EverCommerce Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 11 speakers on the call.

Operator

You for standing by, and welcome to Evercommerch's First Quarter 2023 Earnings Conference Call. My name is Sarah, and I will be your operator for today. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference call is being recorded today, May 9, 2023.

Operator

And now I would like to turn the conference over to Brad Korch, SVP and Head of Investor Relations for Ever Commerce, please go ahead.

Speaker 1

Good afternoon, and thank you for joining. Today's call will be led by Eric Rimmer, EverCommerce' Chairman and Chief Executive Officer and Mark Thompson, EverCommerce' Chief Financial Officer. Joining them for the Q and A portion of the call is Commerce's President, Matt Firestein. This call is being webcast with a slide presentation that reviews the key financial and operating results for the 3 months ended March 31, 2023. For a link to the live or replay webcast, please visit the Investor Relations section of the Evercommerse website, www.evercommerce.com.

Speaker 1

Slide presentation and the earnings release are also directly available on the site. Please turn to Page 2 of our earnings call presentation, while I review our Safe Harbor statement. Statements made on this call and contained in the earnings materials available on our website that are not historical in nature may constitute forward looking statements. Such statements are based on the current expectations and beliefs of management. Actual results may differ materially from these forward looking statements due to risks and uncertainties that are In more detail on our filings with the SEC, Windy take no obligation to publicly update or revise these forward looking statements, except as required by law.

Speaker 1

We We'll also refer to certain non GAAP financial measures to provide additional information to you, our investors. A reconciliation of non GAAP to GAAP historical measures is Before turning the call over to our CEO, Eric Riemer, I want to note that management will not be commenting today on any rumors or speculation that has been in the press, either in prepared remarks or during the question and answer portion of the call. Eric, please continue.

Speaker 2

Thank you, Brad. On today's call, I will highlight Q1 results and discuss key customer trends and metrics Before turning the call over to Mark to dive deeper into our financials. Eric Commerce started the year strong, beating the top end of the first quarter 1st quarter results benefited from continued solid customer growth and payments penetration As the secular tailwinds that propel the digitization of the service economy continue. We continue to balance growth and profitability as we operate the business, And our first quarter results underscore this mantra. We exceeded our goals for the quarter with year over year revenue growth of 12.2% and EBITDA margin of 20%.

Speaker 2

As we've discussed previously, we go to market leading with our core system of action SaaS solutions and then up sell, cross sell additional And features to enhance the value to our customers and drive revenue growth for EverCommerce. Embedded Payments continues to lead our cross selling motion and during the Q1, Total payment volume, or TPV, grew 70% year over year. Strong TPV growth and improved economics grew payment revenue 37% year over year in the Q1. EverCommerce provides vertically tailored end to end SaaS solutions that support the Our first question comes from the line of Sarah. Hi, Sarah.

Speaker 2

I'm Sarah. I'm very pleased with the progress we made in the quarter. I'm very pleased with the progress we made in the quarter. I'm very pleased with the progress we made in the quarter. I'm very pleased with the progress we made in the quarter.

Speaker 2

I'm very pleased with the progress we made in the quarter. I'm very pleased with the progress we made in the quarter. I'm very pleased with the progress we made in the quarter. Automate manual processes, generate new business and create more loyal customers. As a leading service commerce platform, we provide system of software across our many micro verticals, which in turn drive the workflows to help our customers generate new business, fulfill services, manage day to day operations and engage with our customers.

Speaker 2

As we discussed during our Q4 2022 earnings call in March, We ended the year with serving more than 685,000 customers. Our large customer base represents an incredible opportunity for revenue expansion to cross sell, upsell of our solutions. We measure the progress of this land and expand strategy by the number of customers using more than one solution. This metric continues to grow as we embed payments and market our digital marketing And lead generation solutions to our customers. Year over year, the number of customers using more than 1 of EverCommerce solutions grew 22%, Providing significant tailwinds in our business.

Speaker 2

Today, approximately 10% of our customers are utilizing more than And this continues to represent one of the largest opportunities for growth out of us. As customers purchase add on capabilities And more than one of our products, we see ARPU expand and our retention of these customers improve. We measure this through our annualized net revenue retention or NRR. Looking back at trailing 12 months, our annualized net revenue retention has remained constant approximately 100%. Embedded payments is our largest and most accretive cross sold solution.

Speaker 2

Year over year, our payments revenue grew 37%, Outpacing overall revenue growth and contributing to margin expansion in the quarter as payments are booked on net revenue basis and contribute approximately 95% gross margins. Payments revenue growth is driven by TPV growth and by improved economics given our scale. We ended this quarter with an annualized TPV of $11,100,000,000 representing a 17% year over year growth. We expect TPV and overall payments revenue to grow as we continue to embed our payment solutions into our core system of action, a $100,000,000 plus revenue company established significant Across our platform, our vertically tailored system of action SaaS solutions that are complemented by value added payments, Marketing Technology and Customer Engagement Solutions. We have integrated these products onto our centralized operating platform, Leveraging centers of excellence across key functions such as marketing, finance, accounting, IT, legal, HR and product development To improve the scalability and optimization of our consolidated operations.

Speaker 2

Today, I'd like to highlight Everhealth as part of the continued evolution of our service commerce platform. Serving approximately 100,000 small physicians, specialty health and medical practices, Health Services is one of our 3 key customer verticals. Through our integration and consolidation initiatives, we have created a platform of connected and customizable solutions in EHR, practice management and patient engagement Empowering our customers and health services to streamline and grow their practices. The picture shown on Slide 8 is our recent Everhealth booth at HIMSS conference last month. This conference marked the first time that we went to market as one integrated Everhealth brand, Allowing us to better focus our efforts on our customers and their needs, providing them an integrated set of solutions under one umbrella.

Speaker 2

We are bullish on our ability to open up new growth opportunities as we move from providing point solutions in the healthcare space to integrated suites of solutions. We'll be able to further streamline our operations and drive cost efficiencies and margin expansion over time. Now I will pass it over to Mark,

Speaker 3

Thanks, Eric. Total revenue in the Q1 was $161,100,000 up 12.2% from the prior year period. Within total revenue, subscription and transaction revenue was 123,800,000 percent from the prior year period and revenue from Marketing Technology Solutions was $31,800,000 up 6.3% from the prior year period. The strong performance in subscription and transaction revenue, which is in line with our long term target, was largely due to solid execution Our strategy to provide customers our core systems of action software and cross selling embedded payments, which grew 37% in Q1, As Eric had mentioned earlier in the call. As we've highlighted in the past two earnings calls, we continue to see modest headwinds to growth in our marketing technology solutions, We continue to take actions to balance growth with profitability within these products and services.

Speaker 3

1st quarter other revenue of $5,500,000 included $500,000 of revenue that was previously expected in the second quarter, modestly affecting the pacing of revenue growth in the first half of twenty twenty three. At the end of Q1, LTM revenue was $638,300,000 up 20.7% on a reported basis and 13.8 percent

Speaker 4

on a pro form a basis.

Speaker 3

As a reminder, we calculate our pro form a revenue growth as though all acquisitions closed As of the end of the latest period, we're closed as of the 1st day of the prior year period, including before the time we completed the acquisition. We believe the pro form a growth rate provides the best insight into the underlying growth dynamics of our business. Our reported growth rate for Q1 is equivalent to our pro form Adjusted EBITDA was $31,900,000 representing a 19.8% margin versus 16% in the Q1 of 2022 And 39% growth year over year. Additionally, LTM adjusted EBITDA was $128,000,000 representing a 20.1% margin. In the Q1, we are clearly delivering towards our full year in 2023 objectives by exceeding guidance and achieving 20% adjusted EBITDA margins.

Speaker 3

Adjusted EBITDA outperformance in the quarter was partially due to higher revenue, but was primarily due to our focus on actively managing our operating expenses, Driving operating leverage and cash flow generation. Adjusted gross profit in the quarter was $105,200,000 representing an adjusted margin of 65.3 percent versus 64.7 percent in 2022. LTM adjusted gross profit was 415.7 Representing an adjusted gross margin of 65.1%. Adjusted gross profit is seasonally weakest in the Q1 and strengthens over the course of the year, we do expect gross margins to improve. Now turning to operating expenses.

Speaker 3

Adjusted sales and marketing expenses were 29,200,000 18.1 percent of revenue, down from 20.1 percent of revenue in the prior year period. This was driven by both the timing and pacing of growth investments And expected scale economies as our business grows. Adjusted product development expense was $18,100,000 or 11.3 percent of revenue, down from 12 In our Solutions and Centralized IT Operations, adjusted G and A expense was $25,900,000 or 16.1 percent of revenue, down from 16.5 percent of revenue in the prior year period. This was largely driven by active cost management during the quarter And also stabilizing investments in our public company infrastructure as we are now in our 2nd full year as a public company. We continue to generate significant free cash flow as we invest to grow our business.

Speaker 3

Our adjusted unlevered free cash flow for Quarter was $22,400,000 representing 50.4% year over year growth and a 13.9% margin. For the last 12 months, our adjusted unlevered free cash flow was $92,800,000 Levered free cash flow, Which accounts not only for debt service, but also various working capital adjustments, was $7,800,000 in the quarter. This It was down slightly year over year, primarily due to higher interest rates. For the trailing 12 months, levered free cash flow was 46 point 1,000,000 continuing to underscore our balance sheet flexibility. Strong free cash flow generation allows us to operate our business with an optimal capital structure That includes modest levels of leverage.

Speaker 3

Ultimately, this can allow us to deliver enhanced equity returns to our shareholders. It also allows us to efficiently allocate capital across the spectrum of opportunities. While we continue to appropriately invest in our organic growth, we used a significant amount excess cash in Q1 to continue our share repurchase program. In the Q1, we repurchased 3,100,000 shares for a total Cash consideration of $29,600,000 an increase from the Q4 of 2022 when we repurchased 2,100,000 shares. We ended the quarter with $69,800,000 in cash and cash equivalents, and we maintained $190,000,000 of undrawn capacity on our revolver.

Speaker 3

Our debt is a combination floating and fixed rate and total net leverage as calculated for our credit facility at the end of the quarter was approximately 3.2x, Consistent with our financial policy, we have no material maturities until 2028. I'd now like to finish by providing our I'll look for the remainder of 2023, beginning with the Q2. For Q2 revenue, we expect total revenue of $168,000,000 to 172,000,000 And we expect adjusted EBITDA of $31,000,000 to $34,000,000 Our full year 2023 revenue guidance remains 680 And we are raising our adjusted EBITDA guidance to $136,000,000 to $144,000,000 As we noted on the Q1 call, Our 2023 outlook does not include any potential Before we begin the question and answer portion of the call, I want to highlight once again Our focus continues to be on executing against our strategic priorities to deliver consistent profitable growth And significant value for our customers and shareholders. Operator, we're now ready to begin the question and answer section of the call.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Kirk McTernay with Evercore ISI. Please go ahead.

Speaker 5

Yes. Thanks very much, and congrats on a good start to the year. Eric, you just talk a little bit more about the macro environment? Are things pretty much leveling out versus what you saw in the sort of the 4th quarter? How would you kind of characterize how the quarter went?

Speaker 5

Was there any sort of impact from some of the macro intensity around the banks in March? I was just kind of curious Where do you think we are on that front?

Speaker 2

Thank you, Kirk. Appreciate the question. Really, this quarter really The continuation kind of of the growth of Q4 and really business as usual, we did not see any impact in the core verticals we serve and we've talked about this before directly. As you remember, we in the kind of service businesses that we serve and the verticals that we're in from healthcare, fitness, wellness As well as home services, which is a large category, it's really been kind of a continuation of very steady growth. And at this point, we expect that for the rest of the year, we have not seen any type of any degradation in any of the core verticals that we serve.

Speaker 5

Okay, great. And then Mark one for you. Just on the EBITDA forecast for the year, I guess where are you, I guess year to date against your Hiring assumptions, is there anything we should be thinking about maybe in the back half of the year from a seasonality perspective around hiring or any yield loss expenses? Thanks.

Speaker 3

Thanks, Kirk. So nothing of magnitude. I think, look, coming into this year, Just given the climate we're in, we want to be in front of our expense base and managing that tightly. We refer to that as active management, we did a good job of that in Q1. So we're being very deliberate with respect to our hiring and making sure that we're And making sure that we're doing that in the right places for the right reasons.

Speaker 3

I think coming into the quarter or excuse me, exiting the quarter, Investment pace is a little bit slower than anticipated. So that I think will sort of carry through the balance of the year. But all in all, Nothing to really call out.

Speaker 5

Great. Thank you all.

Operator

Our next question comes from Matt Hedberg with RBC Capital Markets. Please go ahead.

Speaker 6

Hi. This is Anishta for Matt Hedberg. Thanks for taking my question here. Maybe if you could just start by talking about what Trends you're seeing on the new customer side of things relative to last quarter? And then how should we think about the net adds going forward?

Speaker 2

Thank you so much for the question. Really, the continuation, as just talked to Kirk about, The Cut Pro acquisition is kind of on pace as expected, really based on plan that we thought. And it's not Anything that's anywhere in the funnel from top of funnel down to new customer growth has really been really as planned, as expected Q1.

Speaker 7

Yes. I'd say similarly from just the full funnel conversion standpoint to all of our channels and obviously digital being our largest region And largest impact one from digital to partnerships to live in trade shows and conferences. Again, we've seen stability quarter over quarter and Performance of the funnel there. So happy about that progression.

Speaker 6

Got it. And then you talked about Price increases built into the guide and that you're planning to press harder on price lever this year. Could you talk more about that Price as a driver for you. And then what has been the customer reception of the price increases so far? Thanks.

Speaker 3

So thanks for that. I'll take that. So as we said on our last call, We always increase prices. We really are focused on volume pricing across all of our various products and solutions. I think coming into this year, We have been more deliberate and more widespread with that motion, and we do expect that to have impact Through the year, probably more in the second half because obviously, we're initiating those here in the first half.

Speaker 3

Thus far and has always been our history, When we raise price, we tend not to see much impact. We usually plan for that noise right around that action. And typically, we really don't see much, and that's certainly

Operator

Our next question comes from Brad Reback with Stifel. Please go ahead.

Speaker 8

Great. Thanks very much. Eric, do you see an opportunity to getting back to the M and A strategy? Or is your stock so compelling of a value right here that it makes no sense To buy other businesses. Thanks.

Speaker 2

Yes. Thanks, Brad. I think we're getting closer. I think it has to do with our value, because I think we will continue to perform, and I think the stock will take care of itself over time. But I do think we're starting to see, really, Brad, as we've talked about before, Just being disciplined and making sure what we're finding is going to be accretive to the business, both in the near term to long term.

Speaker 2

And I think the market is Beginning to balance out a little bit more now than I've seen in quarters past. And so we're looking at a bunch of things, but We're going to be active as we see opportunities that make sense of the business.

Speaker 8

And so following up on that, is there a maximum Financial EBITDA leverage you'd be comfortable with? Or how should we think about adding more debt to the business?

Speaker 2

Thanks. Yes. Right now, I think, as you saw, our leverage went down slightly. We have cash on the balance sheet That we look at. And so a lot of it is going to depend on the right type of deal, how accretive that is.

Speaker 2

Some of the deals we're looking at are actually just Could be on the smaller side of things that we can buy off balance sheet without having to create additional leverage. And so we're going to be prudent as Mark Put the kind of the priorities out historically in terms of the ranges we're willing to kind of gross up to. But at this point in time, we don't see the need to draw down additional leverage.

Speaker 8

Great. Thanks very much.

Operator

Our next question comes from Bhavan Shah with Deutsche Bank. Please go ahead.

Speaker 9

Great. Thanks for taking my questions. Just in terms of the consolidation into the larger EverHouse, Everwell Xcerra Brands. Can you just talk first from a cost standpoint, what you guys need to do from an integration perspective to kind of Consolidate under those brands and then 2, I know it's kind of early, but what are you seeing on the other side of things in terms of from a demand generation standpoint and a cross selloff sell standpoint?

Speaker 7

Yes. I mean, it's a great question. On the cost side of things, obviously, it's still early. What we expect to see is No, cost efficiency in terms of how we go to market. So as we consolidate brands and we're actually going to market with less of those brands, our digital marketing costs should Those are costs that we do feel like we're going to be able to consolidate and get more efficiency from as we're going with a consolidated set of solutions versus A less integrated set of point solutions, think about our motion down funnel from that go to market when you think about Sales organizations, implementation, how we service the customer, how we continue to evolve our product platforms, all of those represent Cost efficiencies when we think about consolidating not just the brand, but the underlying operations.

Speaker 7

And again, that's something that we have been underway with. And As we've spoken about in the past, have been most significantly underway from an Ever Health standpoint. Obviously, still early innings. You asked About what are our results there, but the reception in the marketplace has been really, really strong. Obviously, from a customer experience standpoint, That consolidated set of suite of integrated solutions versus what Previously, we're less integrated, more point solutions.

Speaker 7

That is a better customer experience, and that really is the kind of whole thesis behind EverCommerce And really the whole thesis behind this consolidation and integration of brands and the underlying operations and products. So super excited about early innings, but our customer reception has been good.

Speaker 3

Bob, it's Mark. Just to double click on what Matt just described more from a time context. I mean, we are in The very formative stages of doing this ever help us, and we've said this really over the last couple of quarters, they're sort of leading paving the way, if you will, in terms of consolidation of Products and organizations within a particular vertical. It is a multi quarter arc Of optimization, though, it does create what we think is a very long tail opportunity and one we're very, very focused on because as Matt said, It's ultimately, it's a lot better for our customers, and it will breed

Speaker 2

a lot of

Speaker 3

optimization into our organization operation. So we are excited about that, but It won't be an overnight kind of experience.

Speaker 9

For sure, that makes a ton of sense. And I guess just one follow-up on this topic. Your customers as they kind of interface with the product that they use, Doctor. Coron or the therapy, etcetera, like are those UIs changing where it's more prevalent that they're seeing Everhealth out There or is it still facing chronic CRADA?

Speaker 7

Yes. That's going to be an iteration over time for sure. And we'll obviously be thoughtful about that, obviously thoughtful about the brands that have equity and strong attraction from the customers and others where maybe That doesn't exist. But yes, over time, in a very considered way, throughout the product experience, they would see throughout the not just the product experience, Throughout their entire experience with Evercommerse, they will see that shift over time. But again, we're very thoughtful about that, and That's going to be a deliberate change.

Speaker 10

Thanks for taking my questions.

Operator

Our next question comes from Alex Sklar with Raymond James. Please go ahead.

Speaker 4

Hi, thanks for taking the question. This is John on for Alex. I wanted to start off with 1 on the ability to stand in the newer micro verticals. Any opportunities here to stand up new micro verticals using existing solutions without the use of M and A?

Speaker 2

John, thanks for the question. The answer is yes, we're constantly expanding, looking at opportunities within the verticals that we serve. Some of that comes organically, meaning Verticals, customers and kind of complementary or adjacent verticals, we utilize our solution as we start getting critical mass. We build additional Services on top of that. A great example of that is in our pest control business that we have.

Speaker 2

We started getting more kind of tree care type Customers utilized that because they had very similar overlap into the pest control. We saw some things that might needed to add to make it even more complete product. We built some of that, and now we have a really full suite product for that vertical. So we're doing that in several different places as we see the opportunity.

Speaker 4

Thanks. That was great color there. And maybe just a follow-up on an earlier question on the multi product success. Any changes in deal sizes on like a like for like solution basis given the increased integration of payments into more Core systems of action. So basically, are you seeing more multi product success at the initial point of sale versus cross line later?

Speaker 4

Thank you.

Speaker 7

Absolutely. It's a great question. I think we think about multi product take, again, both at the time of sale of the core system of action, That's a whole mantra around a suite of integrated solutions. The more that is integrated, the more we can sell upfront. But again, we also will meet customers where they are and System of action is where they are.

Speaker 7

We're going to have a motion for adding that second product on the back end. So we aren't seeing nice success, pulse in the initial sale As well as the add on cross sell at a later time when the customer is ready to ingest that. So both strategies, both pushing on both and success on both fronts.

Speaker 4

Thank you very much.

Operator

The next Question comes from Jeremy Saylor with Jefferies. Please go ahead.

Speaker 10

Hey, guys. This is Jeremy on for Samad. Thanks for taking my questions. So first, you guys called out that take rate expansion, and it looks like that was a bigger contributor to that payment revenue than TPV growth. Can you talk about what's driving that take rate expansion and kind of much juice is there left for further expansion?

Speaker 7

Yes, absolutely. Absolutely one of the core strategies within our payments From a payments growth standpoint, we've seen that really on two fronts, merchant pricing. We have Had opportunities, and again, you hear us say price to value. So payments is another place that we look at price to value, and we've had opportunity to expand that specifically as The integration and breadth of our payments offering has continued to expand in those integrated solutions. So, merchant pricing is a spot there.

Speaker 7

And With scale, obviously, we continue to have the opportunity to optimize our contractual relationships with our back end Which creates an expansion opportunity for Spread. So both of those things together has absolutely led to an increase in net take rate over time on our

Speaker 10

Got it. That's great color. Thank you. And then on the reiterated full year guide, You guys called out kind of continuing headwinds to Marketing Tech. I guess, of that reiterated guide, how much of that is coming from incremental strength And subscriptions, transactions, are you expecting any stabilization in marketing tech?

Speaker 2

Yes. We're basically we're seeing kind of we kind of talked about this last quarter. Q3 was the kind of time where we saw some markdown come down. It stabilized in Q4 and it stabilized in Q1. So as we look throughout the rest of the year, it's really we're expecting really continuation of the current trends that we're seeing.

Speaker 2

I think their trends have been favorable for us. If you want them, we expect that throughout the rest of the year, being prudent without knowing The macro world, so we feel very comfortable with the guidance we've given at this point.

Speaker 10

Got it. Thanks for taking my questions, guys.

Operator

Question comes from Noah Herman with JPMorgan. Please go ahead.

Speaker 10

Just one from our end. What business steps are you facing to sort of improve the onboarding of Penguin's capabilities for customers?

Speaker 1

Hi, Noah. Can you repeat for

Speaker 2

the question? Unfortunately, it got muffled a little bit. Could you repeat that, please? I'm sorry.

Speaker 9

Yes, no problem. What steps are you taking to improve the onboarding of payment capabilities for customers?

Speaker 7

Yes, got it. Thanks. That's great. Again, obviously, part of the core growth strategy around payments is Creating more opportunities for attach rate, driving more attach rate, getting those customers to Activate and start processing as quickly as possible, expanding their wallet share, and as I just talked about, growing the net take rate. So from an onboarding standpoint, Obviously, that's key right in between the attach and actually utilization.

Speaker 7

So super focused from that perspective. I think it's an area that We have been pretty strong on. We very much understand that it's not just about The proposition in from a marketing and sales standpoint, but getting somebody set up and starting the process is critical. From all of our touches during the marketing and sales process, educational pieces that we're consistently providing, Touches from a customer success standpoint to get people lit up. There are a variety of strategic initiatives that we have across the payments landscape that are really focused on Exactly that, getting that attached payment customer onboarded and starting to utilize the product.

Speaker 9

Thank you and congrats on the quarter.

Speaker 1

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Eric Reamer, CEO, for any closing remarks.

Speaker 2

Thank you for that. Evercomer started the year very strong, and we remain extremely excited about our future prospects and really the continuation of the digitization of the service economy. Thank you guys very much for joining the call today.

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EverCommerce Q1 2023
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