost cutting, but it's definitely going to -- I would think, hopefully, impact retention over time and customer satisfaction over time. So early days of the cost out, but obviously, you can start to see some of the examples on implementation and some of the other areas of the business where we're going to get a lot more efficient.

Great. Last for me be if you think about you've been adding the sales on a pretty steady basis, can you talk generally about your overall sales productivity levels. How good you think they are now, how much they could improve? and what do you think that the implication for that for, let's say, a medium-term sustainable growth rate for the company on an organic basis?

Yes, Rich, as I even look at the second half, we believe there will be double-digit reoccurring revenue on an organic basis and some on that is laying the foundation of salespeople that we've already done. But that being said, if you look at productivity, our productivity around attach rates about having more dollars available to sell at getting at the right level with a software model or we'll do it for you model, we think we're in the early innings. We've had some really good success productivity. I would think that next year, we'll be targeting 25% plus productivity, especially in those year 1, year 2 sales reps that will work through an overall productivity at a later date. But those are the things that really excite me. And I think what's happening, if you look at it, you have an area of bringing all these products together with the Asure Central, layering out AsureWorks, adding salespeople, adding training to that and getting up to the business owner as opposed to an office manager.

All those things are really good for productivity. And then from a growth rate perspective, we're going to be relentless on getting to double-digit organic growth. We think that's really important part of the model and then layering in tuck-in acquisitions, where we already -- especially where we already own the platform.

Congrats on a good quarter.

Next to hear from Jared Levine with TD Cowen.

First, I want to dig into some of your commentary in terms of expectations of hitting double-digit organic growth in the second half. But I guess if you look at the midpoint, it's just closer to 7%. I guess, would you attribute that to conservatism or anything else to note here?

Yes. So what we're trying to say, Jared, is if I were to look at last year and the composition of the revenue, I think we had some pretty healthy nonrecurring professional services, specifically with some of the large tax deals. So the way we've got the back half of the year currently forecasted and modeled is those are going to be negative from a compare so we're going to lose some of that nonrecurring revenue on a compare basis, but we think that that's going to be offset by the growth in recurring organic side of the business, which again, it's healthier, it's better. But yes, we have a little bit of a compare on the nonrecurring from prior year that's causing that overall overall revenue growth to be a little bit muted because of that.

And Jared, a lot of the -- I'm sorry, Jared, just a lot of the motion is already in place. So we feel real confident in getting to those kind of outcomes.

Understood. And then I was hoping you could dig into some of the ASO offering traction here. We have seen a number of your competitors roll out managed service offerings, too. And I guess how you expect to differentiate versus some of the competitors out there in terms of these ASO managed service offerings as well?

Yes. And I think if you think about our history, we really had managed payroll as part of our core offering before competitors thought it was cool. And so I think we have that opportunity in what we've been layering in to Asure Central is really we have the software to run a business and keep them compliant, keep them efficient, et cetera, but we can also do it for them. And then if you think about Luna, we introduced Luna a couple of years ago and for her to really do a lot of the work around workflow and and AI, but then also not only due to work but orchestrated from a team approach, whether it's payroll benefits, general ledger interface, et cetera, there's a lot of things that get coordinated.

So we built AI into our product and into Asure Works. We also if you think about our core customer base, the average maybe company hires an HR professional at about 80 employees or so. We're there every day, helping people do work where we've already done it at the payroll manager level. Now we're extending it out through managed services. So we feel that this is really a core offering where we have quite a bit of a lead in. And we think the competition kind of looking at that model will really help us because they're starting fresh and they'll draw more attention to the space, and we feel that this is right in our core competence [indiscernible].

Next, we'll hear from Vijay Holman with Craig-Hallum Capital Group.

This is Vijay on for Jeffrey Van Rhee. Just kind of First question on the sales heads. I know you guys have set the goal, I think, to be at 150 by the end of the year. I was wondering just can you give any update there, whether you're on trend? I know last quarter, I think you had been a little bit below.

Yes, I'd say just we're at 150 for the year here, and we're probably still about 10 where we want to be. If I look at kind of the bridge in a number of cases, we've top skilled or upskilled the sales leadership, and those leaderships bring people along in many cases. So about half our kind of resources are manager-led versus, let's say, a recruitment. The recruitment we have kind of added a couple of recruiters in that space, and I think we have a really good traction from a pipeline.

And then from a selectivity perspective, we are building an efficient kind of adding who we want to select, et cetera, with the criteria. But also we're in a position where it can be a bit choosy and we're in a position as well that we're selling the whole solution as opposed to a point solution. So some of those muscles are different than historically. We feel like we're doing a really good job in getting the salespeople we want. We can see the productivity, and we feel confident that we'll be at 150 by the end of the year.

Got it. That makes sense. And then just as far as the multiproduct kind of attach rates you talked -- you guys have obviously had success getting customers to kind of 2 products. I guess what's kind of thinking in the way of getting people to 3 or 4 that you kind of alluded to there in the remarks.

Yes. I think -- well, first of all, we're getting a lot of traction in our HR area combined with payroll and 401(k). We see just increasingly confident both of them are really building up units each and every quarter that, in a lot of cases, are records for us. So that's really positive. Those two, obviously, time with the acquisition of Latham and the integration, we feel those 4 products will really be the core to some of payroll, tax filing is always part of the offering. So then when you think about depending where you are in the cycle of hiring our recruiting solution, from a benefit perspective, we've invested in broker record as well as HSA, FSA, COBRA. So we're really rounding out the offering, but I'll tell you just the 2 to 4 simply put time and attendance, HR and 401(k), we have really good line of sight to those being added to our core offerings.

And we'll move on to Joshua Reilly with Needham & Company

Maybe just starting with the 5% organic growth number in the quarter. Would you say that it's fairly balanced in terms of the contribution across product lines? Or did the large enterprise tax deal have an influence a little bit outsized influence on that. And then along with that, you mentioned that the seasonality impacted the quarter-over-quarter change in organic growth from 7% to 5%. Can you just give us some more color on what that dynamic was there?

Yes. A couple of things. First of all, the tax, we've been busy, as John mentioned, around installing base of large customers that we've had in the background attacks. We think that there's potential. And I think you'll see some activity in the second half of the year around new logo acquisition, a new partner acquisition field pipeline is really, really strong. As it relates to the second quarter, the recurring mix that John talked about we're very confident in the double-digit recurring growth that's organic in the second half of the year versus the onetime mix. That leads us to a lot of success here in the quarter, which was small business related.

And I talked about some of the attach rates around 401(k) and around time and attendance and HRC or HR compliance offerings. Those are the things that have led our growth combined with payroll. And I think you'll see more of it as the reoccurring revenue builds here in the second half. Tax filing, I think, continue. We're very excited about the story. We accomplished a lot in taking ventures over $2 million live. There's more to come in that area, and you'll see that. But that didn't you have any outside influence in second quarter's growth?

Got it. That's super helpful. And then as we think about the Asure Central now having -- what was the number? 30,000 direct clients on it. Curious, there's always been the opportunity there for cross-sell and increase attach rates. But are you actually seeing it now that you have a bigger sample size in pocket? What are you seeing, I guess, in terms of the near-term trends? Or is it still going to take quarters to kind of build awareness?

It absolutely and it will build on itself exponentially as we continue throughout the year. And in the quarter, we had a 6% improvement in cross-sell, but we're just getting started, feel really good about that. And then as we are layering in different cohorts from some of the reseller acquisitions in the past after a year, we layer them in. Those historically were 1 or 2 products. Now they have the ability to continue to cross-sell all the offerings. And as we layer Asure Central to the multiproduct family, we talk about some of the intent and trigger event analysis, this only is going to continue. So I'm very pleased with the transactions that have been been sold around time 401(k) and HRC, I think that will build in the second half. And we're -- as we increase the trigger event opportunities we believe that will be more of a standard than an incremental approach.

Got it. Last question for me is if you go back to the enterprise payroll tax pipeline, I know you can't discuss any specific deal because of competitive dynamics. But is the pipeline up year-over-year, would you say in terms of the opportunities? And then I just wanted to confirm, you don't have any well, I guess, first of all, is there any large deal potential that could be signed in the second half of the year? And if so, have you factored any of that stuff in that you haven't won yet? Or how are you thinking about that relative to guidance?

Yes. Great question, Josh. I would say the emerging pipeline is extraordinarily strong. As far as when that turns into revenue, sometimes they have shorter and longer-term cycle, but we're very pleased with the opportunities available to us in that area of the business. And as far as forecasting it, John talked a little bit about the onetime revenue we didn't forecast a ton of PS work and maybe we're being conservative there and whether that falls in '26, '27 or frankly, even '28 will remain to be seen. But our guidance is -- not have a lot of tax in it, although I think you'll see over the next quarter or so that you'll see some press releases that will reflect growth opportunity in the business.

And next, we'll move to Eric Martinuzzi with Lake Street.

Yes. John, I wanted to ask about the adjusted EBITDA margin midpoint. It looks like you tweak things a little bit higher, so you raised that low end of the adjusted EBITDA margin guidance. And I was just curious to know, is that a result of the mix that you're assuming in the revenue? Or is there something going on with your cost of goods?

I think it's more of just what's already in the barn, right? So we've got -- I think we've had pretty strong quarters already. We put up in terms of adjusted EBITDA. So we feel pretty steady state that we can hit that bottom line. I mean we want to tighten up a little bit because we felt like it was pretty achievable. So nothing -- nothing structurally has changed dramatically. It's really just had pretty strong quarters these first two of the year and want to take it up a little bit based on where we think we're going to land.

Okay. And then second question, you've owned Latham time now for a year. I think that closed in the beginning of July 2025. If you could comment maybe, first of all, on the retention that you forecast versus what you've been able to hang on to? And then the opportunity for cross-sell, whether that's a second half '26 or more like 2027?

I'll take the retention. I mean, the thing -- that business has been around 100-plus years and was really, really consistent in terms of the retention, very similar retention stats to ours, and nothing's really changed post acquisition. So it's really been very, very consistent business, performed at or a little bit above our expectations when we bought it in terms of the revenue production. So really -- and we've been able to realize most of the cost savings that we had planned for, if not a little bit more. So it's performed as good as we hoped for from that perspective. And then I'll let Pat can talk about cross-sell.

Yes. And culturally, a great fit. Bill Latham did a great job from a family perspective and then our GM Lance has done a great job with Latham and in the culture. And the culture of the 2 companies, the profile of the current customers, et cetera, it's just spot on. And we're continuing to evolve kind of the thinking whereas Latham was more of a stand-alone time on the smaller end. We're integrating but we're keeping those key relationships from a stand-alone perspective, but then also we're integrating the go-to-market strategy. And John talked about in some cases where the time clocks, et cetera, are going to be HaaS for the first time, our hardware as a service, in the first half of the year, that will impact the revenue of about $600,000, but it aligns the value proposition the offering with an integrated approach with payroll, et cetera. And long term, it's about a $2 million positive just at the current numbers.

So we think the opportunity with Azure Central, what we're trying to accomplish with Asure works, that really fits us really well. We have a product that's plugging plug and play. And now we're aligning the pricing strategy for both of them. So we believe that we're just getting started there. But boy, if you told me a year ago where we'd be with Latham. We've hit really almost every milestone, and we have a lot more to build off in the future.

So it sounds like more of a 2027 for cross-sell opportunity with Latham?

No. Well, I think there's certainly more in 2027, but we're -- we've been pretty pleased with the payroll opportunities that we've gotten, and we're pretty pleased with the attach rates of time and attendance, we think some of the pricing around reoccurring time will continue to build. But no, it's been -- I think when I look at it, the second half and even the first half of this year have been real strong on the cross-sell opportunities, it's just going to build and we'll continue the momentum through 2027 and 2028.

[Operator Instructions]

Next, we'll hear from Greg Gibas with Northland Securities.

Great. In your prepared remarks, you mentioned expectations to complete a few M&A deals in the back half, I believe. And just wondering if there's any incremental color you can share around those expectations? And perhaps if anything is included in guidance?

No, there's nothing included in the guidance right now on the back half. So it will be incremental if we do take some down. We've been, I think, pre-discerning. We've had some deals come across, but we've either for price or whatever reason, we decided not to do them. So don't have anything imminent, but we'll continue to look. So nothing in the guide right now for acquisitions.

Yes. And as you know, Greg, the reseller will be active in that area and continue to be active. We've been working on a couple that we believe could happen. And I believe you'll see some of that, but more to come when it does get finalized. And I think you'll see some of it in the back half of the year.

Fair enough. And wanted to follow-up just regarding the kind of composition of recurring versus nonrecurring strength that you had year-over-year as we head into the back half and kind of how that can -- within your guidance that does imply kind of more recurring strength. Just wanted to get a better -- more comfortability around kind of what your expectations are in terms of the drivers there. I mean, I guess, if we do have that muted dynamic related to nonrecurring dropping down a little, where you kind of have confidence in the recurring side?

Yes. So right now, again, our current guide -- let's say, I look at last year in the back half of the year, we probably had about $9 million of nonrecurring. And I said, A big chunk of that, obviously, we have the latent hardware coming in, but a lot of that $9 million was some professional services work with regards to large tax yields. So right now, we don't have those focused. So I think it's fair, if you're thinking about your model, probably in that $5 million to $6 million range is kind of what we're thinking about on nonrecurring in the back half of the year as opposed to $9 million for last year, and so when you start to do that math, that really shows you where the gross cap coming from. It's coming from recurring. We don't have any acquisitions imminent. We'll lapping Latham. So that's where we kind of go back to the beginning comment about most of the growth in the back half as we currently guided it is coming from the recurring organic side of the house.

And more specifically, 401(k), HRC, time and attendance, combined with payroll are the leading products that we're cross-selling that last year, we had, let's say, a 70-30 of new logos to customer -- now it's closer to 53-47, and that additional kind of products in additional dollars are building up and lead to the reoccurring revenue that's growing in the second half. So we think it's a very predictable story. We think investors appreciate the predictability and if we do have an acquisition or we do have some professional services dollars that will be additive. But right now, we feel really, really good about where we're at as a company.

Yes. Let me just -- I just went back and look at my notes. Actually, it was $10 million last year in the back half of the year, I think, for nonrecurring. So yes, I think that's where you're seeing the transition.

There are no further questions at this time. I would like to turn the floor back to Pat Goepel, Chairman and CEO, for closing remarks.

Well, I sure appreciate your time today in previewing and viewing the second quarter results. We feel like we have a lot of momentum. We talked to you about the predictability of the results going forward, feel good about where we're at, and we always take stock at halftime and then look forward to a strong second half and the beginning of 2027. We appreciate you as an investor and look forward to talking to you again real soon. We'll do some outreach here with different conferences in the third quarter and fourth quarter. So hopefully, we'll see you soon. Thank you.

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

Good afternoon, and welcome to Asure Software's First Quarter 2026 Earnings Conference Call. Joining us today's call are Chairman and CEO, Pat Keppel, Chief Financial Officer, John Pence; and Vice President of Investor Relations, Patrick McKillop. Following their prepared remarks, there will be a question-and-answer session for analysts and investors. I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure Software's First Quarter 2026 Earnings Results Call. Following the close of the market, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find our investor presentation. .

During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. The description and timing of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations.

I'll hand the call over to Pat in a moment, but I just wanted to take a moment to remind people of our upcoming Investor Relations activities. On May 13, we are attending the 21st Annual Needham TMT Conference in New York. And on May 14, the OlahanLokeyON Conference also in New York. On May 28, we will attend the Craig-Hallum conference in Minneapolis. On June 23, we will participate in the Northland Capital Markets Conference, which is being held virtually.

We also are in the process of scheduling some nondeal roadshows. Investor outreach is very important to Asure, and I would like to thank all of those that assist us in our efforts to connect with investors. Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. With that, I would like to -- now I'll turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thank you, Patrick, and welcome, everyone, to Asure Software's First Quarter 2026 Earnings Results Call. I'm joined on this call by our CFO, John Pence, and we will provide a business update for quarter 1, 2026 results as well as our updated outlook for the remainder of the year. We are very pleased to report a strong start in 2026. First quarter revenues came in at $42.8 million, representing growth of 23% and compared to Q1 of 2025.

This performance reflects continued momentum across our core business lines and validate the investments we've made in our platform sales force and AI capabilities over the past year. Our organic growth rate for quarter 1 2026 was 7% compared with 3% in quarter 1, 2025, and and 3.5% in quarter 1, 2024. This is a significant acceleration in a quarter, which historically has shown some seasonality. We're encouraged but the drivers behind it, increasing attach rates with our existing client base as well as continued new logo wins.

Given global uncertainty, we're taking a conservative stance on operating the business. However, we remain very bullish on the customer response to our platform improvements, and we believe we can deliver double-digit organic growth as we move through the remainder of 2026. Fifth, the launch of Asure Central in October 2025, adoption has continued at a rapid pace, and we believe that by the end of the second quarter of 2026, the majority of our approximately 30,000 direct clients, it will be on the platform with the majority of our direct client base now on a single unified platform, we believe we are increasingly well positioned to accelerate cross-sell and attach rates throughout the remainder of 2020.

Our multiproduct attach rates continue to improve. The number of clients purchasing multiple products in our payroll business grew by 15% in quarter 1 compared to quarter 1 of 2025. We continue to work toward our internal goal of moving clients from an average to 2 products to 4 or more products per relationship. Earlier this year, at our sales kickoff, we introduced to Asure Works which is our administrative services outsourcing or ASO model, which allows clients to delegate key payroll and HR compliance processes to ensure. We are scaling Asure Works thoughtfully building sales, implementation and support capacity based on early results, it's still early days.

However, the reception has been very positive. Our pipeline is growing, and we've started to win new clients. We're seeing interest across multiple types of buyers, small hotel chains, restaurants, HVAC companies are among the early adopters, which is consistent with our broader client base of Main Street businesses that need payroll and HR compliance support, but lack the internal resources to manage it themselves. We currently have 6 sales reps dedicated to AssureWorks in the pilot effort and plan to add a few more in the near term. This offering is strategically important.

Clients who adopt managed payroll and compliance services typically represent 2 to 3x the revenue of a payroll-only client. Importantly, AsureWorks is not a PEO model. We're not taking on co-employment risk. So for clients constrained by the costs or rigidity of a traditional PO, we believe AsureWorks is a compelling flexible alternative. We are on track toward our full year target of 150 sales reps and continue to invest in training and enablement, Sales leadership upon our President Chief Revenue Officer, Al Goldstein, is driving focus on both new logo acquisition and multiproduct cross-sell within our existing base with the goal of transitioning our mix over time, towards approximately 35% new logos and 65% base expansion.

Our new bookings in our core human capital management payroll continued at a strong pace in quarter 1 up 13% versus last year, and our contracted backlog remains healthy at approximately $85.6 million. We expect to convert approximately 38% of that backlog over the next 12 months. Our client base, primarily small and midsized businesses in payroll intensive, compliance-driven industries remains resilient. We have not observed meaningful changes in sales cycle dynamics or competitive behavior in quarter 1.

I want to take a moment to reiterate our thoughts on AI and what it means for our business, much of the disruption narrative applies to productivity and workflow software, tools where AI can replicate or replace the core function of a software that the software performs. Payroll and HR compliance is not in that category. We move approximately $20 billion annually on behalf of our clients. And to do so, we hold money transmitter licenses in every state and requires them a regulatory infrastructure that takes years to build.

It represents a significant barrier to entry. We interface directly with the IR state and local tax agencies and banking institutions. Our clients carry 7 or more years of employment history, complex multi-jurisdictional tax obligations and real-time compliance requirements where the margin of error is effectively 0. These are not functions that a generic AI layer can absorb the regulatory complexity, does that go away. In fact, it compounds.

What makes it sure a system of record rather than a workflow tool is precisely this we are embedded in the legal and financial infrastructure of our clients' businesses. Switching costs are high. Our revenue model is consumption based on headcount and payroll runs rather than a seat license and our client base is concentrated in the frontline essential workforce, economy, plumbers, hotel workers, trades people. Those work is among the most resilient to automation.

At the same time, we believe AI is a meaningful accelerator for us. Luna, our AI agent has been adopted by greater than 15% of potential users to date without any active marketing or onboarding from Asure. In quarter 1, Luna interactions increased by nearly 50% over the prior quarter. To date, we have transcribed, categorized and scored approximately 80,000 support calls for sentiment and our ticket mining capability analyzes more than 100,000 cases monthly.

These numbers reflect AI working across both the client basing and operational sides of the business, deflecting support volume, enabling employees and administrators to self-serve across payroll, benefits and compliance workflows and driving continuous product and service improvements. The result is a smarter, faster and more responsive organization without reducing the compliance expertise and accountability our clients rely on us to provide.

In our last call, we told you that Luna could perform over 50 actions live, audible and permission control. Since then, we've proved the model at scale. Our Canadian tax solution is the clearest example. A fully automated Luna AI-powered pipelines that converted a traditionally manual compliance workflow into a proactive, continuous modern system. Our more periodic checks continuous coverage, that architecture is now a blueprint, and we're systematically replacing it across U.S. payroll, U.S. tax and HR compliance.

This is not a feature rollout. It is a platform-wide operating model shift from reactive to proactive, from human check to AI verified from process dependent to infrastructure driven. That same shift that makes sure where it's possible. We can now take on the work itself, not just deliver to software, because the AI layer gives us the efficiency and the ability to do it at scale without scaling headcount literally. Through Asure Central every payroll specialist works from a unified action surface. Discrepancies its data pending filings require approvals, surfaced in real time, not buried in reports.

Luna identifies what needs attention. Central delivers it to the right person at the right moment, detection, notification, action, close to loop. These capabilities compound. Every compliance workflow we automate strengthens our models across the entire client base. And when you're processing approximately $20 billion in payroll annually. That compounding effect on system-wide intelligence is very meaningful. Internally, the same AI foundation is accelerating product development, sharpening sales intelligence and improving support operations, all of which we expect to continue to expand the margin profile over time.

The results, higher accuracy, greater efficiency and a structural lower cost to serve with human accountability preserved for every compliance sensitive decision. In short, we are a system of record business with compounding data gravity operating in a highly regulated compliance critical environment. This is an entirely different category than the SaaS segments where disruption concerns are most valid, and we remain confident in both the durability of our model and the opportunity that AI creates for us going forward. With that, I'd like to turn the call over to John to discuss our quarter 1 financial results in more detail and provide an update on our 2026 guidance. John?

Thanks, Pat. As Patrick noted, several figures discussed today are on a non-GAAP or adjusted basis. Reconciliations are available in our meeting, in our earnings release and our investor presentation at investor.asuresoftware.com. First quarter total revenues were $42.8 million compared to $34.9 million in Q1 2025, representing growth of 23% year-over-year. Recurring revenue for Q1 2026 was $37.8 million compared to $33.2 million in Q1 2025, an increase of over 14% year-over-year. .

Recurring revenue represented approximately 88% of total revenue in the quarter. We believe that in 2026 recurring revenue as a percentage of total revenue will be in the low 90% range, and we anticipate that will continue to trend upwards in 2027. Professional services and hardware revenue was $5 million in Q1 2026 compared to $1.7 million in Q1 2025. The increase in nonrecurring revenue was primarily due to hardware sales from our Latham acquisition and professional services tied to enterprise tax.

Total revenue was relatively flat in Q1 2026 compared to Q1 2025. We have modeled 2 additional rate cuts in 2026, which we anticipate will be partially offset by continued growth in client fund balances. Gross profit for Q1 2026 was $30.5 million compared to $24.6 million in Q1 of 2025. GAAP gross margin for Q1 2026 was 71%, in line with Q1 of 2025. Non-GAAP gross margin for Q1 2026 was 76% compared to 75% in Q1 of 2025. Net income for Q1 2026 was $0.6 million compared to a net loss of $2.4 million in Q1 of 2025. EBITDA for Q1 2026 was $9.4 million compared to $4.1 million in Q1 of 2025. Adjusted EBITDA for Q1 2026 of $12.3 million compared to $7.3 million in Q1 of 2025, an increase of 69% year-over-year.

Adjusted EBITDA margin for Q1 2026 was 29% compared to 21% and in Q1 of 2025, an increase of approximately 800 basis points. For the full year, we continue to expect to generate positive unlevered free cash flow in the mid- to high teens range, which we calculate by taking adjusted EBITDA at the midpoint of our guidance range, less software capitalization of approximately $15 million to $16 million and approximately $6 million in cash interest cost.

We ended the first quarter with cash and cash equivalents of $19.2 million and debt of $68.8 million as of March 31, 2026. Based on continued positive momentum in our business, we are updating our full year 2026 guidance and also providing Q2 guidance. It's important to keep in mind that the first quarter's are seasonally strong as recurring year-end W-2 ACA revenue is recognized in this period.

Full year 2026 guidance. Revenue of $159 million to $163 million and adjusted EBITDA margin of 23% to 25%. Q2 2026 guidance, revenue of $36 million to $38 million and adjusted EBITDA of $6 million to $8 million. Our cost structure, including CapEx and capitalized R&D is expected to remain relatively stable on a dollar basis. With that, I'll turn the call back to Pat for closing remarks.

Thanks, John. Quarter 1, 2026 marks continued progress towards the inflection point we've been building towards. With Asure Central now substantially adopted across our direct client base, our Luna AI delivering measurable efficiency gains, AsureWorks getting early traction and our sales force growing towards 150 reps, we're executing on the plan we've been sharing with investors. We believe we are at an important inflection point in the business where growth and profitability are advancing together.

This combination, top line momentum, bottom line discipline at the same time is what we've been working towards. And we're very pleased to be delivering on it. We remain on track toward our medium-term target of $180 million to $200 million in revenues, with adjusted EBITDA margins of 30% or better, a level we came within close range of during this quarter and in quarter 4, 2025. And our longer-term vision, which we have discussed with investors reflects the potential for margins to expand well beyond 30% as we achieve scale.

AI continues to reduce our cost to serve while simultaneously expanding our market and revenue opportunities. We're excited about 2026 and remain committed to delivering value to our shareholders, our clients and our stakeholders. Thank you for joining us today. And now I'll send the call back to the operator for the question-and-answer session. Operator?

[Operator Instructions] Our first question comes from Jeff Vanry with Craig Hallum Capital Group.

Just a couple of quick ones for you. On Asure Central, I'm curious, now that you're getting a little further into it, what are you reserving with respect to the path of adoption as people get single sign on are getting explorers to more products? Just kind of curious what the paths of adoption are looking like so far? .

Yes, really, really pleased. Attach rates were up about 15% year-over-year. People are really getting into the flow of it. And I think more important than that, it's 1 of the reasons why we also introduced AsureWorks. The bigger story for us with small and medium-sized businesses is we can go to a small business and say, hey, we'll give you the tools to manage compliance and across all products in human capital management or we can do the work for you.

And because we have the proof point of Asure Central where all the products are under a single pane of glass, the light bulbs are starting to go on. So I think we're early innings yet. But boy, we're really, really pleased. And then our acquisition of Latam, which we acquired in July, they're undergoing Asure Central and they'll be largely done in the second quarter here. So really, really pleased with our sales motion, our customer service motion.

And the other thing that's coming out which is interesting is the prompts or the trigger events. So if you get to 20 employees and -- now by law, you have to offer Cobra, it's almost a no-brainer to say, "Hey, do you want to sure to manage that for you as opposed to try to introduce that somewhere else? " Or if you're in a state at 401(k) is a regulatory requirement hey, we noticed you don't have any 401(k) deductions, would you like us to help you with that plan. It's a real easy conversation. So we're just getting started, but those are some of the things that are popping out quickly.

Yes. That's helpful. And in the deck, you talk about the expanding PEPM. Can you talk -- I mean, I can see you're taking it from 15 in 2020 to $100 in 2026. But where by your math, you at this point in terms of Patman any thoughts on '27, '28 trend to just get a sense? I know what the potential is, but where are you and where do you think you can be? .

Yes. What I would say right now is we have kind of an internal goal that we're shooting for 2 products to 4 products. because we have a direct model and an indirect model, et cetera, in the investor deck, we have 64% of our business in the small kind of mid business, and it's a focus area for more and more products. We'll have a better kind of RPU, but from an intentionality perspective, we were kind of in the area $12 to $15 per employee per month. .

I think what you're going to see is a double here over the next 3 years or so. And you're going to see, I would say, we're pretty optimistic right now. But it is the first quarter. I think we'll have a better answer here when we get Latam in probably on the second earnings call. But I would be disappointed with the -- that we don't do a double over the next 2 to 3 years here.

Yes. I mean you've certainly added an incredible amount of breadth to the product set over the last several years. So it makes sense. One last maybe for me on tax season impact. Just what was the seasonal uplift in Q1 from tax season?

Debbie, are you talking W-2s or are you talking to flow. We were probably up in the area of 300,000 or so on W-2s and ACA. Some of our employee count, they have app environment where we don't bill separately for W-2s. But for the ones we bill separately, it's about a 6% increase. And I would say anecdotally float balances ended the quarter and double-digit increase in float balances. .

Our next question comes from Joshua Reilly with Needham & Co.

I just wanted to start off on the last piece you were talking about there with the forms growth. The 7% organic growth is pretty impressive versus what, 3.5% the last couple of years in the first quarter. How much of a headwind or a tailwind, I guess, was the forms growth in this March quarter versus the last couple of years? Because I know it's been a headwind the last couple of years, and I know you just threw out the 6% number. What was that referencing exactly? Was that the forms growth for the quarter? .

That was the for growth. So really, Josh, there was no headwind in Forms growth. Maybe it's 1%. .

Got it. And in the prior 2 years, there was somewhat of a more of a headwind. Is that the right way to think about it? -- in this year?

If you think that you had the great resonation and that you had have the great say, during a couple of those periods, turnover was really heavy which would add more to W-2s and then when you stay, it's a little bit less. So there was a headwind, a couple of percentage points in that area. .

Got it. And then on the Las transition the business model transition, how is that going? Because the hardware revenue was a little bit above my estimates here for the March quarter. And just curious, is that still on track with your expectations entering the year?

Yes, I think so. I'm not sure that the hardware was that much up. I think we also had some pretty healthy professional services, Josh with regard to some of the larger tax implementations. So I think from my perspective, made was kind of in line with last year and nothing too crazy. In terms of the integration and the plan I would say we're going to be in earnest the back half of this year and into next, converting to that half model.

So early stages, and we haven't started to see that transition, which will, again, obviously be really good for the mix of revenue, right, turn it in and recurring, but it will put some pressure on the nonrecurring side, right? So on the compares, we're going to be adding a lot more recurring revenue in a couple of quarters, and you're going to see a decrease in nonrecurring. Again, good for the health of the business, but it will be a little bit of a transition in terms of the bag. And that's what we expect to happen kind of over the next, I would say, 18 months, 2 years.

Yes. And I would say really, really pleased with the Latham acquisition overall. It was absolutely the right acquisition for us. Our customers love it. And anecdotally, the install times and the coordination around multiproduct implementations has gone really, really well. .

Last point for me is on the enterprise payroll tax deals, can you just give us -- we've seen some kind of mixed feedback in the market about ERP migrations. How important is the cloud ERP migration for you or just any type of key migration for you to win business there? And can you still win some deals even if ERP migrations are in a period that's a little bit slower?

Yes. First of all, Josh, and I hope you appreciate this. In addition to analysts and investors, we have people from Team red on the call who is our primary competitor. So I can't go too much in detail like I used to be able to because they've noticed us. But anyway, what I'd like to talk about here is, first of all, the market for tax is really compelling. We have -- we think we're miles ahead of the competition.

I think we have a really good offering there. and we're going to continue to grow in that area. As far as ERP migrations or implementations, first of all, we do -- a lot of times, we are to tail at the dog in the sense that when somebody goes to an Oracle or UKG or an SAP or Workday, what happens is we are -- the timing of some of those deals or when they do implement with ERP. So sometimes that can lengthen an install center but -- install cycle -- but it absolutely -- actually, it's -- the market right now for compliance and tax services, especially with how we go about it with AI is very strong. [indiscernible] Josh, all stains here. We're lucky to have them today. I don't know..

Yes, Josh. So we also have a really big opportunity, not only on the greenfield, new ERP deployments. But also the current installed base. And we're doing quite a bit of work within the current base, and we've got such a long runway there as well. So we're not seeing any impact from what might be happening with the broader group around ERP in general. .

Our next question comes from Bryan Bergin with Cowen. .

It's actually Ger Livio for Piancente -- to start, can you talk about your managed service offerings, the recent announcements there? What do you see in terms of the revenue opportunity, including the PEPM uplift specifically from those managed service offerings? .

Yes. I mean, first of all, I sure Works, we're really excited about it. The fact that we could do it all 4 or more a customer doesn't necessarily have to hire a full-time either payroll or HR professional and they can help us -- they can use us to help them. For from the trees, we see an opportunity of about $50 or so per employee per month. where we're doing the work for them. Now some of that can change based on the size and scale of the customer and the breadth of what we're doing. But that's the kind of opportunity we see with AsureWorks.

We have had this in motion for quite some time. We had 1 of our resellers kind of pilot the program and we since acquired that reseller. And then we're rolling that model all across the country. I would say it's more of a '27, '28 initiative, but I do think you'll see somewhere around kind of $3 million to $5 million in opportunity in this year's revenue. But over time, it's going to continue to grow. And that's what's exciting for us. And not only that, but when you can go to a customer, they don't need to go to a PEO or employee leasing to get all their kind of compliance and all their offering done where we can do it for them or the same software that we're doing in form they can use internally.

We think that's a real compelling message. And even if we don't get the entire business, we're going to get a good majority of the business. So many times, we'll pitch that, if you will, and they'd say, well, maybe we'll start with HR compliance, and we'll start with benefits or we'll start with payroll tax in time. So we think we're just getting started. We had 6 people offering. We're selling it today. But clearly, we've exposed the sales organization and have a set of learning and development training going on to roll this out. So we're pretty bullish on this.

Great. And then a follow-up here in terms of the guidance. So it looks like you then passed through all of the quarterly revenue and adjusted EBITDA beat -- anything to call out there? And just also want to confirm there was no kind of incremental M&A since the last earnings here.

Yes. No M&A. -- since the last earnings. And again, we tried to kind of get you where we think we need to be for the rest of the year.

Our next question comes from Eric Martinuzzi with Lake Street. .

Yes. I wanted to ask about the -- when the Latham folks come on to Asure Central, will that entire base be viewed as kind of a multiproduct adoption customer base? In other words, should we see a spike in the percentage of customers when we have this same conversation .

Eric, what I would say it depends, we're -- in our business, what we do is we have some stand-alone channels. We'll do a stand-alone tax channel, for example, where we partner with other payroll companies. We won't cross sell without their permission into those kind of companies that we have relationships with. And then what we do with Latam is we have some other payroll companies that use Latham and are partnered with them, and we'll respect that the same way. .

But a large majority of the Latham customers will be in Asure Central. We're still going through kind of that floor, if you will, and those will all be available to cross-sell, et cetera. It hasn't really slowed us down because we prioritize Asure Central and the upgrades with the customers that have already been sold with the cross-sell of Latham products. So those customers are already on Asure Central. We'll just continue to adopt them through the second quarter. It will, but no question, add velocity to our cross-sell approach and our attachment of those customers.

Got it. And then you talked about you're still on target for the 150 million sales reps by the end of the year. You finished out at 118, I believe, at the end of 2025. Are we talking about kind of a linear progression on our way to 2026? Or -- in other words, I guess a better way to ask the question is what's the sales headcount now?

Yes. We're about 10 under where I really would like to be and nails with me, and he can comment, but for us, we've been really choosing quality. If you think about where we're going with the Asure Central and where we're going with the Asure works, we're looking for people that really have a consultative sell versus, let's say, a product sale. And maybe, Al, you could talk a little bit about some of the candidates and the flow there. .

Yes. Yes. So we've -- historically, we've looked at more small business, transactional sales professionals, and that worked well for us where we had point solutions, and we're really selling more payroll tax deals than anything else. Now that we're selling more of the broader product, the complete product and especially with Asure Works, it's a much more consultative sell. It's a much more solution sell, much more disciplined around the sales process and needs analysis and demoing the product and the software, which we're really proud of these days.

And so that just is a different caliber and profile of a sales professional. Now the good news is, the folks we're bringing in check all those boxes and they're actually ramping a lot quicker than historically what reps were ramping at. But we're being more disciplined about who we're bringing in, and we feel confident we'll get to that $150 million by the end of the year.

Our next question comes from Richard Baldry with Roth Capital Partners.

When you talk about accelerating to double-digit organic growth, can you talk maybe about the pieces that get you there? Presumably, some of it's the head count, but -- how much of it is ARPU and maybe how much visibility do you have into that acceleration, whether it's in pipeline retention rate changes, when rate changes, et cetera?

Yes. Rich, thank you. Definitely, the attach rate numbers are really positive, and we have pretty good retention on that. Candidly, in the fourth quarter and first quarter, we did a lot of professional services work. And I would say that 1 time probably is the only thing that's noise in the numbers sometimes because we have been a little onetime heavy. Now that ultimately will be a very strong indicator for us. But short term, some pets you have to grow over bigger compares on 1 time.

But what I would tell you is the ARPU, the attach rate, the number of reps, the rollout of Asure Central, the rollout of AsureWorks, Asure Bay we're right down the -- we're early days, but I would tell you, really good pipeline development, real good underpinning of the pipeline, real good focus on attach rates I can see from our deal alerts, we've had a really exciting not only first quarter, but second quarter and I can see it just based on our hiring profile in our learning and development as people get up to speed. So we have pretty good visibility, but we're also want to be conservative in an environment that has a lot of global uncertainty, we, for that matter, really haven't pressed same-store sales or we have pressed a ton of employment growth or interest rate increases, right? So what we have tried to do is be conservative in our forecast. And hopefully, we can upside and produce an outside income or outside goals in the second half.

And for a follow-up. Can you talk about the internal sort of use deployment of newer AI efficiency tools, how much do you feel that, that can help you either hold the line on costs in some areas, maybe cut costs to sort of bolster your EBITDA growth maybe in excess of what organic growth might otherwise argue?

Rich, we're seeing it used all throughout the organization. I mean there's really not an area that's not started to investigate and start to deploy it. We're using it in the financial organization, just basic stuff like doing variance analysis and helping on the forecasting. The operations team is using it to again interact with customers and make things more efficient in those interactions with the processing the payrolls, sales team is doing a lot of work with the front end of analyzing customers and getting a lot more effective and a lot more throughput.

So I think we're seeing it throughout the organization. And I think it's really, really early days. It's pretty interesting. But you're exactly right. I think it's going to help. I don't think we're going to necessarily want to exit a bunch of people. But what we're going to do is we're going to kind of change the profile of what they're doing, right? So if somebody was more on the data entry side, interaction with the customer that's going to go away or that's going to be much more diminished. They're going to be much more involved with making that customer happy, trying to solve their problems.

And that goes back to the AsureWorks concept, right? -- really going to be a lot closer and tighter with the people we've got servicing the customers and less on the data manipulation side of the business. So I think we can do that and not really change the cost structure, add to the top line. And ultimately, you're right, it's going to fall through to the bottom on...

Maybe if you could talk about sales and marketing. Yes, Rich. So on the front end, we're using it quite a bit as well. And we're doing a lot on the marketing side around content creation and and around being able to put out much more thought leadership much quicker. That's helped quite a bit. for us. And then on the sales side, we're looking at quite a bit of tools, but what we've implemented already is some AI tools around the needs analysis and discovery. And again, as we do more of these larger deals in that 20 to 100 space. We're doing much more quicker research.

We're able to get output much quicker around certain company and maybe who they're competing with or their peers and help drive more of the front end of the sales process and making sure our reps are well versed and knowledgeable when they engage with the prospect as well as taking all of the data that they learn from an actual discovery or needs analysis and being able to put a pretty quick deliverable and output with all of our services tied to that.

And then the ROI and value from it. All of that now for us is done through different AI tools, it's helped speed up quite a bit of the process for us on the front end. And frankly, now we're leaning into some more to some more technology around the actual outbound motion that we have around the demand gen. And we actually think that, that will have quite a big impact on how many people were able to reach and having really good bespoke conversations with thousands more companies than we would normally have, leveraging more human motion around the business development side.

And then finally, Rich, just operationally, we quoted last quarter about 80,000 transactions that Luna assisted with and over $100,000 this quarter. And so that obviously helps us with scale it helps the customer experience where they're changing their W-4 with holding with Luna assisting and that. So I think what you're going to see is more velocity in the model, the financial model. I know in our long-term model, we had 40%. We believe over time we can achieve 50% and that's all AI-assisted. .

Our next question comes from Greg Gibas with Northland Securities.

Could you discuss the pace of organic growth implied by your guidance through the balance of the year? And maybe what your updated expectations perhaps are the same of R4 professional services and hardware on a go-forward basis? .

Yes. So real quick at the midpoint of the guide, I think it puts us at kind of roughly around 15% full year year-over-year in terms of growth. I think it's going to be kind of split evenly. -- it will be a second half between the organic and inorganic based on the guide. So I think they're obviously the upside. We don't have any acquisitions plan. So the upside to the numbers would be on the organic side. And right now, as we're sitting today. .

Just professional services and hardware considering it was a little higher than expected, but I know some of that is seasonal. .

Yes. I think it will normalize back down to we're going to be in the kind of high 90% recurring for the full year. I do think this quarter was a little heavy fatter than the rest of the quarters. .

Got it. Got it. And you maybe beat me through this 1 a little bit, but just on the outlook for reseller acquisitions, and you mentioned nothing since the last earnings. Could you remind us on what's been done year-to-date? And curious to hear your stance on incremental strategic platform acquisitions? Or is the focus right now, just more integration, expanding the sales force and cross-sell opportunities and then even the Latham model transition? .

Yes, certainly quick. I really feel pretty good about the components of our solution. We've pointed in an area where we strengthened the products around payroll and have done a really good job there. And then with the integration of Asure Central the development at AsurePay. We just announced sure works here, but we've been working on that for a quarter. I really think we got our product kind of set, if you will, -- now to me, it's attachment rates, ARPU, revenue per unit we're really going to try to cross-sell, et cetera.

As a reminder, I thought Al did a wonderful job leading the sales organization. Historically, we're close to 70% new logo now we're closer to 50-50, and we're not dropping down new logos, right? So it really speaks to kind of broadening out the revenue. Now that being said, we do have a reseller kind of network, if you will, and we'll continue to add that. You see and we published some of the cost takeouts in that. model, but also now that we have the products and services to cross-sell and attach based on the reseller network. We think it's even more compelling to go that way. So I think you'll see a series of small acquisitions. I don't think you'll see anything major, but that will be our focus here.

And to answer your question, yes, the only acquisition we talked about on the last earnings call was done kind of in the January time frame. .

Our next question comes from Vincent Colichio with Barrington Research. .

Yes. Pat, could you talk to the health of your client base -- is it expanding? And are clients hiring in this environment? .

It's a great question, Vince. I would say, in general, it's I think people are cautiously optimistic. I think in some cases, depending where you sit maybe oil prices has kind of swooped them a little bit or what have you, they definitely see a very strong opportunity in the business environment. In some cases, they have a stable employment workforce, which is great. They're trying to figure out kind of and separate what they're seeing is good cash register versus if they listen to a war or listen to all the kind of news some banks, it's it's a cause for base, right?

And so I don't see employment growth growing at time here. And some of it's just demographic where you have a little bit of an aging population, you have as many people retiring as coming into the workforce. But I would certainly -- I see a lot of opportunities. I think Al, who's on the front line here would agree to that, I think. And for me, it's a very stable thriving small business workplace.

And how should we think about the organic growth this quarter? Would you say it was broadly distributed across your core categories? .

Yes. I'd say so. I think -- we're trying to get to a point where we describe the business and it's in the IR deck, there's a pie chart. I would say, in general, most of the growth this quarter was probably on the ACM platform side of the business. as opposed to enterprise tax. So that's the way I would think about it, Vince. I mean, I really think about -- that's the kind of the buckets that we're trying to describe the business. And so that's where the majority of the growth was this quarter.

And as far as through the year, I think attach rates and RPU growth in small business is going to carry today. I think you're -- we've had some really good milestones of getting customers live and we see good prospects in the tax business that have continue to grow. I think we have some professional services and hardware that in some cases, we'll continue professional services as we implement, but as far as hardware, I think you'll see a moving of the mix from 1 time to reoccurring over a period of time, but we'll still have some onetime. And then we have some nonstrategic businesses that will, over time, not be as focused, but we'll continue to be with it. But really sure works Asure Central, AsurePay, we're going to lean in there. And then we're going to absolutely grow our -- continue to grow our money movement and compliance offerings up and down the HR stack. .

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Pat Keppel for closing comments. .

Yes. I appreciate each and every 1 of you from an investor perspective and an analyst. We have a great analyst community, and they do a good job representing a sure software -- and then as far as if you've been an investor with us here a while we continue to make progress, I think we're pretty consistent. We have the investor deck on the customer website I would say we've done some non-deal roadshows. And with Patrick coming on board, we're going to have some conferences here throughout the year.

And definitely, I'm coming to New York here soon on some investor conferences. So we look forward to meeting you and seeing you soon, and we're very thankful for you and just keep following our progress because we're pretty confident in our growth. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Good afternoon, and welcome to Asure's fireside chat on current perspective on AI. This webcast will include a presentation followed by a question-and-answer session. I would now like to hand it over to Patrick McKillop, VP of Investor Relations.

Thank you, operator, and welcome, everyone, to Asure's AI webcast. Today's call will contain forward-looking statements that refer to future events and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations. Specifically, our event today will include a discussion of AI and our use of AI in connection with Asure's business. For more information about certain risks to our business as a result of the emergence of AI and our use of artificial intelligence, please see our risk factors in Item 1A on our Form 10-K filed with the SEC on February 26, 2026.

Now what I'd like to do is walk you through today's agenda. These are our forward-looking statements I just referenced. So for the agenda today, we have 4 different sections. And we have Pat Goepel, Asure's Chairman and CEO; as well as Yasmine Rodriguez, who is our Chief Technology Officer. In the first section, we plan to talk about how AI is reshaping enterprise software economics. In the second section, we talk -- want to talk about Asure's platform execution infrastructure. In the third section, we're going to talk about structural advantages of Asure's execution platform. And finally, in Section 4, we're going to talk about how AI expands Asure's operating leverage.

So with that, I'd like to move on to the first section and hand it over to Pat Goepel, Chairman and CEO.

Yes. Thank you, Patrick. And hey, I'm really excited to be here today. And wow, we set up this as an adjunct investor meeting, and I got calls from employees and clients and friends that I haven't seen in a couple of years. It feels like everybody is talking about AI and wants to hear more about the topic. And with me, Patrick to introduce our CTO, Yasmine Rodriguez, but I got to tell you, I've been working closely with her for 6 years, and she is a game changer, and there's nobody I'd rather be on this panel with than Yasmine. So you'll hear plenty from her, really excited about her presenting what she's helped us do and really drove within Asure. And so we're going to get right into it, but I can't wait for the conversation.

So first of all, Section 1, AI is reshaping enterprise software economics. If I go to the next slide, hey, there's no -- there's always changes in technology. And I'm old enough to think about whether it's mainframes and DOS and DOS to Windows and Windows to client server, client server to the Internet, Internet to mobile, mobile to AI, let's talk about that. And with this model, if you think about it, remember when mainframe went to the PCs, COBOL for a long time was the fastest cruncher of data. And still today, there's COBOL systems in. So it's not an either/or, but where we think it really is, is AI and software together that's ultimately going to be the answer. But before we even talk about the answer, if you think about how AI is reshaping enterprise software economics, similar to those days with COBOL, which was very narrow on a calculation engine, AI is different in that it gets data from all over the place very, very quickly and can come back with a probabilistic answer or a directionally correct answer very, very quickly.

So if you think of businesses that might be at a disruption risk, consulting and labor services around consulting, where they're looking for a large amount of probable outcomes and large amount of data, they're going to be more apt to be disruptive next on the continuum feature SaaS, where capabilities are increasingly getting automated and AI can help not only in the software component of that, but also with agents as well as workflow items, et cetera. System of records has some defensible and structural advantages. And that's operational data or the data that's proprietary that really is almost system of record data, but data where action could begin where you need that data as a premise as part of moving forward. And then there's to the right where you have execution infrastructure around it where it's a regulated transaction, maybe money movement or [indiscernible] agencies or Arista legal kind of documentation compliance offering, where you really have highly regulated data and you have to be 100% right. And so very, very different on the continuum.

The next slide. If we know that coming into it and we look at it, and we're going to introduce some concepts here. But on the left, you have what I talked about on the bottom left, if you have, hey, I want to be directionally correct and I want to have various levels of outcome, consulting and labor services, you can get there pretty quickly with AI with just being directionally perhaps more advantageous than when it started. Now if you want to get pretty deterministic or with a very secure outcome, system of record will help and be in the top left. In the third quadrant there with feature SaaS, where your computation is probabilistic, your execution infrastructure is high. Now that you have a lot of software tools for knowledge work, AI agents can replicate the features, you're going to have some risk. But where you have execution infrastructure. So if you think about it, the money movement, and we move roughly $20 billion today. We have 100,000 clients where we have platform of very, very secure data with social security numbers and wage, et cetera.

And where it's clients cannot easily replicate, that's an execution infrastructure that will actually accelerate where software [indiscernible] AI, especially if you embed AI with the software right from the ground up. So we're going to talk a little bit about that, but we think we're in the right quadrant here. And that's why we are so excited about hitting this topic head on.

Next question or next slide, I should say. So why the execution platforms behave differently? First of all, at the revenue model, we'll tell you where there might be disruption. And you see in the news or you see on CNBC where seat subscriptions or SaaS companies that have a revenue model that's all around people as opposed to agents, they got to kind of pivot to outcomes. The good news with execution infrastructure that Asure has, we already have that outcome where we get paid when people get paid. We get paid on the amount of transactions. So the good news here is our model is in place, and our model doesn't change with AI. AI will enhance some of the execution pricing on the model, which gives us really a competitive advantage here.

The AI on traditional SaaS, where it replicates features, the AI automates delivery. When I think of kind of our market, you have software tools, you have software enablement, you have software workflow and you have ultimately people that execute that. software with AI opens up a huge opportunity here where we might have played in one of those areas, but now we can potentially play in all 4. And when you think about operating leverage expense, let's just take the category of people. If you have, like we do 100,000 customers where we have a payroll person potentially or an HR person, we have people within our service delivery infrastructure. If you look at the end-to-end process, and remember, end-to-end process starts at the customer wall all the way to our walls and back. Well, now you have 4 areas, whether it's people, whether it's workflow, whether it's enablement, or you also have the baseline kind of transaction where now you have the ability to open up a bigger, bigger market.

Some analysts such as Sapphire and some of the work Gartner and others that have done it opens up this possibility close to 50x. So over time, we believe we're at a structural advantage that will ultimately compound and accelerate over time with software using AI.

The next slide. So what is it about our platform and execution infrastructure? This is the longest 11 minutes that Yasmine has let me talk. I'm feathered. I'm going to bring in Yasmine Rodriguez, our CTO, to talk about the execution infrastructure that we really have the foundation for what we just talked about.

Thank you, Pat. And it was. It was a good time. It was good. So I'm going to start really by reframing a question. I wake up every morning, the first thing I look at what is the latest post out there about AI. So the question that the market keeps asking, is AI a threat to your business? I think in my humble opinion, it's the wrong question or maybe it's an incomplete one. The right question should be, does AI affect your specific business model positively or negatively?

AI is absolutely reshaping the enterprise software economics, absolutely. That's not even a dispute today. Software features are going to continuously be automated. Cost structures are going to shift across every category. The impact. The impact is going to vary enormously by business model. For Asure, the answer is going to be a positive impact. I'm going to go through that today. It's structurally positive. Three things if I was to have you walk away with today after our presentation of that. One, AI affects business models totally differently. Second, the revenue structure is what determines the AI impact. Third, and you heard Pat talk about it, the execution platform is what Asure sits across the board. You saw it on the spectrum, you saw it on the execution, Asure sits there. What we do is gain operating leverage as AI scales, not the other way around. So let's get started on how that works. Let's go to the next slide, please.

Okay. We all know that AI can reason. Most of us has used it. It can analyze, it could summarize. It could recommend, it could generate. I mean, it's impressive. What it cannot do is execute in a regulated world of work without infrastructure. Traditional SaaS has features and the system of records. Asure has all of that. But in addition to that, it has 3 additional layers that are key. Statutory system. We are, at Asure, a registered IRS bulk filer. We are a legal agent with the authority to file on behalf of thousands of employers who have been doing it for years. We are fully accountable to the outcome of our filing. That relationship is really earned through demonstrated operational history and regulatory approval. It cannot be something you just download and you get it.

The tax laws that are out there are updated continuously. Sometimes agencies release detail right before the due date. One may argue AI is absolutely capable of reading an IRS update online in real time. Yes, it can. But reading a rule and being authorized to act upon it, are completely different. Asure doesn't just know the rule changed. We filed under it. We hold the power of attorney with tax agencies on behalf of our client. That is a legal trust relationship with regulators. This is not just a software integration and APIs.

Let's go to the compliance systems. Every payroll calculation has to be traceable, reproducible, defensible on demand under an audit. Federal law requires those payroll records to be retained for a minimum of 3 years, in some cases, 7. Regulators are not going to accept it's because the AI said so as the documentation, a payroll tax filing error is not just a bug report on an integration. It results in IRS penalties, state interest charges, direct employer liability that is that accountability that lands on Asure, not on the model that helped us actually calculate it.

Last is your financial rails. Asure participates in ACH networks. We operate under NACHA risk controls. We maintain knowing your customers, the banking laws, anti-money laundering, the BSA Act. We hold money transmitter licenses across the state that require them. Each of these require separate application. And for those that ever went through this, it required a surety bond, audited financials, regulatory approvals. Some take up to 12 to 18 months just to review your application. So in summary, AI can reason about the money movement, about all of it, but Asure is actually the one authorized to move it.

So if you keep in mind, knowledge is not what gives you authorization. Being aware of something does not hold you accountable. An AI system can know every tax code in every jurisdiction and still cannot file a single return on your behalf or bear a single dollar of liability, Asure can, and we do that every single day.

Now move to the next slide, please. I want you to look at the flow left to right and because this is the architectural reality that works in our favor today. On the left is AI reasoning, agents, copilots, models, excellent at that probabilistic reasoning. They analyze, they recommend, they decide. This is where the AI ecosystem lives today, your OpenAI, your Microsoft Copilot, all these models. The minute any of these need to act or take an action, they have to make a system request. They have to do it through event triggers and notice what sits at the center of that request. It's Asure Luna. You guys are going to hear me talk a lot about Asure Luna. Our AI agent, beginning of 2025 is when we actually released our AI agent Luna. So it's not just a chatbot. AI Luna is capable of actually performing actions on behalf of the employees and the customer. We've done that in beginning 2025. We launched Luna really, and we kept on growing Luna with more of more actions taken.

Luna is not connecting to our payroll system from the outside. She runs within it. So within our architecture, our infrastructure, we were at the right time of a modernization journey that we embedded her into the architecture. So Luna, as you see there, is the bridge between that entire external AI and action-taking AI engine inside a live regulated payroll platform. Luna does not connect to the payroll again from the outside. She's within it. So when a system request comes in and hits the system of record, whether it's payroll, tax, employee data, it is verified. It is audited. It is legally defensible. It's not just a general database. It's a license compliance approved execution platform.

On the round, that deterministic execution, the real-world outcome, money movement, as we said, tax filing, IRS. This is where AI recommendation becomes a legal transaction, real accountability behind it. So an AI agent all the way on the left cannot just skip and go right to the right side. It needs that orchestration layer. It needs our Luna. It needs our AI, the system of record, the regulated execution infrastructure that we built and all of that does exist today in Asure. [indiscernible] with anything on the left, any of the AI models, we are that infrastructure that AI model will need to reach to the right. And as AI adoption grows, that [indiscernible] only deepens. It does not shrink on our side.

Next slide, please. In a world where every company has AI copilot, let's say, the future coming, what happens to the platform underneath it? The answer is right on this slide. They don't get bypassed. They become even more valuable. So external AI system, whether Microsoft Copilot, any other agent platform, connecting through the Luna orchestrator to execute payroll, perform tax actions, compliance actions securely, the AI is the interface Asure is the engine behind it. I'm going to give you an example. It's a favorite for our CFO, by the way.

A CFO is budgeting in Excel. He's living in Excel, picks up Microsoft Copilot, which is embedded in Excel, the CFO would type, "Model a 3% raise effective January 1, all the way to July 1." And by the way, show me the payroll cost, the tax impact, the cash flow effect. Copilot invokes Luna, the orchestrator via secure API. Luna pulls live headcount. Why? Because Luna is in the payroll system. It pulls tax directly from Asure central, applies compliance awareness, logic across every jurisdiction. You're going to see some of that in our demo later. Returns on a real P&L and cash impact instantly. There's no separate log in. You didn't have to log out of Excel, go to an Asure central to pull the data. There is no export. There's no manual modeling. Excel stays the interface, Asure remains the system of record. Luna remains the orchestrator.

Let's take another one for HR. An HR manager gets a Slack message. We're hiring 3 engineers in Texas and 2 in Pennsylvania starting next month. What's the fully loaded cost? HR asked the copilot to do agent -- the same question. Again, what does the agent do? It invokes Luna orchestrator. Luna pulls current salary benchmark calculates employer side payroll taxes by state. It includes local Pennsylvania detail, applies the benefit load and returns are fully loaded cost per head within seconds, no spreadsheet, no call to finance, no waiting, no separate login. The pattern is the same in both of those cases. AI handles the interface, Luna handles the orchestration, Asure handles the execution. The more AI copilot across our client organizations as they on take it, the more requests will come through Asure. That's not a threat. It's really a distribution advantage for us.

Can I go to the next slide, please. In there, what I would like to do is I'm going to ask the operator to run our payroll demo. What you're about to see is a payroll manager running a complete payroll cycle within Luna. You're going to see proactive notification. You're going to see live data retrieval, downloading. You're going to see anomaly detection, which is key that is actually going to bring up any exception prior to processing the payroll. And then you're going to get confirmation that the payroll has processed.

Operator, would you please run the payroll?

Yes. And Yasmine, just before we roll it, we're going to show you this example within our Asure Central application that we've rolled out in October. And if you really think about this demonstration and the demonstration will take about 3 minutes or so. But this is about -- it can be a full day of work. It can be a half day of work because what happens is there's a lot of coordination overtime, getting information from the time clock. Maybe somebody didn't get paid. Were they on vacation? Were they not? Maybe the person has to ask a bunch of questions. So really pay attention to the workflow and how easy it is in when AI meets software as opposed to maybe where you have to pay people 30 days ago. So with that, operator, turn on the demonstration.

Thanks, Pat.

Operator, can you play the sound with the video?

[Presentation]

Pat?

Yes.

Okay. I think now that we concluded the payroll, right, demonstration, we do have one more around tax. One of the most important things in the compliance engine when it comes to tax is really knowing the rules. And I want us to see that video first, but would you like to say a couple of things, Pat, before we get started?

Yes, about a 2-minute demonstration. And if you think about the conversation, you're going to see Luna kind of look at, is it a tax ID or is it a tax jurisdiction. If you see when Yasmine talked about kind of setting up Pennsylvania in different states, you'll see some evidence of this. And then some of you have been asking questions around scale and kind of does it impact the model? I think by this demonstration, you can see it sure impacts our model and our quality as well as our cost to serve. So with that, operator, can you turn on to tax demonstration.

[Presentation]

Okay. Great. If we can go to the next slide? So the structural advantages of Asure's execution platform. We talked a little bit about it, but really, if we go to the next slide, the big advantage here -- next slide.

I'm sorry. There you go.

Yes. And Yasmine, you hit it, and I'll let you talk to it. But really, if you think about our execution infrastructure, really, whether it's regulatory, money transmitter licensing, whether it's the banking, NACHA payments, et cetera, security, compliance, IRS, state agencies, local agencies. And then on the bottom here, we really talk about all the kind of things that were happening. And I know Yasmine and I both had as we go through the money transmitter licenses, we had to get fingerprinted, et cetera. I don't know if [indiscernible] has a fingerprint yet, but we'll answer that question here at some point. But Yasmine, I think this is the real advantage here.

Absolutely, Pat. You said it as well. These are the infrastructure layers that we talk about. Each one of them is defensible and all of them reinforce each other. They come together as an infrastructure. The regulatory infrastructure where the money transmitter licensing, those state regularity oversight, custodial fine handling requirement, these are legal relationships. Keep in mind, we said it before with regulators. So they actually acquire years of history and the security and the compliance, what you need to go through the audit with SOC controls and certification, data protection controls, audit, compliance framework, annual audit really against defined standards. There are standards you have to follow. Operational maturity over time.

This is not an overnight thing that you do. Banking and payment, we talked about the ACH network participation. There are some NACHA risk controls. There are the KYCs, all of these have to be in place when you are actually in an HCM system where you're dealing with people's PII, tax filing infrastructure, the IRS bulk filer status, you said it. You got to get fingerprinted. There is a huge process in there. There are power of attorneys that are actually where you hold them with the customers that you are representing. There are agency notices that come through and that needs to be reconciled. Years of operational history with actual tax authorities. So each of these reinforce each other. AI without this infrastructure -- sorry, go ahead.

No, no. Yes, I'm sorry, Yas, go ahead.

I was just going to say the AI without this infrastructure in place really does not work. It becomes a liability. So the hard part is not the AI piece, it's exactly what's on this slide, those 4 pillars. Go ahead, Pat.

And if you think about on the next slide, if you think about why this infrastructure is in place, it's really all the data gravity. And what it is, if you look at the blue on this one, whether you have dental plans or health insurance or 401(k)s, local taxes, wages, social security numbers, that's why it's really legislated like it is. And that data gravity is ultimately a compounding effect when you can use software, with security, with AI to really drive transactions. And really, this infrastructure, combined with the execution infrastructure and the data, this is a competitive advantage in what we can do for our customers, what we can do is really a game changer and AI helps enable this to be really a multiple of our customers.

If I go to the next slide. And the next slide -- I'm sorry, on the operating leverage, I'm going to let Yasmine talk about this because really the effect of this with the data, the legislation, et cetera, now let's show and let's talk about ways that AI embedded in our software can really help us.

Yes, absolutely, Pat. Thank you. I think if you think Luna becomes a cost reduction engine, it is one. It's that payroll query deflection. We saw it also guys in the demo. Fewer support tickets per cycle, guided compliance question and answers reduces the processor time, where today, a customer support representative have to answer those questions. The entry of a payroll keying it in, that's taken it from minutes and probably 20 to 30 minutes effort into a 2-minute and less. The automated amendment suggestion, they cut manual review, onboarding acceleration, when you're onboarding customers via conversational workflow that we have in our client onboarding module with Luna. Every payroll query that Luna resolve is a support ticket that doesn't need a human agent to handle it. Same revenue, lower delivery cost.

In the near term, Luna becomes the revenue retention tool. It's that proactive compliance alert that increases the stickiness. You saw it with the EIM and the rate where a user may actually enter incorrect data and Luna will add that prevention. It alerts the user of a possibility of an error. That creates stickiness. That AI-powered anomaly detection before a payroll run reduces errors that in case most of the time turns happen because of errors. And Luna itself becomes that switching cost. A client who switches platform is no longer just losing the software, they lose the AI that already learned their business and their payroll. In the long term, Luna is that competitive differentiator, AI that only works because of a source data depth. We compete on AI intelligence, not just the features.

The platform data mode compounds with every single payroll run, AI capabilities justify that premium tier pricing. So Luna, not a feature. It's the mechanism by which our margin profile improve over time without proportionally cost growth. Pat?

Yes. And if you think about it, the market expansion, given that it's not only tools, it's not only enablement, it's not only workflow, it's people, our market expands the more people we can bring awareness to or bring AI to awareness to our company and our AI-generated marketing, et cetera, can help us. It's voice activated in addition to software. So that multimedia approach is going to bring more adoption and more ask into our environment. And then from a revenue retention and sentiment analysis, we get so much learning that Yasmine says compounds and what we're finding is we can get ahead of issues before they become issues. So ultimately, that's a competitive separator for us. And it really, really is a game changer for the model.

Next slide. So AI embedded across software. I talked about tools, enablement, automation and cost out at the client level. And remember, end-to-end process is not only at the 4 walls of Asure, but it's at the customer wall all the way and back. So when you think about the people and you think about tools, you might need less L&D, you might need less HR. You can really provide and use Asure Central and our software or you could say, you know what, I'd rather have you use AI Asure, you got our back office, and we can grow our business. That's a much different message. It's a bigger message ultimately by embedding both. And then I know, Yas, you had a couple of examples here on product and revenue and operational efficiency.

Absolutely, Pat. For me, more on the R&D and the product itself, right? Today, approximately 70% of any new code is generated with AI tool as a co assistant as a copilot. Our UX prototyping where you used to have to spend probably days coming up with a prototype just to share the idea of the vision of a solution. Now it's done in minutes, where we are not only able to show the prototype, we're allowing them to walk through the functionality before we write the line of code, getting alignment, legacy code translated and modernized by AI. We're only shipping faster with the same team. We are running faster through our road map because of the use of AI. And I think on the revenue itself, productivity, right, Pat, if you want to take on what our team is doing today as well.

Yes. And just in the interest of time, I'll let you read or let the investors read, but really some nice changes that we've highlighted on the earnings call. On the next slide. So when you look at kind of some of those operating leverage and AI adoption, what it really does for us, and Yasmine, I think you talked about the 3 items initially that you wanted to bring home. But maybe, Yas, if you could do that, and then I'll wrap it up for questions.

Yes. Sure, Pat. I think the most important thing that we wanted to -- those 3 items, AI affects your business model differently, it does. Not all software are equally exposed, absolutely. This is your second, whether it's a labor hour or it's an execution platform. The market has been really pricing AI risk broadly across multiple software. So what matters is the execution layer is what is important and Asure is in there. We are not -- Sorry, go ahead, Matt.

I'm sorry, Yas. There's a little bit of a delay, so I apologize. Go ahead.

No, I was just going to talk a little bit more about the execution platform, but the essence of time, I'll let you do it. I'll let you wrap this up.

So with that, all across Asure, we create structural operating leverage, and we talked about that. What that means for you as an investor over time is if you look to the next slide, what you have is the next slide, Patrick, is over time here, what we've done a nice job is building a business. And then where we build the business, we're at $200 million, roughly 30% margin. We see opportunities to accelerate growth. We see opportunities to have fixed cost absorption. We also see opportunities we can grow revenue faster than cost with really using AI embedded with software in the sense of where we can look at tools, we can look at enablement, we look at workflow. Ultimately, we look at people and where we can grow faster than revenue. And again, by looking at the end-to-end process, not only in our 4 walls, but also within the customer, that opens up huge scale advantages, not only in payroll, but if you think about our business, whether it's insurance, 401(k), money movement, tax filing, all the agencies, now you have an infrastructure that can be accelerated with AI as opposed to at risk.

If we go to the next slide. So we talked about execution infrastructure. Yas talked about it, why it's a strategic advantage. We feel strongly that it is. We see where we're positioned. We want to make sure as a discerning investor, you look at the opportunity of all software and you look at our business in a different way or in a way that really is an acceleration here. And we're excited to offer that point of view today.

With that, Patrick, if we have questions, Yasmine and I would be happy to answer them.

Okay. Great, Pat. Just getting some questions here on the web, and we'll check for any people that are submitting questions online. But first off, just one question is, what would it actually take for an AI company to become an IRS bulk filer and start executing payroll tax filings directly? Are the barriers primarily regulatory, operational or technical?

All 3. So Yasmine, I don't know if you want to add any color there.

No, it's absolutely. It's what you said. It's all of the above. It requires all of it, right? It's -- you've got to become a reporting agent. There is the forms that you have to fill in and there is, of course, the fingerprinting. There is a lot that needs to be in place. And plus what comes with it is really the knowledge and the authority that you have gained throughout years of experience with the IRS. It's not something that you can -- any company that just can turn on and become an IRS bulk filer.

And Patrick, I always go to the example. I go to the mailbox every day, and I have 100,000 companies that we process payroll and taxes for. And I'm always disappointed because I never get a letter from the IRS saying, "Hey, Pat, great job on those taxes." But if there's a problem, I certainly get a letter, and we work through with our clients to make sure those get resolved. And it's a negative satisfier business where perfection is expected. But if you have risk and you have a problem, it takes a little bit of know-how to work through and getting those problems solved. And that's really the key. And we think we can use AI to our advantage, and we don't think it will replace it anytime soon. Next question.

Let's see here. Where are you already seeing tangible reductions in cost to serve from AI, support operations, compliance workflows, onboarding or somewhere else?

Yes. Honestly, all of the above. And I think I thought Yasmine and Luna did a great job and Sarah on the demo that point out the payroll, the tax filing. If you think about the workflow within your own company, how quickly we went through that demonstration and how streamlined those questions got answered and the process got run. If you think about where we are as a growing business, I think you're going to see us grow more revenue faster than we're adding people, and that's by layering in those opportunities. And then we're expanding our marketplace because we're taking on more. So really excited about that opportunity, but those are the items that you've seen.

Okay. Operator, can we just check to see if we have any questions from folks that may have dialed in on the phone here?

Yes, I don't see any questions.

Okay. So we'll just continue with ones that are coming in over the web here. Next question is the Luna value proposition is very clear, but can you please talk about how you're going about monetizing the product and driving adoption?

Yas, do you want to talk about that? Do you want me to?

You could go ahead, and I'll add to it.

Yes. No, I think, first of all, monetizing adoption, we can do a lot more. So if you think about all the data that we have, what's interesting is we bring Asure Central together, we're talking about attach rates. We're talking about revenue per unit because now when we sit on this kind of data and we have the tools, the workflow, ultimately now when somebody has 50 employees and they need worksite reporting, we can automatically enroll that client. All they have to do is check Yas in worksite reporting. So that comes with a fee. It also is regulatory. 20 employees, COBRA starts. It comes with a fee. It's regulatory, and we can ask them proactively if they want us to handle it or themselves. If you think about the bigger kind of question as well, we can go to a small business and say, listen, we have all the products and services that you can use with software. But if you want Asure to help you and do it all for you or with you, we can do that. That opens up a big marketplace.

And then I don't know lately, if you've seen all the work we've done with tax filing, money movement, treasury management, we have an ability to continue to grow to help customers. AsurePay is a prime example where we now have earned wage access. in addition to a default kind of opportunity to get people paid right away and get a little bit of interest on their bank account. So a number of different ways. We're going to continue to talk through all those items on the quarterly call.

Okay, Pat. It looks like we're just about out of time. I don't see any other questions popping in at the second. So I don't know if you want to take a minute and kind of wrap things up.

Yes, absolutely. And first of all, I want to thank Yasmine Rodriguez. I tell you, she's a Chief Technology Officer, second to none. She's done a great job here building the foundation with AI and Asure. She and I talked about this with our management team probably a little over 2 years ago and really excited about it. So what you're seeing, sometimes the best laid plans happen either overnight or a couple of years into making. And in this case, it was a couple of years making. We believe we're at a really good inflection point within the business. We hope you came away and you learned something today or you understand a little bit more about Asure. And we have quarterly calls. We also are available through Investor Relations. Patrick, as always makes himself available. And as if you have questions or comments, please, please reach out to us. We're excited about the opportunity and really want to thank you for taking and investing some time today.

Yes. Thank you all.

Thank you all. Operator, I think we can log off now. Thank you.

Thank you.

Good afternoon, and welcome to Asure's Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining us for today's call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and VP of Investor Relations, Patrick McKillop. Following their prepared remarks, there will be a question-and-answer session for the analysts and investors.

I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Fourth Quarter and Full Year 2025 Earnings Results Call. Following the close of the market, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find the investor presentation.

During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release.

Today's call will also contain forward-looking statements that refer to future events and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations.

I will hand the call over to Pat in a moment, but I just wanted to take a moment to remind people of our upcoming Investor Relations activities. In March, we will attend the raw conference in Dana Point, California on March 23 and 24. We are also planning for some non-deal roadshows during March and April. On May 13, we are attending the 21st Annual Needham TMT Conference in New York. And on May 14, the Julian Loke one Conference also in New York. On May 28, we will attend the Craig-Hallum Conference in Minneapolis. Investor outreach is very important to Asure, and I would like to thank all of those that assist us in our efforts to connect with investors.

Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website.

With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thank you, Patrick, and welcome, everyone, to Asure Software's Fourth Quarter and Full Year 2025 Earnings Results Call. I am joined on this call by our CFO, John Pence, and we will provide a business update for our fourth quarter and full year 2025 results as well as our outlook for the remainder of 2026. Following our remarks, we'll be available to answer your questions.

We're excited to report that our full year revenues were very strong, coming in at $140.5 million, an increase of 17% versus the prior year. Contributors to our success in 2025 were broad-based with many product lines showing growth such as payroll, benefits, recruiting, time and attendance as well as our payroll tax management businesses. Organic growth in the fourth quarter was 10%, which improved sequentially from the third quarter of 4% and for the full year of 2025, it was 5%.

We believe that we are at an inflection point in the business following the launch of Asure Central last October with more than 2/3 of our clients upgrading to the new portal. Asure Central offers clients a new experience with a brand-new look and feel improves their workflow as well as enabling us to amplify items such as event-driven marketing efforts. Our cross-selling or attach rates with more than 100,000 clients have improved throughout last year, the number of clients buying multiple products from us in our payroll business has grown by 10% in the fourth quarter over the prior year. We believe that the Asure Central portal will continue to help drive further improvements and attach rates and continued acceleration of organic growth.

Now let me take a moment to address one of the most important topics shaping today's business landscape, AI. First off, we have new slides in our investor presentation, which highlight our approach to AI, and I encourage you to review them. Also, we're hosting an AI fireside chat with myself and our Chief Technology Officer, Yasmin Rodriguez on March 11 at 3:30 Central Time 4:30 Eastern Time, and we look forward to your participation in this exciting event, where we'll discuss Asure's current perspective on artificial intelligence.

Much of the public conversation focuses on fears of large-scale labor disruption, but our exposure to that risk is far lower than many might assume. It is worthwhile to mention that our revenue model is not a typical SaaS seat-based model and is instead a function of total employee count and payroll runs benefit and retirement plan uptake and reoccurring services. Furthermore, our clients are primarily blue, gray and white collar Main Street businesses organizations rooted in essential work that is far more resilient to automation. At the same time, while AI is being deployed across many areas of the economy, we believe that highly sensitive functions like payroll, tax filing remain uniquely protected. These processes involve complex regulations, confidential data and real-time compliance obligations, areas where the margin for air is effectively zero.

Payroll is already one of the most mission-critical and heavily regulated responsibilities inside any business. When you're navigating local tax rules, shifting labor laws and ongoing compliance requirements, accuracy and accountability aren't optional especially when you're moving approximately $20 billion annually like Asure does. That's why we see AI, not as a replacement for oversight, but it's a powerful tool to enhance precision, efficiency and decision-making. We have adopted AI assertively, but thoughtfully in ways that strengthen our platform, while humans remain in the lead to ensure trust and compliance.

During 2024, we built a secure model agnostic AI layer directly into our payroll and tax system of record in early 2025, we launched Luna, the industry's first true AI agent for payroll and HR. Unlike traditional generative chatbots, Luna understands Asure's full product suite and can act not just provide suggestions. Luna detects issues, resolve them, logs outcomes and supports both employees through self-service and business owners and administrators across their workflows.

Today, our Luna AI could perform over 50 actions, which are live, audible and permission control. In the first 90 days of Asure Central's general availability, conversations with Luna resulted in 80,000-plus messages and avoided thousands of support center interactions, which offset the workload of about 3 client service reps and clearly showed how AI is driving our operational efficiency.

Internally, we have been using AI to help increased product development, drive revenue productivity and further operational efficiencies. In terms of product, we can build faster with AI-assisted engineering and quality assurance resulting in faster release cycles. Within revenue productivity, our SCR agent collects and enriches buyer insights in 3 minutes versus a typical 1-hour discovery and our list building agent crawls job boards for new HR postings creating 1,000-plus leads. Operationally, our agent helps with sentiment analysis during phone calls with clients and analyzes support tickets to prioritize products and process improvement. We're continuing to invest in tomorrow's AI capabilities for both our client product experience and our internal processes to enable our entire organization to work more efficiently.

Now moving from AI. Recently, in our sales kickoff in Austin, we introduced a new offering called AsureWorks, which we are launching internally in a limited scope. AsureWorks is our administrative services outsourcing or ASO model. Rather than simply providing payroll and HR software, we take responsibility for running key administrative processes on behalf of the client, supported by our Luna AI and our Asure Central platform, we're seeing a clear shift in the market. Small and midsize businesses faced increasingly regulatory complexity and leaner staffing models and they no longer have the bandwidth to manage payroll and HR compliance internally.

With AsureWorks clients can rely on Asure's expertise and systems to execute that work, helping reduce compliance risk and allowing them to focus on their core business. Strategically, this expands our share of wallet and deepens client relationships. Clients who adopt managed payroll and compliance services typically represent 2 to 3x the revenue of a payroll-only client with further upside as additional models are managed. This is not a PEO model, and we're not taking on co-employment risk for businesses that feel constrained by the cost or the rigidity of a traditional PEO, AsureWorks offers a flexible alternative with operational support and greater control.

We will scale AsureWorks thoughtfully as we build sales, implementation and support capacity based on our early results. Our sales efforts for 2025 resulted in a 35% increase in new bookings. Additionally, we continue to have a very healthy contracted backlog of approximately $100 million which continues to grow and was up 18% since our third quarter of 2025. We expect to convert approximately 41% of this backlog in the next 12 months. And this, combined with our historic retention rates, gives us a lot of confidence in our 2026 guidance.

Now I would like to hand it off to John to discuss our financial results in more detail as well as our guidance. John?

Thanks, Pat. As Patrick mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. The reconciliations themselves are also included in our most recent investor presentation posted in the Investor Relations section of our website at investor.asuresoftware.com.

Now on to the fourth quarter and 25 results. Fourth quarter total revenues were $39.3 million, increasing by 28%, compared to the prior year period, while recurring revenue grew by 18% to $33.7 million. For the full year 2025, total revenue grew by 17% to $140.5 million, and recurring revenue grew by 11% to $127.3 million for the full year. Our professional services and hardware revenue was $5.6 million for the fourth quarter compared to $2.3 million in the fourth quarter of last year.

For the full year of 2025, our professional services and hardware revenue was $13.3 million compared to $5.3 million in the prior year. Our organic growth rate for the fourth quarter improved sequentially to 10% compared to 4% in the third quarter. Organic growth for the full year of 2025 was 5%.

Revenue was down slightly versus prior year due to previous rate reductions made to the federal funds rate partially offset by an increase in client funds.

Our outlook for interest rates, we have modeled two more rate cuts during 2026. We believe that as our client fund balances increase, this will help offset some of these rate cuts. Gross profit for the fourth quarter was $27.2 million versus $21 million in the fourth quarter of the prior year. Gross margins for the full year were 68% compared to 69% in the prior year.

Non-GAAP gross margins for the fourth quarter were 75% compared to 73% in the prior year. Non-GAAP gross margins for the full year were 73% versus 74% in the prior year. Our overall gross margins for the year were down slightly due to the revenue mix as we experienced an increase in lower-margin nonrecurring sales, primarily driven by the recent Lathem acquisition. However, we are forecasting improvement in gross margins over time as we integrate the Lathem acquisition and transition the Lathem hardware sales into a Hardware-as-a-Service model over the coming years. We believe further scale in our business will also help the margins in the future.

Net income for the fourth quarter was $0.8 million versus a net loss of $3.2 million during the prior year. Net loss for the full year was $13.1 million versus a net loss of $11.8 million in the prior year. EBITDA for the fourth quarter was $8.7 million, up from $3.4 million in the prior year. EBITDA for the full year was $18.2 million versus $11.4 million in the prior year.

Adjusted EBITDA for the fourth quarter increased 82% to $11.4 million from $6.2 million in the prior year, and our adjusted EBITDA margin was 29%, an increase of 900 basis points compared to the 20% we realized in the prior year. Adjusted EBITDA for the full year increased 42% to $32 million versus $22.5 million in the prior year. Adjusted EBITDA margin was 23%, up 400 basis points from 19% a year ago.

Turning now to the balance sheet. We ended the year with cash and cash equivalents of $25.2 million, and we have debt of $67.6 million as of December 31, 2025.

Now on the guidance. We have consistently emphasized on prior earnings calls, that we are continuing to invest in our technology and product offerings to support sustained revenue growth and improved profitability. At the same time, we expect our cost structure, including our CapEx and capitalized R&D to remain relatively stable on a dollar basis throughout the remainder of 2026. Our first quarter 2026 and full year 2026 guidance is based on our expectation of continued positive momentum in our business.

Now in terms of guidance for the first quarter of 2026, we are expecting the first quarter revenues to be in the range of $41 million to $43 million and adjusted EBITDA for the first quarter is expected to be between $10 million and $11 million. Today, we are also updating our 2026 revenue which we believe will be between $159 million and $162 million, with adjusted EBITDA margins of between 23% and 25%.

In conclusion, we are excited about 2026 and look forward to 2026 being a major inflection point for Asure's business, where we expect to deliver double-digit growth and GAAP profitability.

With that, I will turn the call back to Pat for closing remarks.

Thanks, John. We are pleased to have delivered strong results for the full year 2025. The integration of the point solutions we've acquired plus the investments we've made in AI and improving our technology are having an impact on our growth trajectory, and we expect that we will continue to deliver improved growth and profitability going forward. Our plan for 2026 includes increased investment in our sales and marketing efforts to continue to drive the improving growth we're experiencing. We have a target of reaching 150 sales reps in 2026 and believe that with our new technology such as Asure Central, we can experience improved productivity from the sales force. We believe our margins continue to expand through natural scaling benefits and the growth of higher-margin automated revenue streams, such as benefits, 401(k). These factors combined with the potential for AI to reduce the cost of support and onboarding plus our forecast of lower legacy technology spend with all support higher margins in the future.

We are well on our way to our medium-term plan of $180 million to $200 million in revenues, where we believe we can sustain and achieve adjusted EBITDA margins of 30% plus, which we showed in an early preview of fourth quarter 2025.

In summary, 2025 was a great year for Asure with lots of accomplishments. We'll continue to grow the business, roll out new technology and seek out value-creating opportunities, all while expecting to deliver GAAP profitability on a more consistent basis in the future. We remain excited for the remainder of 2026 and we continue to work diligently on creating increased value for our shareholders and our stakeholders. We'll continue to provide innovative human capital management solutions that help businesses thrive, human capital management providers grow their base and large enterprises streamlined tax compliance.

Thank you for listening to our prepared remarks. So with that, I will send the call back to the operator for the question-and-answer session. Operator?

[Operator Instructions] And our first question comes from the line of Eric Martinuzzi with Lake Street Capital.

Congrats on the terrific results for Q4 and on the 2026 outlook. I think I've got this right. The -- you bumped up the low end of revenue in the 2026 guidance, is that correct?

Yes, we took it up $1 million.

Okay. And just curious to know, was anything in particular that caused that because the Q1 guide is relatively kind of where we and the rest of -- The Street were, but just wondering where the comp -- incremental comp came from?

We closed an acquisition a couple of weeks ago. So we wanted to give a little bit more upside as a result of that.

Got you. Okay. And then for the attach rates, obviously, this is a key to the growth story and that 10% organic number was really kind of eye-opening. You talked about the -- an increase of about 10% in the number of customers that are buying multiple products. And I was just curious to know if you have -- do you have a target, what you're shooting for in 2026 for that, I guess, however you could comment on the multiproduct, the growth rate for the...

Yes, Eric, thanks for the question. It's a big focus for us. We don't have a specific target. We just know that, for example, the Asure Central was rolled out in October. We have about 16,000 direct clients. As you know, we acquired Latham in July, they go under the Asure umbrella here in the early second quarter or April time frame. And for us, we have some internal goals of going from, let's say, 2 products to 4 products with every sale. Now how fast we get there and how long we'll continue to measure ourselves and report. We think there's an opportunity to go up and to the right. But as far as kind of measuring each quarter, we have a lot of moving parts quite yet that we're not going to give specific numbers, but I assure you internally and externally, these are key metrics that we'll report on. And as we get in a rhythm right now where we have a number of different kind of moving parts, we'll start to then declare more in advance specific targets. But we're probably not quite there yet. We do want to measure it and show you the progress along the way.

Yes. And I would say, Eric, if you get a chance, I know it's we just put it out there 30 minutes or so ago, but we've added a couple of slides to the investor deck to you. So take a look at those if you get a chance, let's talk about it.

And our next question comes from the line of Richard Baldry with ROTH Capital Partners.

So post the Lathem acquisition, the nonrecurring revenue stepped up pretty meaningfully. So when we look out to next year, can you walk us through how to think about the cadence on that line? Whether there's seasonality types of embedded growth we can do there? Or as it moves to more of an as-a-service model, will we see that line come down maybe with the recurring side sort of accelerating in its place?

Yes. I think, Rich, I would expect next year for 2026 to be kind of in that low 90s of recurring revenue. I think it's pretty even throughout the year. The other thing that's also rolling up into that line is some professional services and implementation work with some of the large tax deals, which is a little bit more sporadic and not as predictable. But I would say a good way to model or think about it is low 90s next year in terms of recurring. And then I think we could -- we're hoping to have that kind of half model in by the back half of the year. And maybe as we get into '27, we get to kind of in the 95% recurring revenue again, but it's probably a little too early to call that one. But that's ultimately what we're trying to do is move that hardware into recurring model. But you're right, so I'm just not sure we're going to get there in '26.

Great. Then your internal adjusted EBITDA stepped up to meaningful new record highs now. At the same time as valuations have come down pretty meaningfully for the sector. Sort of curious what your perception is of the private market for acquisitions, whether those valuation expectations have also come down to make that sort of more of a push in 2026? Or do you feel like it should be sort of business as usual and that that's not a major catalyst?

Yes. I think, Rich, we'll be opportunistic around some of those opportunities. The private company sometimes trails the public company in kind of a reset, et cetera. And then we think and believe and we put a lot of more meat in the investor deck from around AI and valuations, especially in this business because we believe we're a system of record business. We work with the IRS, the banks. We interface with time clocks and hardware. So there's a number of different areas that make this sticky. And unlike some of the large enterprise, we're on a consumption-based model really anyway, and it's underserved in a marketplace, so in small business. So we believe that valuations here in a public company as people really analyze this space, we think they'll go up. We're going to tell that story and be loud about it because we've seen, quite frankly, a lot of opportunity. And then on the private side, we'll be opportunistic if those private valuations come down. I will say I've gotten a couple of calls here over the last couple of weeks and a lot of people are trying to figure out kind of where they see. And we feel like we're a little bit of the one-eyed guy in the blind man's world right now where we think we have a really good path. And we telegraphed early on that $180 million to $200 million would be 30%. You'll see our longer-term model has more aspiration than that 30%. And we believe we're in the market segments that really can drive it. So we think AI is an accelerator, not a deterrent. We'll be very focused on valuations continuing. We're getting at a fun part of the business where scale really matters, and we think we can make improvement here in bunches, and we're going to execute on that plan.

And I'll ask a third, unfortunately. But -- we agree that for a system of record class companies, this should be an accelerator at the top line. We also think that it can increase the long-term profitability because there are so many places that internally can cut costs for software-centric, tech-centric companies. Can you maybe talk a little bit about how much internally? You talked somewhat about the customer service side helping take the equivalent of 3 reps worth of work off, which is great. How far -- how deep do you think that can roll through the internal cost savings side?

I think we're in the early days from my perspective, Rich. I mean we think there's a lot of opportunity to make a better experience for the customer and obviously make it -- and take some cost out on the cost of serve side. But I think early, early days is my perspective. But Pat?

Yes. One of the things, Rich, I agree with you. We added kind of a longer-term outlook slide on where we think this can go. And we mentioned the 180 to 200 at 30%. We ultimately think we can achieve about 50% margins. We gave the example of not only the kind of Luna with the 80,000 transactions and the 3 customer service reps but also the retention opportunity with event-driven marketing as we bring Asure Central together when a small business goes, let's say, from 20 employees, they now have COBRA eligibility of services. We can be proactive and lean in on that number. So that's a revenue generator. At 50 employees, it's work site reporting. It's certain kind of savings account in 401(k), we can highlight opportunities for that at different monetary amount. So we're just beginning, but we see opportunities on the revenue side, on the cost side. We see opportunity long term where AI can bring more traffic to us. Our marketing people are beyond excited where they see opportunity to continue to drive people to our platform.

And then also ease of use, we're seeing people use AI on voice and then ultimately using that voice to make it easier to get in payroll hours. We also see the opportunity with AsureWorks where we'll provide the software for a company to do it all, but if they want us to do it because we have the expertise, we can use AI internally to be more efficient. So I think this thing really opens up the model, and that's why we're going to have a separate call. March 11, Yasmine Rodriguez and I, our CTO, because we're just getting started. So I'm really excited about the opportunities this is going to unleash and we want to kind of educate, understand and really make sure people understand the opportunities here because we're at an opportunity potentially that we've been playing for, for a long time internally. But then externally, this is a catalyst that's really going to help us.

And our next question comes from the line of Jeff Van Rhee with Craig-Hallum Capital Group.

Nice to see that organic growth picking up there guys, so congrats on that. A few quick housekeeping. Pat, you mentioned the target reps. Just where are we now in terms of rep count? And is there anything going on in terms of sales, sales incentives that's changing the focus more or less towards the existing base versus new customers?

We have had -- we've been fortunate where we've had almost 65% to 70% new logos as part of our sales. Clearly, there is opportunity with the Asure Central to attach more products and services that will help on a volume perspective, but we also internally took away some sales friction. So we have opportunity for our salespeople to drive more attach rate, more products right at the point of sale. In some cases, we didn't want to penalize them for bringing in, let's say, in 401(k), a licensed person. So we are focusing on getting those 4 or more products in their bag, which will drive up commissions, that's important.

What that also will do is over time, where I'd like to be is somewhere around 35% new logos, 65% the base. I think we have that kind of opportunity. And then with the AsureWorks, I want to have the opportunity to really include all our products from a software perspective. But then if the client wants us to actually do the work and have the expertise because compliance, whether it's the IRS, the local agencies, HR, all that is pretty complex. We can provide that expertise with them. We see a huge opportunity to drive cross-sell in that area.

And then as far as where we are today, I think we're somewhere around 118 reps or so in that area. We have a plan to get to 150 and that 150 throughout the year. We're investing enablement. We're investing in training. And really, we brought a leader under El Goldstein that's really sharp. I've had a history with him, he recently came from deal, Steve Cohen, I think he's going to do a great job with us in really getting the basic you've seen this movie before of what we're trying to accomplish. And I think he's going to make a big difference here.

Very helpful. And John, on the guide, what's the implicit free cash flow expectation for the 2026 guide? And one other, if I could, on Lathem, being acquired last year. Just refresh me what the expectation was there in terms of revenues and then ultimately what it delivered?

Yes. It's also in the K disclosed. I think we did -- on Wall not answer that last question first think in the quarter, it's about $4.5 million of revenue contribution from the acquisition of which about $2.5 million was recurring and the other $2 million was hardware. So it's actually performing exactly the way we had hoped it performed. So we're really happy with that acquisition. We're actually getting a higher cash contribution than we'd actually modeled. We expected that to come in later. So it's been a pleasant in terms of that acquisition.

In terms of free cash flow. So again, the way I think about it, Jeff, is I take the adjusted EBITDA number. So at the midpoint, I think we're at 24x 160, right? So what's that math? To pick -- that puts you at roughly $38 million. And then the way I think about it is I deduct software cap is a major one. We're going to be roughly software cap again next year is going to be in the $15 million to $16 million range. That's what we've modeled. So that if you take that deduction, that brings you to if I'm right, you're at almost [indiscernible] Yes, I think with the interest, right? So about $6 million in interest, so we're going to be in that range kind of mid-teens when I think unlevered free cash flow.

Okay. Got it. Very helpful. And then, Pat, just back to you just very briefly on -- just talk for a second on Asure Central. You blue-passed but -- what are you -- I mean from a user experience, you got some pretty rapid adoption there. Like what does this look like? I haven't seen it side by side. What's the difference in the impression to a user and how much easier is it to adopt and start taking additional services?

Yes. I think -- and one of the things we'll have a demo on this March 11 is part of our AI conversation and where we're taking the product and service. But First of all, with Luna, it's a single pane of glass where we have a common user interface across all our products. So all the data is in one place. And for us, from a usability perspective, now you have -- whether it's payroll, benefits, your check stub, you want to change it at the employee level, your direct deposit et cetera, you have that ability to do it, and Luna will show you how to do it. So we think it's degrees of difficulty easier. It's a more modern look and then with AI and Luna, it can help do the work for you or tell you how to do it and instruct you how to do it. So the feedback has been very positive. If you think about where we've been over the last 5, 6 years, we bought point solutions. We started with Asure Identity where it knows it's Jeff Anre that's logging into the system based on our identification and multifactor authentication. Now what we're doing is putting all the products in a single pane of glass. And then more and more, you'll see a common look and feel throughout the whole product -- and from that perspective, what's interesting about that is now the whole solution combined together is really AsureWorks where you have all the products and services available. And now if you have an event, that Luna will suggest, "Hey, here's an event that you want to be compliant on. Would you want us to help you get compliance?" So we think we're just getting started in this area. Fourth quarter was a big milestone, but we'll see improvements every quarter throughout the year. So really excited about that opportunity.

Yes, makes complete sense. And thanks on the upcoming fire side, I think it's desperately. I mean every time a cloud plug-in pops, the whole sector gets destroyed. I think people need help separating winners from losers. So appreciate that event. Look forward to it.

And our next question comes from the line of Greg Gibas with Northland Securities.

Congrats on the results. Nice to see that attach rate improved. Pretty meaningfully there. I wanted to ask just about your guidance and maybe what level of organic growth is implied there? And maybe just your expected pace of acquisitions in '26.

I think -- and I'll let Pat go. I think we expect to be kind of the double-digit organic for the full year. I'm not sure we'll be 100% every quarter that way. But I do think we'll have kind of a double digit or at least that's what we're hoping for in terms of double-digit organic pace of acquisitions, as Pat mentioned, I think, in an earlier comment, we don't have anything right now that's imminent. We're always going to be opportunistic. But we've not got a lot in our wheelhouse right in the second, but that's my perspective, Pat.

Yes. And Greg, thanks. We didn't model acquisitions in. Clearly, we're going to do some with the resellers, et cetera. We don't have anything imminent, but also the world changed a little bit here over the last 3 weeks, et cetera. I will tell you, I've gotten calls and been pretty active. We'll kind of inform you each quarter how we're doing and what we're thinking at bait. Clearly, there will be some opportunities just based on our pipeline and based on the resellers, but we'll let that shake out and we'll report to you each quarter. But clearly, we'll be opportunistic in this area. And then the other thing with the attach rates going up the way we're starting to show, and I think we're really in the early innings. Some of these type of acquisitions look pretty good to us because we have the ability to cross sell and not only drive the cost line, but we can drive the revenue line.

Makes sense. And I wanted to ask just about -- you had really nice adoption of Asure Central. Can you remind us maybe what your plans are for the timing of continued adoption there? Like when maybe you expect to get to whatever full adoption levels look like? And it seems like it could be a continued accelerator of that attach rate.

Yes. I think, first of all, we have a big cohort with the Lathem acquisition, which is about 14,000. And that will be available here in early April and -- and really, if I think about it, the second quarter, we want to continue to have most of our direct clients adopted into Asure Central. So I think the first huge wave has already started to happen. But by the first half of the year, the second wave really will be there. And then from our perspective, There'll be some other stragglers or adoption into the second half of the year. But for the most part, the first half of the year will be fully adopted.

And our next question comes from the line of Vincent Colicchio with Barrington Research.

Pat, can you discuss the sales cycles and pipeline levels for your key offerings?

Yes. Pipeline prospects are really good. We are increasing our marketing spend this year. We think that there's huge opportunity AI-assisted as well as we've used some tools here that we think make a difference in the pipeline creation. We will continue to build pipe, obviously, fourth quarter, you kind of sell for January and then you're building pipe a bit. We're right where we want to be. I would tell you, though, April, May, I think you're going to see pipeline increase quite a bit. The pipeline over the last, let's say, 25 days or so has been really, really good. From a sales cycle perspective, we haven't seen any big changes. I do think some of the noise on the financial community around AI and software, we see as an accelerate short term, somebody reads, they have mines and they kind of say, okay, what's with that? But we're not typically in the space where our customer is Main Street America frontline workers, whether it's plumbers, it's people that hotel workers, et cetera, they interface with either time or POS solutions, they interface with bankers, they interface with the IRS, et cetera. They want help. And so from our perspective, when they see that need, and they know that we can help them both from a software perspective, but also a compliance perspective and then ultimately from a people perspective to provide the people to run the software. They view that as an opportunity. So I think pipeline will grow quite a bit. Right now, I'm okay with pipeline. It's about 120% where it was last year. But clearly, I want to keep focusing on doing that, and then I want to hire people and then our marketing spend will drive pipeline quite a bit. And I could see already by the programs in place by second quarter, we'll have a pretty decent pipeline of where I want to be, which is about 150% where we were last year.

And a question on the competitive landscape. Anything to call out in terms of changes since last quarter?

No, not really. I think people are -- from my perspective, I think it's been what I would say, and it ties a little bit to our industry is I think early on, people were saying, well, you can embed the calculation and that is good enough. For Main Street America, that's not good enough because the penalties are tough, the gravity of the data where you have 7 years of history and you have compliance issues, whether it's HR, payroll, you have different government agencies, different banking agencies. Those -- that complexity doesn't go away in an embedded solution. So from our perspective, what we're seeing is kind of, hey, how do you provide the expertise and how do you provide the people, the workflow, the enablement and the technology through AI and the system of record to really accelerate your value proposition. And I think we're in a position that we have that. And so we're going to pound our chest on that and keep getting really clear on our value proposition. I do think that's resonating with clients, and we think we're in a really good position here to have an excellent 2026.

[Operator Instructions]

Well, it looks like there's no more questions. And first of all, thank you for coming to the conference call. March 11, love to see you. We're going to talk about AI and a demo of our product and how we're using. Luna is being helpful to customers and employees as well as our solutioning. When I think back -- I've been in this industry a long time, and when I see technology shifts, whether it's to windows, Windows to client server, client server to Internet, Internet to mobile. Right now, the technology shift that we're going is really exciting. And when you think about opportunities here, we think we have a great moat available. We also think we can use AI in a way that really will accelerate growth. And it's in these technology shifts that people really can thrive. We think we're at a really good opportunity here. And we hope you agree with us and come on March 11 because we think we have a story that's unique to us in a world that's ever changing and really excited about the opportunity.

Really appreciate your time. Thank you.

Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation, and you may disconnect your lines at this time, and have a wonderful day.

Good afternoon, and welcome to Asure's Third Quarter 2025 Earnings Conference Call. Joining us today's call are Chairman and CEO, Pat Goepel; Chief Financial Officer, John Pence; and Vice President of Investor Relations, Patrick McKillop. Following their prepared remarks, there will be a question-and-answer session for the analysts and the investors.

I would now like to turn the call over to Patrick McKillop for introductory remarks. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining us for Asure's Third Quarter 2025 Earnings Results Call. Following the close of the markets, we released our financial results. The earnings release is available on the SEC's website and our Investor Relations website at investor.asuresoftware.com, where you can also find the investor presentation.

During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non-GAAP measures to their most comparable GAAP measures can be found in our earnings release. Today's call will also contain forward-looking statements that refer to future events and as such, involve some risks. We use words such as expects, believes and may to indicate forward-looking statements, and we encourage you to review our filings with the SEC for additional information on factors that could cause actual results to differ materially from our current expectations.

I will hand the call over to Pat in a moment, but I just wanted to take a moment to remind people of our upcoming Investor Relations activities. During the month of November, we will be attending the following conferences. On November 18, the Craig-Hallum Alpha Select Conference in New York; on November 19, the ROTH Technology Conference in New York, and the Stephens Conference in Nashville. On November 20, we will attend the Needham Technology Conference in New York. On December 16, we will participate in the Northland Growth Conference, which is being held virtually. We also expect to schedule some additional non-deal roadshows. Investor outreach is very important to Asure, and I would like to thank all of those that assist us in our efforts to connect with investors.

Finally, I would like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website.

With that, I would now like to turn the call over to Pat Goepel, Chairman and CEO. Pat?

Thank you, Patrick, and welcome, everyone, to Asure Software's Third Quarter 2025 Earnings Results Call. I am joined on this call by our CFO, John Pence, and we will provide a business update for our third quarter 2025 results as well as our outlook for the remainder of 2025 plus our initial guidance for 2026. Following our remarks, we'll be available to answer your questions.

We're pleased to report that our third quarter revenues were very strong, coming in at $36.3 million, 24% increase versus the prior year third quarter. Our revenues reflect what we believe is an inflection point of increasing growth, which was broadly based across all our product lines such as payroll, benefits, recruiting, time and attendance as well as our payroll tax management business. Organic growth in the third quarter improved sequentially from the second quarter, and we're forecasting continued improvement in the future. Our performance this quarter is reflective of what we believe is strong demand for human capital management products from business owners of all sizes.

Our recent acquisition of Lathem Time is also performing well, and our team is continuing to work on achieving revenue and cost synergies going forward, which we believe can be obtained over the next 12 months. As a reminder, we believe the addition of Lathem will further increase cross-selling opportunities for us and quicken the pace of which we can get new payroll clients started.

As we've discussed during the past earnings calls, we have made investments in order to improve our technology as well as integrate the different point solutions we have acquired over the past few years. Today, we are excited to announce that we recently launched a new client interface, which we call Asure Central. Asure Central will offer clients a new experience with a brand-new look and feel and improve their workflow as well as enable us to amplify items such as event-driven marketing efforts. We believe that this new client experience will also further accelerate the rate at which we can drive our cross-selling or attach rates with more than our 100,000 clients going forward. Our team has just started this rollout in the past week with our direct clients, and we plan to introduce it to our indirect clients soon.

Our bookings for the third quarter declined by 41% versus a year ago due to large enterprise deals, which were booked in the third quarter of 2024. Excluding those deals from the comparison, our bookings were up 21%.

Now I would like to hand it off to John to discuss our financial results in more detail as well as our guidance. John?

Thanks, Pat. As Patrick mentioned at the beginning of this call, several of the financial figures discussed today are given on a non-GAAP or adjusted basis. You will find a description of these GAAP to non-GAAP reconciliations in the earnings release that was made available earlier today. The reconciliations themselves are also included on our most recent investor presentation posted in the Investor Relations section of our website at investor.asuresoftware.com.

Now on to the third quarter results. Third quarter total revenue was $36.3 million, increasing by 24% compared to the prior year period. Recurring revenues for the third quarter grew 11% versus the prior year to $31.8 million. Our professional services and hardware revenue was $4.4 million in the quarter compared to $700,000 in the third quarter of last year. A majority of the revenue growth in this category was driven by hardware sales tied to our recent acquisition of Lathem Time.

Our organic growth improved sequentially to approximately 4% in the third quarter compared to 1% in the second quarter. The impact of HRC ERTC-related churn in the second quarter was 4%. And in the third quarter, it was 3%. So, in summary, our organic growth, excluding HRC ERTC-related churn in the third quarter was 7% compared to 5% in the second quarter.

Float revenue was down slightly versus prior year due to previous rate reductions made to the federal funds rate, partially offset by an increase in client funds. Regarding our outlook for interest rates, yesterday, the Federal Reserve cut rates by 0.25 point, and we are now modeling another 0.25 point interest rate cut in the remainder of this year. We believe that as our client fund balances increase, this will help offset some of these rate cuts.

Our cross-selling efforts showed good results this quarter with our attach rates, which measure clients that take more than one product, continuing to move higher sequentially in the low single digits versus second quarter.

Gross profit for the third quarter increased to $23.1 million versus $19.7 million in the prior year third quarter. Gross margins for the third quarter were 64% compared with prior year at 67%. Non-GAAP gross margins for the third quarter were 70% compared to the third quarter of the prior year at 73%. Our overall gross margins were down due to revenue mix as we experienced an increase in lower-margin nonrecurring sales, primarily driven by the recent Lathem acquisition.

Net loss for the third quarter was $5.4 million versus a net loss of $3.9 million during the prior year. EBITDA for the third quarter was $3.9 million, up from $2.2 million in the prior year. Adjusted EBITDA for the third quarter increased 49% to $8.1 million from $5.4 million in the prior year, and our adjusted EBITDA margin was 22%, an increase of 300 basis points compared to 19% in the prior year.

Turning now to the balance sheet. We ended the third quarter with cash and cash equivalents of $21.5 million, and we have debt of $70.4 million as of September 30, 2025.

As we discussed on prior earnings calls during 2025, we have and continue to invest in our technology and our product offerings to achieve our continued revenue growth and improve profitability goals. We continue to model for a relatively stable cost structure for the remainder of this year and into 2026. Our fourth quarter and 2025 full year preliminary 2026 guidance is based on continued positive momentum in our business.

Now in terms of guidance for the fourth quarter of 2025, we are expecting fourth quarter revenues to be in the range of $38 million to $40 million, and adjusted EBITDA for the fourth quarter is expected to be between $10 million and $12 million. Therefore, our full year 2025 results should be between $139 million to $141 million in revenue, with adjusted EBITDA margins of between 22% and 23%.

Today, we are also providing our initial view on 2026 revenue, which we believe will be between $158 million and $162 million, with adjusted EBITDA margins of between 23% to 25%. Our belief is that at these higher revenue levels, combined with a consistent cost structure, we will begin to deliver consistent GAAP profitability. In conclusion, we are excited about the remainder of 2025 and look forward to 2026 being an inflection point for Asure's business.

With that, I will turn the call back to Pat for closing remarks.

Thanks, John. We are pleased to have delivered strong results in the third quarter of 2025. Our business has performed well during the first nine months of the year, and we're excited about the future. We believe that we are at an inflection point in the business with all the hard work we've done to improve our product offerings, invest in our technology and integrate acquisitions. We will continue to increase our growth organically while potentially being GAAP profitable in Q4 of 2025 and for the year 2026, both of which are important milestones for the business.

As we look forward to 2026, we'll continue to grow organically, invest in sales and marketing, roll out technology and look to acquire value-creating opportunities. We're not slowing down. Our guidance for 2026 implies continued improving organic growth and margin improvement. We're well on our way to our medium-term plan of between $180 million to $200 million in revenues, where we believe we can achieve adjusted EBITDA margins of 30% plus. We are super excited about the launch of Asure Central, which we believe is going to be a major enhancement to our client experience.

Our R&D team has spent an enormous amount of time on this development, and I would like to thank them for their efforts. Asure Central is the latest in this list of the many accomplishments we achieved during this past year.

In summary, we're very pleased to have delivered a strong performance in quarter 3. The outlook for a combination of improved organic growth, more free cash flow and potential GAAP profitability, we believe, is a great recipe for success. We continue to work diligently on creating increased value for our shareholders and our stakeholders. We'll continue to provide innovative human capital management solutions that help businesses thrive, human capital management providers grow their base and large enterprise is streamline their tax compliance.

Thank you for listening to our prepared remarks. So, with that, I will send the call back to the operator for the Q&A session. Operator?

[Operator Instructions] Our first question comes from Joshua Reilly with Needham & Co.

All right. Nice job on the quarter here. I just wanted to hit on the 2026 outlook to start with here and get a better understanding of what are you assuming in terms of the traditional organic growth and enhanced organic growth assumed in the trend there?

And then along with that, how are you thinking about where the balance sheet is at today to kind of continue the reseller acquisitions at a pace that you have been going at in the first half of this year and what you were doing in 2024?

Yes. I'll answer the -- Josh, this is John. I'll go first and let Pat kind of annotate. I think we feel pretty good about where the balance sheet sits right now. We'll be opportunistic like we always are in terms of doing the tuck-in deals. We have not modeled anything extraordinary in terms of the enhanced organic going into next year. Really, it's just the runoff of what we've previously purchased that's currently in our estimation for next year. In terms of capacity, one of the reasons we chose mid-cap now we've used up the current committed facility. But obviously, they've got the wherewithal to support us if we find things that are interesting.

So long-winded answer to say not a lot played in for enhanced outside of what's already been acquired. And we feel like we -- with our lending partner, if we do find something that's pretty large that we can tap them to help us with those extra deals -- large deals.

So, I'll give it to Pat.

Yes, Josh, I think we're at an inflection point. Second quarter was an inflection point. organic growth, we're going to end the year with each quarter increasing more and more on organic growth, and that won't slow down in '26. I think you're going to see is the '26 guide. What we have visibility, especially in the first half year is to continued organic growth increases. So the $160 million would imply somewhere around 7% or so, but we're continuing to have confidence. And the way we've thought about the year is the stuff that's already baked and we have visibility to. And I think towards the second half of '26, we have the ability then as those plans continue to crystallize to increase it.

As far as profitability, we're at a point now where we can start throwing off cash. So from a lending perspective, the nice thing about it is we have some cash on the balance sheet, but we're also generating cash, and we'll have that available. And then as John stated, from a mid-cap perspective, if we need to expand the line, we'll do that.

But I really feel like we have increasing momentum here. The inflection point was the second quarter. And I think you're going to see both in GAAP profitability as well as organic growth that we're in a position to keep increasing here. And then from an enhanced perspective, I think we all -- we will have opportunities as we go into the year, but we don't have anything extraordinarily planned right now.

Got you. And then just one follow-up on the 7% adjusted organic for the ERTC HR Compliance item there. How much of that -- that's a little better run rate than what we've seen recently -- how much of that is from cross-sell versus net new units to the business? Any color there would be helpful.

Yes. What I would say our cross-sell results were up 7% quarter-over-quarter, and that's without Asure Central. And Asure Central brings all the products and solutions together under one common UI. The other thing to point to that, which is really exciting, is the fastest growing of the sequential growth is in three, four, five products.

So people are wanting to buy the whole solution. And from a technology and a delivery perspective, we're increasingly capable of setting that up for clients and really leaning into that. So I think you're going to see that be a big driver and a big theme into next year. And like I said, I think Q2 was the inflection point, a down payment here in Q3. You'll see an increase in Q4. You'll start to see an increase in Q1. We really have some pretty good momentum in this area. And then we've been planning for it in the entire organization, whether it's technology, sales, marketing, implementation, we're bringing all these products together from point solutions to a solution for the entire business, and that's really exciting.

And I think just to your point on ERTC and we believe that there's probably another 1% maybe impact in the fourth quarter, and then we'll never have to talk about it again. So I think we're getting pretty close to having ERTC and compares and talking about that out of our contract.

Our next question comes from Bryan Bergin with TD Cowen.

This is actually Jared Levine on for Brian. Can I just start, can you talk about sales cycles and pipeline views across your key offerings? Has anything kind of materially changed since last quarter?

No. I think from a small business perspective, I think in some cases, decisions are quick. In some cases, I would say there might be multi-solution deals that take a little bit extra-long. But in the segment of the market we play, which is largely in the small business, medium-sized business market, we're not seeing too much slowdown, if you will.

On the large enterprise deals, you may see an extra 30 days of measuring once or measuring twice, cutting once. But nothing material for us to talk about today. I think it's really business as usual in the small business area despite what happens in the broader macro environment.

And what about those pipeline views as well?

Pipeline views look pretty strong. I do think you're going to see us lean in more to marketing in '26, and that was implied in our guide already that we'll continue to look. We think there's opportunities to continue to market and sell to that base. As far as the pipeline this year, pipeline is up quite a bit.

Got it. And then in terms of that 7% organic growth assumed for FY '26, I just want to double-click on this. Can you highlight what are the key drivers underlying this and whether that's kind of key offerings under within the business there? And then how much of a headwind will float revenue be to that organic growth rate?

Yes. From a float revenue perspective, we've modeled two more cuts in '26, and we think that we'll be somewhere between 3% and 3.25% at the low point. Now we also believe account balances going up will partially offset that. And then as you know, in our Q, we have roughly $90 million or so that is in long term. So that protects that float quite a bit. So, really, we're probably a small degradation planned in next year, but we're hopeful that, that gets minimized by some of the things we talked about. We model kind of flat employment, if you will, nothing heroic there.

And as far as the solution offering and the reason we're so excited about it at Asure Central is as we bring these solutions together, the ability to sell, let's say, an ASO offering with multiple products and services similar to, let's say, a PEO without the PEO kind of insurance policies, et cetera, or employee leasing. And it allows us really to be a back office for a small business and be compliant across all products and services, whether it's HR, payroll tax filing.

We think that's a winning proposition, and that's the one we're going to lean into in general. Some of our point solutions will continue to grow as well. And then obviously, with the acquisition of Lathem, we think the attach rates of time to payroll will continue to grow up as part of those offerings.

Our next question comes from Eric Martinuzzi with Lake Street.

Yes. Regarding the Lathem time, you had said last quarter that you were anticipating about a $15 million revenue contribution over the 12-month period from July through the end of June of 2026. Is that still an accurate number?

Yes. I mean I think there's -- this quarter, for example, we -- the net impact before the acquisition was roughly $4.7 million or $4.6 million. It's in the kind of bridge of the 24%. And the composition of that is roughly 40% hardware or nonrecurring and the rest is recurring. So about $2.7 million or so of that $4.7 million, $4.6 million is recurring. So the recurring is pretty easy to predict, right? So take that $2.7 million, that's $10 million. So there'll be $10 million of recurring contribution over an annual period for Lathem.

And then the question mark really is what's the velocity of the hardware sales. I think what the $15 million is probably not unreasonable. It could be a little bit higher if we have some windfalls. But what you got to remember is what we're going to do ultimately with Lathem is change their business model a little bit. Historically, what they were doing is they sell hardware, have a onetime event and then upsell the software or the solution.

We're going to probably do more of a bundling approach, especially as we start to offer payroll with it and some other products. So I think that's where I'm a little bit hesitant to say, I think 15% is fair. It might be a little bit more. But ultimately, we're going to change a little bit of their business model, the go-to-market strategy. So that's why I think that's probably not an accurate view of kind of Lathem over time.

The other point I'd say is the integration is right on schedule as far as bringing Asure and Lathem together. Lathem has some areas where they have channel partners, et cetera, and we're not going to change too much of that model. But as we integrate the offering between Asure Payroll and Lathem, I think we've already seen some pretty good synergy from a revenue perspective coming together with our offering. So excited about the possibilities for '26.

Yes. And the way I think about it, too, just as another point on Eric, they have 15,000 customers right now that are on using their time and attendance solutions that don't have a connection with us in terms of payroll.

So when we look at that business, yes, they brought us the customers, but we're going to take credit for when we start to sell the payroll into them. So that's where we see a lot of growth. It's going to be into that Lathem base, but it's going to be our product on top of that Lathem base.

And if I could follow up on the hardware. Obviously, you had a higher number in Q3 because of Lathem. That $4.4 million number for professional services and hardware, is that kind of a safe new run rate for that portion of the revenue?

I think about $3 million, honestly. I think probably fair for the near term to think about $2 million of hardware for sure, at least for the next 12 months. And I think a fair number for professional services is probably $1 million. Now it might be higher or lower. The variability on professional services is going to come in as we're doing some work for these large tax deals that can vary decently between quarters as they're going up and live.

So I think you saw a little bit of that last year in the fourth quarter where we had a pretty heavy install, which makes sense right around year-end. So I think you'll see some dynamic in the professional services -- but in general, I think two and one between those two over the year is probably a fair way to start. Does that include that?

Yes. No, I think -- yes, I think that's exactly right. And I think the two and one is pretty safe, and there might be some upside down the line. But right now, that's a great place to model.

Our next question comes from Richard Baldry with ROTH Capital Partners.

I'm curious if Asure Central, the rollout of that will cut any of your sort of legacy technology stack support costs and whether it's already includes as a front end for Lathem or if that's sort of a near-term thing that will develop?

Yes, Rich, no, great question. First of all, from a legacy development, we're already seeing some pretty good cost initiatives around some of our costs. The newer products and services that we've rolled out significantly are cheaper. We're also, from a development cycle, spending less money on maintenance and more money on new, and that continues to grow over the past couple of years as we kind of have an eye towards the future, and we've been able to stabilize and improve the back end quite a bit now the front end. And as we look at some of the new development costs and the new products, they're definitely lower on maintenance. So really excited about that.

As far as Lathem, we're in the, I'll call it, months, not years. We're really close to integrating that with Asure Central. All -- most of the other products are either online or going to be online within this quarter. So Lathem probably targeted towards first quarter, but we're well on our way to doing that.

Great. Well, you're seeing the improvement in the organic growth. Can you talk about sort of what's the underlying drivers there? Is it sales headcount improvements? Is it sales efficiencies? Is it sort of unit driven or ARPU driven, just sort of the pieces underlying that.

Yes, Rich, we said earlier in the year that attach rates are going to be kind of a driver. And the 7% sequential, we think is a pretty good proof point from second to third quarter. And then if I dive into those numbers, which is two or more products, if I look at three, four, five products, that's the fastest growing. So I think as we look at this year, we've been kind of run rating it.

As you look at 2026, I think you're going to see us spend more money in sales and marketing. That's implicit in the guide. We're also bringing online the technology development really that we've been building towards for the last couple of years. So you'll continue to roll that out. That's in the guide. I think we really are sitting on an opportunity to really grow exponentially here as we bring all these point solutions together.

Now any time you're bringing them together, it's kind of crawl, walk, run. I would say we're walking fast, and we'll continue to do that and get momentum here, not only this quarter as we've done in third quarter, but fourth quarter will be increased, first quarter will be increased. And we anticipate each quarter in '26 to continue for us to get better at selling, implementing, servicing multiproduct installations, and we anticipate that area to grow.

Last for me would be with the rollout of some of the newer AI-driven sort of development tools, but other agentic things to help back offices be more efficient. How do you think about the connection or leverage on top line growth versus operating expense growth sort of near term, long term now?

Yes. And John has done a nice job, and we've done a nice job internally around growing scale. If you can think about, let's say, 2021, we were somewhere around $76 million with about adjusted EBITDA of $8 million. Our long-term goal here is $180 million to $200 million or medium-term goal and to get to 30% margins. This year, implicit in our guide for '26 is 23% to 25%. So we're continuing to just grow profitability.

On the revenue side -- and by the way, on the profitability, our headcount has been relatively flat. We've added marketing and sales, but operations and some of the G&A have really been relatively flat during this period of time. So we're getting scale.

And then from a revenue perspective, what we've been leaning into is software and multiproduct software gives you all kinds of advantages. But with the AI workflow, and we have Luna as our Gen agent, and then we have her actually connecting to other agents. We think we have the ability to really control the narrative, not only in software, but also workflow with the software. And we think that there's all kinds of opportunities in that area. And then for us, we're going to lean into that compliance area.

So if you think of a business with 20 employees that now has to report to COBRA, the system can kind of really tell the client that at 20 employees, they have to report COBRA and then we can go out and do it for them with their permission. That kind of experience is an AI experience that drives revenue, and it also drives workflow on cost. So you're going to see a lot of examples in that over the upcoming year.

[Operator Instructions] Our next question comes from Greg Gibas with Northland Securities.

Could you maybe speak to attach rates, the trends you're seeing there? You mentioned, I think, 400 basis points of year-over-year improvement last quarter. Wondering if that trend remained relatively consistent.

Yes. I think what I said in my prepared statements, I think Pat just made a comment to it as well. I mean it's single digits sequentially increasing. So I think you said 7%. I think that's about right, is somewhere in that range sequentially in terms of the improvement quarter-to-quarter.

Got it. And then to follow up, just to clarify, you mentioned about, I think, 7% implied organic growth in 2026. Is that consistent with your expectations for Q4 of this year?

Yes, I think so. I think we did that in Q3. So we expect, I think, maybe a little bit of a tick up based on the fourth quarter, just implied in the guide. It has to come basically from organic a place for it to come from.

Fair enough. And I guess, lastly, as it relates to integration plans with Lathem time, relatively early still, but could you maybe discuss further integration plans that are maybe currently underway?

I mean I think there's some really exciting things. Like we've talked in the past about the AsurePay card, which we're still in the early stages of. But imagine what they've got is they've got a time clock, right? So pretty simple, you go and you wand in with a badge to log in and clock your time in and clock out.

Well, what we can do and what they're working on is another integration point is usually AsurePay as that wanding device. So you've got in the hand of the employee, you've got a device not only that allows them to clock in and clock out, but also as a way to get paid. And that can be the vehicle that they're going to get their paycheck. So that's just one example. We feel like there's a lot of potential with that deal.

Yes. And Greg, just on that, their client base and our direct client base Chile have 30,000 clients. the ability to work together, improved book-to-bill on all those products. We talked a little bit about integration. And then back-office systems, we have opportunities to get integration really through the -- all the way through '26. So really excited about it, really good people. We're excited about the movement, both from a revenue perspective as well as the scale and efficiency perspective.

Our next question comes from Alex Neumann with Stephens.

Could you talk a little bit more about Asure Central? Just what are the major difference here in the new platform? And then just secondly, how do you feel about the upgrade platform from a competitive standpoint and if you're expecting any uplift in price from it?

Yes. I think from us over time, and we'll talk about in '26 is some of the -- not only the attach rates, but the ARPU or revenue per unit. We do anticipate upticks. We're kind of showing that or proving that out, and you'll see more of that in 2026. But if you think about just in Q2 -- in Q3, we had a 7% improvement in unit volume, and we really didn't have Asure Central yet.

So we believe that, that common look and feel across all products and services will drive more adoption of our cross-sell and in turn, that revenue opportunity. We're really excited about that. I think we'll get a little bit more firm data on the ARPU in '26. But for right now, we see evidence that it's happening. We're rolling this out in all avenues of the business from marketing, implementation, sales, operations and technology.

So we know -- and in my past life, I've had this kind of experience before. We think it's -- we're really at an inflection point and bringing these point solutions together will do that. And then from an efficiency perspective, the idea to get to event-driven marketing will make it degrees of difficulty easier to cross-sell and implement faster.

So we'll use our data and reach into AI to enable that to grow faster. And our guide reflects high single digits or so. I think we have an ability to beat that as we go. But that's a story for more proof points along the way. And each quarter, we'll have an opportunity to talk about that.

There are no further questions at this time. So I would now like to turn the floor back over to Pat Goepel for closing comments.

Yes. I really appreciate everybody's interest today. Like I said, I think it's -- we're at an inflection point. We hit that in the second quarter. We're growing. We're bringing everything together here that we've been working on for multiple years, all our products and point solutions, integrating them together. We've had really good growth in areas. We've had really good progress in our money movement and our tax filing business. That will continue as well.

So we think we're at the verge of increasing results, and you'll see that through the end of '25 as well as '26, and we really appreciate your support. Patrick mentioned that we'll be out on some road shows and some client events and investor conferences, and we look forward to telling that story and seeing you out there.

Thanks for your time today. And again, really appreciate it. Take care.

This concludes today's teleconference. You may now disconnect your lines. Thank you for your participation.