The ELMO Software Ltd (ASX: ELO) share price has dropped lower on Wednesday following the release of its third quarter update.
At the time of writing the cloud-based HR and payroll software provider's shares are down 1.5% to $5.62.
What happened in the third quarter?
During the third quarter the company achieved cash receipts of $9.5 million. Whilst this was a 29% increase on the prior corresponding period, it was a 2.7% decline on the second quarter's cash receipts and the second consecutive quarter of cash receipts declines.
Year to date cash receipts now stand at $29.6 million, up 62% on the prior corresponding period.
ELMO's CEO, Danny Lessem, was encouraged by the company's performance during the quarter and appears optimistic on its future.
He said: "We continue to invest in long term sustainable growth and enhancing the functionality, useability and interoperability of our integrated product suite. We are now in a unique position to be able to offer our customers a single integrated SaaS based software solution that automates HR processes, payroll and rostering / time & attendance."
He added: "We are well capitalised and in a good position to take advantage of the strategic opportunities in our large and growing addressable market. ELMO's total addressable market opportunity has grown to over $1.7bn, effectively three times the size it was at the time of the IPO in June 2017. Having only touched ~9% of the market so far, with an average penetration of 2.2 out of a potential 13 modules, we have significant scope for sustained long term growth."
Should you invest?
I thought this was a reasonably underwhelming quarter from ELMO.
Whilst its year to date cash receipts growth remains strong, if things don't improve greatly in the near term the company runs the risk of experiencing a decline in cash receipts in FY 2020. If this occurs then it could weigh heavily on its share price.
In light of this, I would class ELMO as a hold for the time being and focus on other small cap tech shares that continue to grow strongly quarter on quarter such as LiveTiles Ltd (ASX: LVT) and Volpara Health Technologies Ltd (ASX: VHT).
