Here's why the ELMO (ASX:ELO) share price is sinking lower today

The ELMO Software Ltd (ASX:ELO) share price has come under pressure on Thursday. Here's why its shares are sinking lower…

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The ELMO Software Ltd (ASX: ELO) share price has been caught up in the market selloff on Thursday and is tumbling lower despite the release of a solid second quarter update.

At the time of writing, the cloud-based HR and payroll platform provider's shares are down 5.5% to $6.61.

How did ELMO perform in the second quarter?

ELMO continued its strong form in the second quarter of FY 2021 thanks to a combination of organic growth and the benefits of the Breathe and Webexpenses acquisitions. The latter have contributed their own recurring revenues and provided the company with cross-selling opportunities.

For the three months ended 31 December, ELMO reported a 22.1% increase in cash receipts to a record $18.8 million. This brought its cash receipts for the first half to $34.4 million.

Statutory revenue for the half came in at $30.6 million, which was up 29.3% on the first half of FY 2020. This led to the company's annualised recurring revenue (ARR) increasing 42.8% over the prior corresponding period to $74.2 million.

At the end of the half, ELMO was well capitalised with a cash balance of $71.4 million.

Laying the foundations of growth

ELMO's Chief Executive Officer, Danny Lessem, was pleased with the half and believes the company has laid the foundations of growth.

He commented: "We have had a strong first half in FY21 with the highest half year cash collection in ELMO's history. The first half of FY21 was an important investment period for the business as we laid the foundation for high levels of organic growth with entry into the small business market segment and expansion into expense management."

"The acquisition of Breathe, a UK-based scalable self-service HR platform, has provided entry to the small business market in Australia, New Zealand and the UK and typically services customers with less than 50 employees. This segment represents an addressable market of c$2.2bn and pleasingly we have already seen the UK customer base grow in the past few months."

"The acquisition of WebExpenses, a UK based expense management platform, in late December has not only expended ELMO's wide convergent solution, it also accelerates ELMO's UK midmarket expansion by facilitating the cross sell of ELMO modules to existing Webexpenses customers. The expense management segment represents a new addressable market of c$1.4bn," he concluded.

Outlook

ELMO has reaffirmed its guidance for FY 2021.

It continues to expect ARR in the range of $81.5 million to $88.5 million, revenue of $65 million to $71 million, and an operating loss of $2.4 million to $7.4 million.

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Elmo Software. The Motley Fool Australia owns shares of and has recommended Elmo Software. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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