Wall Street seems focused on the obvious: Asure Software's shift away from the lucrative Employee Retention Tax Credit (ERTC) program. Everyone's talking about the 25% growth predicted for the core business, the promising tax management solutions, the exciting new partnerships with giants like Workday and SAP. But while everyone's looking there, they're missing a hidden gold mine buried within Asure's Q1 2024 earnings transcript – a detail so subtle, so cleverly concealed, that it's flown under the radar of every analyst on the call.

What are they missing? The clue lies in Asure's client fund balances, or "float" as they call it. The transcript reveals that Asure's float balances averaged a whopping $240 million throughout the quarter, up from $200 million in 2023. Now, here's where it gets interesting: John Pence, Asure's CFO, casually mentions that the tax business alone accounts for approximately 60% of these client funds. This means that in Q1, Asure held around $144 million in client funds specifically for its tax services.

"Think about that for a moment. $144 million, just sitting there, generating interest income for Asure. It's a veritable money-making machine, fueled by the complex needs of enterprise clients and fueled further by the company's aggressive acquisition strategy. And the best part? Asure seems to be getting even better at leveraging this float. While interest rates are generally declining, Asure's yield on float balances actually jumped from 3.5% in 2023 to 4.5% in Q1 2024."

So, let's do some quick math. At a 4.5% yield, that $144 million generated approximately $1.62 million in interest income for Asure during Q1, just from the tax business alone. And remember, this is a conservative estimate. The company factored a 0.5 point decrease in yield midyear into their guidance, meaning there's potential for even higher returns.

Now, let's compare this to Asure's total adjusted EBITDA of $6.8 million for the quarter. Suddenly, that $1.62 million from float interest looks much more significant. It represents nearly 24% of Asure's adjusted EBITDA, solely from the tax business float. This is pure, high-margin profit – a stream of recurring revenue that requires minimal additional investment and is poised to grow alongside Asure's tax management business.

Float Interest Income vs. Adjusted EBITDA

The following chart illustrates the substantial contribution of float interest income to Asure's adjusted EBITDA in Q1 2024.

It's no secret that Asure is aiming for scale. They've articulated a clear path to 30% adjusted EBITDA margins at $200 million in revenue. But what's less discussed is the potential for float interest to become a key driver of this margin expansion. As Asure acquires more payroll and tax businesses, and as their enterprise tax solutions gain traction, their float balances are set to balloon. If they can maintain – or even improve – their yield on these balances, float interest could become an increasingly substantial contributor to their bottom line, potentially exceeding the profits generated by ERTC at its peak.

This begs the question: Is the market undervaluing Asure's float interest potential? Are investors too fixated on the ERTC transition to grasp the long-term power of this hidden revenue stream? If Asure can execute on its strategy – and their Q1 results suggest they're doing just that – this overlooked detail could become a major catalyst for future growth and profitability.

"Fun Fact: Did you know Asure's roots trace back to 1985, predating even the birth of the World Wide Web? It's a testament to their adaptability and longevity in the ever-changing landscape of human capital management. And if their savvy handling of float interest is any indication, they're well-positioned to continue thriving for years to come."