EngageSmart Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2023

There are 14 speakers on the call.

Operator

Good morning. Thank you for attending today's EngageSmart 4th Quarter and Fiscal Year 2022 Earnings Call. My name is Todd, and I'll be your moderator today. At this time, all participants are in a listen only mode. Later, you will have the opportunity to ask questions during the question and answer session.

Operator

Please note, I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Josh Schmidt of EngageSmart. Josh?

Speaker 1

Thank you. Good morning, and welcome to our Q4 fiscal 2022 earnings call. With me on the call today are Bob Bennett, Chief Executive And Cassandra Hudson, Chief Financial Officer. Our earnings press release, supplemental presentation and associated Form 8 ks can be found at investors. .Engagesmart.com.

Speaker 1

During this call, we will be discussing certain forward looking information. Actual results could differ materially from those contemplated by these forward looking statements. Please refer to the Risk Factors section of our annual report on Form 10 ks and other SEC filings for more information on the risks regarding these forward looking statements and risk factors associated with our business. All metrics discussed during this call are non GAAP unless otherwise noted. A reconciliation of non GAAP metrics to the nearest GAAP metric As well as statements regarding why management believes these measures provide useful information can be found in our earnings press release and supplemental presentation, both of which are available on the Investor Relations section of our website.

Speaker 1

This call is being webcast live and will be available for replay on our website at investors. Engagesmart.com. I would now like to turn the call over to our CEO, Bob Bennett.

Speaker 2

Thanks, Josh. Good morning, everyone, and thank you for joining us on our Q4 fiscal 2022 earnings call today. Fiscal 2022 was truly a phenomenal year for EngageSmart. We delivered record annual revenue of $303,900,000 representing 41% year over year growth, all organic. We also reported record annual adjusted EBITDA of $49,300,000 or 16.2 percent of revenue for the year.

Speaker 2

Our excellent results reflect the strength of EngageSmart's business model, which is characterized by our proven customer led strategy, our deep vertical expertise, our strategic alliances and our highly motivated team. I'd like to thank our teammates for their strong passion and outstanding work throughout 2022, never wavering from their commitment to excellence for our customers. The Q4 fiscal 2022 were marked by robust demand, favorable secular trends and continued execution across our business segments as we drove product innovation and extended our market leadership. We entered 2023 from a position of strength. Our dedication to simplifying customer and client engagement is resonating with the market.

Speaker 2

Our products are gaining market share and we are expanding our footprint across all verticals. Before Cassandra dives deeper into the details Of our financial performance and our outlook for 2023, I'd like to share some 2022 highlights. Our SMB segment is uniquely positioned to help address the shortage of mental health professionals and the high demand for care. SMB achieved outstanding revenue growth of 52% in 2022, Driven by new customer adds, a favorable mix in subscriptions, the successful pricing and packaging changes that we implemented in Q1 of 2022 and our strength in transactions process. We continue to see strong traction in mental health and are excited about our opportunity to drive growth and expand with group practices in 2023.

Speaker 2

Our Enterprise segment benefits from systemic long term tailwinds Stemming from the need for organizations to digitize their operations, Enterprise delivered annual revenue growth of 29% fueled by customer go lives and high digital and paperless adoption with existing customers. To provide more color on our strong results in the SMB segment, We continue to experience high demand for our simple practice solution, particularly in our core mental health vertical. The mental health market is characterized by a addresses those challenges by enabling practitioners to focus on what is most important to them, treating more patients. With a network of over 160,000 mental health and wellness practitioners, SimplePractice helps many therapy seekers take the critical first steps, Find the best provider, get in contact with that provider and successfully book an appointment. And we continuously evolve our The new features and functionalities that add value for our customers.

Speaker 2

Most recently, we launched our new client app, which allows our practitioners to use their smartphone for scheduling, note taking, messaging, billing and more. Monarch and SimplePractice Enterprise are extensions of our efforts to make care more accessible and to enable our practitioners to focus on what they do best, Treating patients. Both Monarch and SimplePractice Enterprise leverage our extensive customer base of over 160,000 practitioners. Monarch is a consumer facing website found at meetmonark.com that enables a digital method for practitioners and patients to connect. It simplifies the process of finding and accepting new patients.

Speaker 2

It also builds the foundation for SimplePractice Enterprise, Our B2B offering for employee assistance programs, EAPs and managed care organizations, MCOs. Our network of practitioners is particularly valuable to these organizations as they frequently struggle to match patients to therapists in a timely fashion. By enabling easy scheduling with simple practice for providers who are already within an EAP or MCO network, we help speed up that process. We recently signed our largest simple practice enterprise deal to date and have a robust pipeline of opportunities. We look forward to exploring the potential contribution to our SimplePractice flywheel as we partner with EAPs and MCOs to capture in network providers We do not yet use SimplePractice.

Speaker 2

In mental health, we are excited also about the opportunity with group practices. In 2023, we are prioritizing this market segment with our product roadmap to expand on the efficiency SimplePractice creates for groups. By further enhancing the value we bring to groups, we believe we can attract new practices and enable our customers to grow their practices by adding more practitioners. Revenue cycle management is also an opportunity for simple practice. Insurance billing is difficult to manage for small practices Getting paid is a key challenge for our practitioners.

Speaker 2

This complexity is often a deterrent to our customers accepting insurance, which can lead to access and affordability issues for patients. We are prioritizing roadmap items to accommodate revenue cycle management and believe we can support our customers in better managing collections and maximizing reimbursement rates. Ultimately, We hope to increase financial transparency for our customers by helping simplify yet another administrative task. Finally, we continue to see a large addressable market opportunity with new verticals and plan to enhance specific features and functionality in the future to continue to drive value for our customers. In addition to product innovation, we continue to invest in marketing to drive account growth.

Speaker 2

Word-of-mouth referrals are our most efficient marketing channel, particularly as we rapidly grow our referral base each quarter. At the same time, we are seeing great traction with our investments in digital marketing, which enables us to broaden our brand awareness beyond existing customers and their network. Now turning to our Enterprise segment. Our strong results are driven by customer go lives across all verticals fueled by our partner assisted selling motion as well as record digital adoption with existing customers. Our verticals, utilities, financial services, government, enterprise healthcare and giving are characterized by broad usage of legacy systems, many of which are outdated, expensive demand came and time consuming to update.

Speaker 2

That's why many builders struggle with high operating costs, Fail to meet consumer demand for digital experiences and often resist the idea of implementing new systems. That is until they meet with us. Our core value proposition is driving superior rates of digital adoption by enabling a modern user experience, a wide variety of payment methods and omni channel capabilities, ultimately increasing cost saving behaviors. We combine a modern commerce experience with engagement capabilities that are specific to the needs of our customers, automated reminders, emails, text messages and personalized bill pay capabilities. And we achieve all that through tight integrations with our billers customer information systems or CISs.

Speaker 2

Our approach allows Our billers to offer a modern billing and payments platform without the time consuming process to upgrade to CIS while extending the useful life of their original solutions. And that's why we win. In the Q4 and throughout 2022, we saw great momentum in all verticals as we continue to realize efficiencies and deals where we have existing integration. We recorded several notable customer launches in utilities, including the City of Port St. Lucie, Florida.

Speaker 2

In insurance, we launched Phase 1 of the go live process with our largest insurance client and in tax, we went live with several new clients including Union County, North Carolina. In addition, we drove record adoption with existing customers in all verticals. Our ability to Quickly achieved results is highly valued by our new billers such as Truckee Meadows Water Authority in Nevada and EMPRO, a medical professional insurance carrier based in New York. Within a year of implementing InvoiceCloud, Truckee Meadows increased autopay adoption by 22%, decreased mailed in payments by 20% and achieved $175,000 in annual operational efficiencies. EnPro saw a 2 11% increase in electronic payment adoption in the 1st year as well as a 7x increase in autopay adoption.

Speaker 2

Increasing autopay adoption is a key value proposition for our insurance clients as more customers automatically renew their policies. We focus not only on driving digital adoption, but also paperless adoption. In the Q4, we had record levels of paperless adoption and achieved a significant milestone. Approximately half of our customers' invoice are sent by us by email, a key step in reducing the use of paper and cost for billers. Soko Creek Water District in California, for example, recorded a 33% increase and paperless enrollment within 1 year.

Speaker 2

The 4th quarter was also a phenomenal bookings quarter for Enterprise. Historically, we have and several large deals. Notably, we signed 2 of the 4 largest deals of 2022 in Q4. Our new customer growth continues to be driven by our strategic alliance go to market strategy. In Q4, we formed several new partnerships across verticals and strengthened existing alliances that contribute to our pipeline and extend our market share.

Speaker 2

In utilities, for example, we launched our Fry Municipal Software Alliance, which further opens the midsize market for us in 27 states. In our high growth insurance vertical, we signed several new customers, including another Guidewire Frankly, Frankly, Mutual Insurance based in New Jersey. And in tax, we finalized the integration with DevNet, opening county tax markets in Illinois, Missouri and North Carolina. Additionally, we finalized a government procurement partnership that streamlines the buying process for local and county governments. Product innovation remains incredibly important to us as we continue to drive higher value for our customers.

Speaker 2

Most recently, we launched outbound payments for insurance customers. Approximately half of the payments in insurance are outbound, representing a large opportunity for us, and we are quickly gaining traction. In Q4, we closed 6 outbound payment deals. In summary, we've had a strong 4th quarter and a great year. We continue to drive traction in the market for products that help save labor costs, Increased operational efficiency and drive customer satisfaction.

Speaker 2

We delivered solid results across our vertically tailored SaaS solutions, driven by continued customer demand, payer adoption on our platform and great customer retention. We believe that this is a testament to the strength of our business model and our market leadership position in customer engagement software with integrated payments. With that, I'll hand the call over to our CFO, Cassandra Hudson. Cassandra?

Speaker 3

Thank you, Bob. Our 4th quarter results again exceeded our revenue and profitability guidance, Capping off an outstanding year in which we delivered record revenue, net income and adjusted EBITDA. Revenue in 2022 was $303,900,000 representing 41 percent growth from 2021 and adjusted EBITDA was $49,300,000 or 16.2 percent of Delivering more than $300,000,000 in revenue as well as a 2 10 basis point expansion in our adjusted EBITDA margin were important milestones that we achieved in 2022. In 2023, we are focused on driving continued growth in both segments and making product and go to market investments that are intended to help us achieve our next midterm milestone of $500,000,000 in revenue, while we continue to expand our margins. For the full year, we expect revenue to be in the range $380,000,000 $384,000,000 or revenue growth of approximately 26%.

Speaker 3

Our revenue guidance implies roughly 30% growth in SMB and 20% growth in Enterprise, the drivers of which I will cover in a few moments. For adjusted EBITDA for the full year, we expect to be in the range of $66,500,000 $69,000,000 which represents an adjusted EBITDA margin of roughly 17.7 percent or a 150 basis point improvement over fiscal year 2022. While we plan to continue investing in sales and marketing to drive top line growth and R and D to maintain product leadership, we are also committed to expanding margins as we continue to make progress toward our long term adjusted EBITDA margin goal of 30% or higher. As a result the outperformance of our business model in 2022, our guidance for revenue and profitability for 2023 is well ahead of our initial expectations from our September 20 1 initial public offering. For Q1 of 2023, we expect revenue in the range of $86,000,000 to $87,000,000 which implies 28% growth year over year at the midpoint of our range.

Speaker 3

We expect adjusted EBITDA in the range of $13,500,000 $14,000,000 which represents an adjusted EBITDA margin of 15.9 percent at the midpoint. We continue to see strong cash flow generation with free cash flow of $45,800,000 in 2022, taking our cash balance to $311,800,000 as of December 31, 2022. In 2023, we expect adjusted EBITDA to free cash flow conversion to moderate to approximately 50% Due to higher cash taxes associated with the capitalization of R and D expenses, which is now required for tax purposes under IRC Section 174, coupled with significant utilization of our remaining NOLs in 2022. As you think about 2023, please keep the following in mind. Regarding SMB, we expect to see continued high demand for our simple practice solution in our core mental health vertical, fueled by a shortage of practitioners coupled with an increasing need for care.

Speaker 3

As our practitioners grow their practices and add more simple practice seats, They use additional features, purchase higher priced packages and process more payments through our solution. We are excited about the opportunity we see with group practices and are prioritizing features that will make it even easier for our customers to manage multiple practitioners this year. As you recall, we successfully launched our new 3 tiered pricing and packaging halfway through Q1 of last year due In 2022. In late Q1 of 2023, we will be increasing the price of our integrated payment processing solution by 20 basis points. This increase will help to offset the higher payment processing and infrastructure costs that we have been incurring and allow us to continue to provide and invest in the seamless experience our customers expect.

Speaker 3

Now turning to Enterprise. As we move into 2023, we remain highly focused on continued sales and implementation execution to fuel new customer growth. We are beginning to focus on larger deals and believe moving up market is a critical aspect of our future growth. Enterprise delivered strong growth in 2022, driven in part by consistency in the mid market and the timing of several large go lives at the end of 2021 and the beginning of 2022. While the ebb and flow associated with the timing of go lives will in moderating revenue growth in 2023, we remain confident in the long term durability of our Enterprise segment, driven by our record bookings quarter in Q4 and a robust pipeline that we believe will continue to fuel strong growth.

Speaker 3

We are excited about our success and traction in our newer insurance and tax verticals. In 2022, we invested in strategic alliances and signed clients in new states that we believe create long term tailwinds for additional targets. Our donor drive solution is more susceptible macroeconomic disruption and our guidance assumes a slowdown in revenue growth from fundraising events this year. In terms of seasonality, we expect to see a small step down in Q1 revenue on a sequential basis due to the timing of transactions in Q4 2022 associated with tax billing and Invoice Cloud and the concentration of large fundraising events for Donor Drive. Beyond new customer growth, we continue to focus on product innovation and customer experience that enables us to drive superior rates of digital and paperless adoption.

Speaker 3

We are investing in further simplifying the customer experience by adding functionality that removes friction to drive higher value for our customers. Now turning to Q4 and full year 2022 results. Total revenue for Q4 was 83.9 and an increase of 24% over the prior year. Our customer growth continues to be mainly driven by new customer additions from marketing programs and word-of-mouth referrals in our SMB segment. We also delivered strong growth in transactions processed.

Speaker 3

In Q4, we processed $38,900,000 transactions, up from $31,200,000 in the year ago quarter, representing 25% growth. We also saw continued strength in our net revenue retention rate, which was 117% for 2022, driven by the pricing and packaging changes in our SMB segment and strong digital payment adoption in our Enterprise segment. Our SMB segment continues to perform exceptionally well with 4th quarter revenue coming in at $45,200,000 representing 45% growth year over year. Subscription revenue of $33,500,000 grew 58% year over year, driven by new customer adds and the impact of pricing and packaging changes. Transaction and usage based revenue of $11,500,000 grew 21% year over year as more transactions were processed on our platform.

Speaker 3

Our Enterprise segment also delivered strong results with reported revenue of $38,700,000 representing 27% year over year growth, driven by new customer adds and strong digital payment and paperless adoption. Our adjusted gross margin for Q4 of 2022 increased to 79.5 percent from 77.8 percent in Q4 of 2021, primarily driven by the results of our SMB pricing and packaging changes. Sales and marketing expenses were $27,500,000 up $6,000,000 In SMB, we continue to test new digital marketing channels to drive new customer and broaden our brand to create awareness for our solutions in all of the verticals we serve today. In Enterprise, our investments continue to be on our partner relationships as well as sales headcount to fuel pipeline and bookings growth. R and D expenses This came in at $13,800,000 up $4,500,000 In our SMB segment, we're investing in features for group practices and revenue cycle management.

Speaker 3

In our Enterprise segment, we're investing in features and functionality to continuously improve the experience for our billers and their payers and to accelerate digital adoption in all of our verticals. G and A costs were $12,600,000 up 1 point Loss of $900,000 in the Q4 of 2021. Adjusted EBITDA was $13,600,000 for the quarter, representing 16.2% margin compared to $6,300,000 or 10.2% margin in the Q4 of 2021. In summary, we continue to believe we operate in defensive verticals that should remain attractive and vibrant even in an economic downturn. Regarding SMB, the unmet need for mental health treatment is large and widespread.

Speaker 3

Periods of economic uncertainty can further increase that need for care. In our Enterprise segment, the majority of bills are non discretionary in nature and the secular trend of digitization remains strong. Overall, we believe we are well positioned and remain confident in our ability to continue to deliver profitable growth. I'll now turn the call back over to Bob for closing comments.

Speaker 2

Woot, Cassandra, tremendous results again feels a little like Groundhog Day. We founded EngageSmart because activities like paying bills, scheduling appointments, onboarding new patients and client communication shouldn't be that hard. It's great to see our team's efforts bear fruit. Our success is driven by 3 simple factors. First, our proven customer focused playbook driven by A Players.

Speaker 2

We are committed to recruiting, retaining and developing top talent. Our momentum is driven by their tremendous work and relentless pursuit of customer satisfaction. 2nd, product leadership as measured by adoption and retention. We leverage our top talent with deep vertical expertise to put our customers at the center of our decision making, ultimately delivering innovative market leading solutions. 3rd, Our large market and runway, we address a $28,000,000,000 U.

Speaker 2

S. Market across all zip codes and have captured about 1% of market share. We continue to invest in our solutions to unlock EngageSmart's full potential and look forward to expanding our footprint across all of our verticals. We remain focused on delighting our customers, growing our business and creating shareholder value while we make a positive impact in the world. We appreciate you all joining us on this call this morning.

Speaker 2

Before we begin Q and A, I'd like to take a moment to thank our investors and analysts for the time and insights they provide us as we further expand EngageSmart and its potential. Your input is incredibly important to us as we work to build long term shareholder value for this growth company. Thank you very much.

Speaker 4

Thank

Operator

Our first question comes from Robert Napoli with William Blair.

Speaker 5

Thank you and good morning. Congratulations on excellent first year as a public company, Hey, good guidance. Just a question on Thanks Bob.

Speaker 2

How are you?

Speaker 5

I'm doing well, Bob. How about yourself? You sound good.

Speaker 6

Thank you. Yes.

Speaker 5

The SMB segment, you do lap the price increase in the Q1. The number of customers you're adding, good trend, as you get larger, some deceleration, but you're moving Up market, are you getting is the average guest clinicians per customer increasing? Do you expect that to increase or continue to increase?

Speaker 3

Yes. I mean, we've continued to see growth in the average number of practitioners per practice, Bob, Through 2022 as well. And I think as you know, it's kind of steadily moved up over the past few years. Certainly with our pricing and packaging changes, the opportunity with group practices was really highlighted For us and that is why we are now prioritizing more features specifically for group practices on our road map. So as we deploy those features, We do continue to expect more traction there

Speaker 2

in the

Speaker 3

Group Practice segment for us.

Speaker 5

Thank you. And a follow-up, just I mean, you had mentioned a 20 basis point Price increase, but just generally around margins. Your margin guidance is solid. You have 30% target long term margins. How do you think about incremental margins to get to that 30% long term margin?

Speaker 5

Any materiality you can get or the 20 basis point price increase, when is that and what does that mean to revenue?

Speaker 3

Sure. So just taking the pricing first, that will start to take effect In late Q1 here, so March timeframe. And so we'll certainly start to see higher transaction revenue As a result of that, we're going to get into Q2. And then on the margin side of things, at least in the near Term, a lot of the expansion you're going to see is going to come specifically from G and A. We're starting to really get leverage from our shared services model across all of Engage Smart.

Speaker 3

And as you know, we've made kind of incremental improvements in gross margin in 2023, and we expect Effectively that level of improvement to continue in the medium term as well. So those are the 2 big areas. We're still Investing on the engineering side and also investing in our go to market functions to drive long term growth.

Speaker 5

Thank you.

Operator

Thank you. Our next question will come from Will Mance with Goldman Sachs.

Speaker 6

Hey, guys. Good morning. Next results this morning. I wanted to ask on the Enterprise segment. You mentioned a handful, I think your largest booking quarter in history, seemed like very strong momentum in the Q4.

Speaker 6

I guess I'm just trying to kind of marry Those comments with the outlook for 20% revenue growth in 2023, should we be thinking about this as sort

Speaker 4

of just like an air pocketed implementation timelines? And Do

Speaker 6

you guys have kind of line of sight towards an acceleration of some of these large bookings kind of start to flow into revenue?

Speaker 3

Thanks for the question, Will. You're thinking about it exactly right. So we did have a really strong Bookings quarter in Q4, we do have to implement those deals. So there's a booking a new Booking cycle and implementation cycle that we have to get through. So the ebb and flow that we see in go This is really reflected in our guidance for this year.

Speaker 3

But as we continue to bring the record breaking bookings That we saw in Q4 live, we'll start to see them really positively impact revenue in the future.

Speaker 6

Got it. That's super helpful. And then I just wondering if you could talk a little bit about penetration rates within just the mental health vertical and simple practice. You guys are talking about going up market into group practices. How do you kind of delineate the size of the market in each and kind of where you stand from a penetration perspective?

Speaker 3

So I mean, we still look at the market holistically. So with simple practice, still targeting $10,000,000,000 TAM with $5,000,000,000 of that More longer term focused on medical specialties, dollars 5,000,000,000 on the wellness market that we're serving today. Within the behavioral health Portion of the market, which we estimate to be at least $1,200,000,000 Obviously, there's A huge concentration of solo practitioners, which we've been very successful at selling into. We're really focused on is Slowly moving up market. So selling to still what I would characterize as small group practices, but that's where we've been seeing the biggest traction to date and we'll continue to kind of slowly progress up into larger and larger group Practices over time, but we're not actively targeting large group practices today, if you will.

Speaker 3

This is a slow movement upward.

Speaker 6

Understood. Appreciate you taking the questions. Nice results.

Speaker 2

Thanks, Will.

Speaker 3

Thanks, Will.

Operator

Thank you. Our next question comes from Terry Tillman with Truist Securities.

Speaker 4

Yes. Hi. Can you hear me?

Speaker 2

Yes. Hi, Terry.

Speaker 3

Good morning, Terry.

Speaker 4

Hey, good morning, Bob, Cassandra and Josh. Nowadays, I feel compelled to ask an AI oriented question, but I'm not going to do it on this call, okay? The first question I had is related well, it's a multipart question related to SimplePractice. 1st, in terms of it does sound like there's still some things and I appreciate what you're saying Cassandra in terms of it's still opportunistic and it's not the main focus on group practices, It sounds like there's still some deliverables you all need to provide in terms of product market fit. So could you give us a sense on when that's going to happen?

Speaker 4

And the second part, I'm intrigued by revenue cycle management. Maybe you could talk about when that could start becoming actionable and what kind of ARPU lift that could provide? And then I had a follow-up for Cassandra.

Speaker 2

Yes. Hey, Terry. So the roadmap for our Market expansion, new specialties continues to drive forward. We're definitely gaining traction very significantly with Very significantly with still speech language pathologists and with occupational therapists And a little bit of a I wouldn't call it a pivot, but an adjustment to accommodate the Really strong growth we're seeing in group practices, in behavioral health and interdisciplinary type clinician outfits where they got speech language pathology, occupational therapy and behavioral health all in the same

Speaker 7

group.

Speaker 2

All of that is While we continue to align our product resources into the squads that can attack The chiropractic, physical therapy and some of the other wellness verticals where we still have a little bit of work to do to for a full product market fit. But again, what we continue to see is that strong demand in behavioral health and in the existing. I mean, SLPs are growing really well. So We just want to continue to be supportive of those groups and continue to enhance those groups so that we can continue to Strong customer satisfaction and the word-of-mouth viral push towards new trials that drive New customer adds. I don't know if that answered your question, Terry.

Speaker 4

It did. And I'm unfair because I'm asking a couple of questions multipart. It's Pretty annoying probably for everyone. But you mentioned revenue cycle management is an opportunity though. That was the second part of the question in terms of just flushing that out a little bit more and Potentially, what kind of the impact and timing?

Speaker 2

Revenue cycle management, we are in trials. We are already in there. We're working To sort of eliminate that administrative burden for many of our practices already today, it's getting Action and we're plowing ahead with it and it looks very favorable and encouraging to us right now. So that We think a significant opportunity as we move forward to really eliminate the hassles around billing, insurance claims and all of that By creating appropriate partnerships where we can bring very high visibility to our customers of what's going on With the insurance claims and eliminate the burden of administering to them. So, we're in play on that right now, going well.

Speaker 4

That's great. And then Cassandra, my second question was just related to the midpoint of the growth for the full year of 2023 is 26% growth. You had the product in Pricing and Packaging that really had a pretty meaningful impact on the SMB in 2022. Is there anything you could share at all about relative growth rates or just to kind of give us some sort of level setting between Enterprise and SMB in 2023? Thank you.

Speaker 3

Sure. Sure. Thanks for the question, Terry. So as it relates to the segments, we expect roughly 30% growth In SMB in 2023 20% growth in enterprise. And really, as you've already highlighted, We're going to be working through the compares on the pricing and packaging this year in SMB, so that's a driver of the growth rate there.

Speaker 3

And then on enterprise, we did have several large go lives at the end of 2021 and the beginning of 2022 that drove really Strong growth for us in the prior year. And there's an ebb and flow associated with the timing of these go lives. So given that, we expect Enterprise to grow roughly 20% in 2023.

Speaker 4

Thank you and congrats.

Speaker 3

Thank you.

Speaker 2

Thanks, Terry.

Operator

Our next question comes from Bhavan Shah with Deutsche Bank.

Speaker 8

Good morning, everyone. It's Nick on for Bob. Thanks for taking my questions. Looking at SimplePractice, Enterprise and Monarch, you talk a little bit more about how

Speaker 2

you see the opportunity growing there going forward? So with SimplePractice Enterprise And Monarch, Bhavan, we see that there's a really strong need for Connecting patients in a timely fashion to care. So with Monarch and SimplePractice Enterprise, We actually enable these MTOs, managed care organizations and employee assistance programs To directly access data and our base of clinicians to set appointments up Online provide online onboarding for new patients, get visibility into whether or not The session actually happened, did the patient show up, did they actually onboard visibility into things that They don't have today in their normal process. Plus, I mean think about a picture yourself as an MCO, as a caregiver Or somebody that's trying to set up care, making 20 phone calls to solo and small group practitioners, leaving messages, Trying to get a hold of somebody so you can align a calendar, they call back here on the phone. So all of that goes away with our automation and our online scheduling capability.

Speaker 2

So We see a really strong need here for well, cost savings with the MCOs and the EAPs to be have Many fewer people that are setting up these appointments because it's all easily handled. And then we see on the other side of that Bob A really strong push from these MCOs and EAPs to get all of their customers, all of their non overlapping clinicians that they refer to today to get onto a simple practice platform or onto the simple practice platform Form 2 ease the ability of scheduling those appointments and then getting the data on the other side of it of whether or not there's Proper outcomes happening from it. So it's all part of Connected Care, outcome tracking and improving what we think is going to be the long term Capabilities of our customers to treat patients in a timely fashion. Great. Thank you.

Speaker 2

And can you give us, I

Speaker 8

guess, a little bit more color on how adoption is going kind of outside of sort of the speech and language pathology and Vocational therapy verticals and sort

Operator

of the rest of the wellness space?

Speaker 2

It continues to grow. I mean, our market Expansion is growing more quickly than our new markets are growing more quickly than behavioral health, which has been the trend. And it continues to grow Aggressively, can't really stop it because the viral word-of-mouth keeps driving it. We're not trying to stop it obviously, but We are still more focused on groups, SLP and OT for the time being. Nutritionists and dieticians continue to grow well just on their own through organic word-of-mouth.

Speaker 2

But I think that the traction is good, strong. I would say it's steady.

Speaker 8

Great. Thanks once again for taking the questions and congrats on the quarter and the year.

Speaker 3

Thanks. Thank you.

Operator

Thank you. Our next question comes from Ashwin Shirvaikar with Citi.

Speaker 7

Hi, Ashwin. Thank you. Hey, Bob. Good morning. Hi, Cassandra.

Speaker 7

Good morning.

Speaker 2

Good morning.

Speaker 7

Good results here. Congratulations on that. Thank you. I was looking for some sort of granular help in terms of Kind of the build out of the model, looking at the SMB side. When we consider sort of The number of locations that are being added per quarter and then the next part of that is the number of professionals per Location and why you don't explicitly have as larger pricing like last year in But you sort of have implicit because more people are moving to group, right?

Speaker 7

So if you could provide any kind of color with regards to how if someone like me Outside looking in can build out that model, that'd be great.

Speaker 3

Thanks for the question. In terms of growth Customer adds, we see pretty consistent trends, consistent with what we saw in 2022 for 2023, really driven by High demand for mental health treatment and care. So that trend remains strong and we think that will still fuel Pretty consistent gross customer adds. We are kind of expecting A slight increase in churn as we work through some of the pricing changes That we have planned for this year. So I would say, again, very small, but largely consistent trends overall with 2022.

Speaker 3

Again, on the gross customer ad side. And then just in terms of group Practices, which I know you asked about, I mean, that has been growing pretty consistently, and we expect that trend to continue for 2023.

Speaker 7

Understood. But no, is there any Other granular detail that you can provide with regards to the penetration of group practices in the base Or anything like that that would be helpful?

Speaker 3

I mean, overall, we have Again, I think just north of 1.6 practitioners per practice and that's been up over the past several years from 1.4. So we're focused on kind of that next segment up, if you will, in group practices. I think still in the 10 to 20 That's where we've been having some good success today and I think that will be contributing to the growth that we see in 2023, especially as we Roll out more features and functionality specific to them, which we expect later this year.

Speaker 7

Understood. And one last cadence question, as we think of rev growth for 2022 and think of it In terms of segments, obviously, the 20% on enterprise, I took your comments to imply it would be sub 20 at least in 1Q and then be higher than that later on. And with regards to SMB, Maybe it goes the other direction north of 30 to start And gets a bit lower than that afterwards. Is that kind of a fair comment? Any other things to watch out for in terms of compares or anything like that?

Speaker 2

No, I mean,

Speaker 3

honestly, the impact in Q1 in terms of the Seasonality that we see in enterprise is very small. So I don't it's not going to be a huge step down here. And I don't think it's going to swing the growth rate too much. And then on SMB, we do start Those compares in Q1, so it will start impacting the growth rate here in the quarter for sure.

Speaker 7

Got it. Thank you. Keep up the good work.

Speaker 3

Thanks Ashwin.

Speaker 7

Thank you.

Operator

Thank you. Our next question comes from Jason Kupferberg with Bank of America.

Speaker 9

Thanks guys. I wanted to ask about ARPU. You continue to see some healthy growth there. What sub segments would you say are primarily driving that? And does ARPU become a bigger part of the overall revenue growth equation in 3, 2024 versus what you've seen in the last couple of years relative to customer growth?

Speaker 3

Yes. I mean, I think we still expect to see really strong contribution from ARPU expansion in 2023. I think 2022 was certainly an outsized year in terms of the ARPU expansion we drove, which really was associated with the pricing and packaging changes we made. So the expansion will clearly be less than what we saw in 2022, but Still a huge contributor for us. And the underlying drivers there are really around our expansion into group practices.

Speaker 3

We have a seat model, so we charge for additional licenses as So more and more payments being processed on our platform.

Speaker 9

Right, right. Okay. And then maybe just a follow-up on margins. And looks like you'll come in this year around 18% in adjusted EBITDA. You reiterated the longer term target of 30%.

Speaker 9

Would you expect just sort of a relatively steady cadence over time or Are there points in time where just because of scale, you start to get more of a pointed inflection, let's say, in terms of your G and A leverage?

Speaker 3

The next few years, it will be steady progression and that will largely be fueled by expansion in G and A as we get Efficiencies there and small incremental improvements in gross margin. Over the long term, I do think we'll start to see real leverage come from sales and marketing, but that is still, I would say, a few years out here as we're really investing To drive growth and capture share.

Speaker 9

Yes. Still chasing a ton of TAM. Yes. Okay, great. Thank you.

Speaker 3

Yes. No worries.

Operator

Thank you. Our next question comes from Scott Berg of Needham.

Speaker 10

Sorry, I was on mute. Apologies there. Congrats on the nice quarter and thanks for taking my questions.

Operator

I guess I got 2.

Speaker 10

Customer adds in the SimplePractice business have kind of bounced around that 5,000 level all year, nice healthy levels, especially with the pricing increase. But we're seeing a number of software companies with exposure to smaller customers find a slightly more challenging environment in the 4th quarter.

Speaker 3

I mean, we're expecting similar trends in terms of gross customer adds for 2023. I think the demand environment, especially around mental health, still remains very Strong. I think at least in terms of the customer that we're targeting, they behave a little bit differently than a typical SMB customer, so I think in some ways that benefits us. But as of now, the demand environment remains strong and We're expecting consistent contribution in terms of gross adds.

Speaker 10

Got it. And then from a follow-up Perspective, the way we calculate kind of transaction a little bit consistently the last couple of quarters here. Any reason why transactions might be or that transaction kind of dollar amount from your customers might be trending down? Just I know if there's something seasonally in the business that's a little bit better in the first half of the year than the second half of the year. Thank you.

Speaker 3

Yes. There is a bit of seasonality to be aware of On the transactional side, and just with the SMB business overall, Q1 tends to be the strongest both in terms of the appointments that our Practitioners have, which obviously drives our payments revenue or our transaction revenue. And Also just in terms of even new customer adds. So Q1 is the strongest and then it kind of slowly steps down through the year As people take more and more vacation and I think in 2022 in particular, we certainly saw people return to a more normal way of life, Taking more vacations, etcetera. And so I think that is a typical seasonal pattern for us.

Speaker 3

The other thing just to be aware of is we did make a lot of changes to pricing and packaging in 2022 and that did shift Some revenue kind of between the buckets. So we're maximizing for total ARPU expansion. And as a result, you can see Shifts in growth between the categories there.

Speaker 10

Great. That's all I have. Thanks for taking the questions.

Speaker 3

Thanks, Scott.

Operator

Thank you. Our next question comes from Josh Beck with KeyBanc.

Speaker 11

Thank you so much for taking the question. I wanted to ask a little bit about the group pricing. Certainly as you get into Even 4 or 5 clinicians per office, it's really meaningful ARPU left Certainly, as you get into 10, it's certainly a really large difference versus your kind of average ARPU. So I'm curious on just with respect to the CAC associated with these group Clinicians, are you finding that the channels that resonate for these large offices Is maybe different than the 1 to 2 type of offices and just how you're kind of Modifying your go to market as group becomes, it seems like a bigger theme.

Speaker 3

I mean, today, our go to market is still pretty simple and very focused on targeted digital marketing and an e commerce driven We do have some onboarding assistance that we provide, but that still Remains our primary go to market motion with groups. And I would say like even in those smaller customer segments, Like of the 4 to 5 practitioners that you were highlighting, we found that go to market motion to be working and effective. You certainly could see longer term if we continue to move up into larger and larger group practices that we might need to Augment our go to market in some way, but I think that's a ways off from where we are today.

Speaker 2

Just to add a little bit of color. With the breadth and depth of our solution for these solo practitioners that come on, we also do see them migrating fairly quickly Yes. They fill up their books to add others add more clinicians to their practice. So there's a natural growth Within, not just going after group practices, but we see a lot of natural growth within the customer base for them attaching other clinicians.

Speaker 11

Okay. That's great color. And maybe just a bit of a follow-up to the prior question About kind of transactions per customer or TPV per customer within simple practice. If you look at your penetration levels, obviously, you offer a solution through Stripe and levels, obviously, you offer a solution through Stripe and get quite attractive, that's a value in economics to your customers that way. I think there's Other options if somebody wants to use maybe another provider, but just when you look at the penetration of your Offering within simple practice, is that something that could be a needle mover in the years ahead where just greater attach even though Maybe the business itself isn't really necessarily your customers business isn't accelerating, but just your penetration within their business is perhaps

Speaker 3

Yes. I do think that will be a contributor to growth as though our customers continue to process more Payments on our platform today, we're at about 75% penetration. So we're processing 75% Our customers' payments directly. So that is pretty high. I think we can still see that tick up a little bit, But more modest contribution going forward.

Speaker 11

Super helpful. Thanks, Lucandra and Bob.

Speaker 3

You're welcome.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Raquel Bitesh with JPMorgan.

Speaker 12

Good morning, Bob and Cassandra, and thanks for taking my question. I know you guys did highlight having your strongest bookings quarter on the enterprise But just given the macro, are you seeing any changes in the sales cycle or any delays?

Speaker 2

I would say that it's been steady, Raquel. We've got We have large deals, there's as we frequently talk about, there's an ebb and flow and different Longer sales cycles for some of the larger deals. But I would say it's we've got a very strong sales engine Enterprise that drives pretty reliable results in terms of number of counts. Now the larger deals come in, in various quarters. And As we mentioned, we had 2 of the 4 largest coming in the Q4 of 2022.

Speaker 2

So anyway, I think that Haven't seen a huge we deliver for Invoice Cloud as an example, we don't charge an upfront fee. We remove pretty much All of the friction from the sale because we're an enhancement to their user experience that they want and There's no they don't have to come up with funds. And frequently, we have the consumer paying the service fee that's associated with our revenue stream. So Not really a big change for any of the customers for their citizens and for their rate payers that are paying a utility bill, for example. So I don't think that yes, I think we're very steady and continue to see good traction.

Speaker 12

Got it. Thanks, Bob. And just a follow-up for me, given your comments around seeing more mid market traction with Invoice Cloud, are there any difference in that sale to a more mid market Customer versus the larger enterprise guys?

Speaker 2

Sales cycle is shorter for the mid market than A larger deal that might be an RFP, a request for proposal oriented, so there's a longer process, a more complex Decision making unit frequently involved, so more drawn out if you will. I mean, I'd say our results Are similar, but we only I would say out of estimating out of 20 new customers, only one of them actually comes as an RFP. So we rely heavily on the mid market and we're seeing a really strong top of funnel better than ever Top of funnel for mid market and enterprise frankly. So I think that we're very bullish in terms of our ability to continue to drive strong bookings This year and in the future.

Speaker 12

Thank you. And congrats on the quarter.

Speaker 2

Thank you. Thank you.

Operator

Thank you. Our next question comes from John Davis with Raymond James.

Speaker 13

Hey, good morning, Bob and Cassandra. Cassandra, on gross margins, those were quite a bit better than I think we expected. I think it expanded about 160 basis points year over year, which is a nice acceleration 3Q. So obviously pricing is having some impact, but that would also have been in 3Q. So anything else going on the gross margin line?

Speaker 13

How should we think about that going into 2023?

Speaker 3

I mean, I think you're thinking about it exactly right, J. D, the biggest contributor is really pricing and packaging. I do think we're getting just continued focus on driving efficiency of the costs that we Encourage to directly support our product and customer support delivery. So those are levers for us as we continue to expand our margins going forward, but those were kind of the big 3, if you will.

Speaker 13

Okay. And then net rev retention was really strong at 117%. Any reason why that should be materially different in 20 20 3, obviously, you had pricing last year, you have some pricing probably a little bit less this year. How should we think about churn, your churn assumptions versus

Speaker 3

Yes. I mean, I think the difference in the contribution on the pricing and packaging will certainly impact the net revenue retention in a similar way to what we Seeing an ARPU expansion, so I would certainly highlight that. And then we are expecting some slightly elevated churn this year, so Maybe a small impact from that as well, but still expecting really strong net revenue retention, again, well north of 100 Which is just really driven by our business model and the levers that we have across both segments to drive growth.

Speaker 13

Okay. And one quick last one here. Once again, in the Q4, you guys flowed through the large majority of the revenue upside to EBITDA. Any reason why that should change in 2023? Should we see revenue upside?

Speaker 13

Do you feel like you have the investments that you want to make Already baked in, in the guide and we could see kind of top line upside flow through to the bottom line or are there plans to maybe spend more if you do exceed the top line?

Speaker 3

I think for the most part to the extent that we see upside in revenue, we expect that to largely flow through at a consistent Rate that we saw in 2022.

Speaker 13

Okay, awesome. Thanks guys.

Speaker 2

Thank you.

Operator

Thank you. There are no additional questions registered at this time. I'll pass the conference to Bob Bennett for closing remarks.

Speaker 2

Thank you. Engagement Mark delivered great results in our Q4 and for our full year of 2022. Momentum for both segments drove record revenue and adjusted EBITDA performance. Standouts are our strong customer growth, the increase in average revenue per Our successful pricing and packaging changes and exceptional customer retention. Our positioning continues to be compelling as we address our huge U.

Speaker 2

S. Market opportunity with Large TAM and SAM. Thank you all for joining us today. We are Excited to speak with you again later this quarter at Raymond James 44th Annual Institutional Investors Conference in Orlando, The Wolfe Research March Madness Software Conference in New York and Truist 2023 Technology, Internet and Services Conference also in New York. Thank you.

Operator

This concludes today's call. Thank you for your participation. You may disconnect at any time.

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Earnings Conference Call
EngageSmart Q4 2022
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