EverCommerce Inc. (NASDAQ:EVCM) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Thank you for standing by, and welcome to EverCommerce’s First Quarter 2023 Earnings Conference Call. My name is Sarah, and I will be your operator for today [Operator Instructions]. As a reminder, this conference call is being recorded today, May 9, 2023. And now I would like to turn the conference over to Brad Korch, SVP and Head of Investor Relations for EverCommerce. Please go ahead.

Brad Korch: Good afternoon and thank you for joining. Today’s call will be led by Eric Remer, EverCommerce’s Chairman and Chief Executive Officer; and Marc Thompson, EverCommerce’s Chief Financial Officer. Joining them for the Q&A portion of the call is EverCommerce’s President, Matt Feierstein. This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended March 31, 2023. For a link to the live or replay webcast, please visit the Investor Relations section of the EverCommerce website, www.evercommerce.com. A 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 described in more detail in our filings with the SEC. We undertake no obligation to publicly update or revise these forward-looking statements, except as required by law. We will 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 provided in both our earnings press release and our earnings call presentation.

Before turning the call over to our CEO, Eric Remer, 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.

Eric Remer: Thank you, Brad. On today’s call, I will highlight first quarter results and discuss key customer trends and metrics before turning the call over to Marc to dive deeper into our financials. EverCommerce started the year strong, being at the top end of the first quarter guidance for both revenue and adjusted EBITDA. First 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%.

As we’ve discussed previously, go-to-market leading with our core system of action SaaS solutions and our upsell cross-sell additional services and features to enhance the value to our customers and drive revenue growth for EverCommerce. Embedded payments continues to lead our cross-selling motion. In the first quarter, total payment volume or TPV grew 17% year-over-year. Strong TPV growth in approved economics grew payment revenue 37% year-over-year in the first quarter. EverCommerce provides sort of tailored end-to-end SaaS solutions that support the highly diverse workflows and customer interactions to professionals and home services, health services and fitness and wellness services used to automate manual processes, generate new business and create more loyal customers as the leading service commerce platform, we provides system of action 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.

As we discussed during our fourth quarter 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 and upsell of our solutions. We measure the progress of this land and expand strategy by the number of customers using more than 1 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 one of EverCommerce solutions grew 22%, providing significant tailwinds in our business. Today, approximately 10% of our customers are utilizing more than one solution, 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. 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 a 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 approximately $11.1 billion, representing a 17% year-over-year growth.

We expect TPV and overall payments revenue grow as we continue to embed our payment solutions into our core system of action. $100 million-plus revenue company established significant scale 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. Today, I’d like to highlight EverHealth as part of the continued evolution of our service commerce platform.

Serving approximately 100,000 small physician, specialty health and medical practices, health service is one of our 3 key customer verticals. Through our integration and consolidation initiative, 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 at our customers and their needs, providing them an integrated set of solutions under one umbrella. We are bullish on our ability to open up new growth opportunities as we move from providing point solutions in the health care space to integrated suites of solutions.

This has become more customer-centric and create simplicity as differentiator in traditionally complex markets. As we execute this strategy, we’ll be able to further streamline our operations and track cost efficiencies and margin expansion over time. Now I will pass it over to Marc, who will review our financial results in more detail as well as provide second quarter and updated full year 2023 guidance.

Marc Thompson: Thanks, Eric. Total revenue in the first quarter was $161.1 million, up 12.2% from the prior year period. Within total revenue, subscription and transaction revenue was $123.8 million, up 14.6% from the prior year period. And revenue for marketing technology solutions was $31.8 million, 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 of 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, and we continue to take actions to balance growth with profitability within these products and services.

First quarter other revenue of $5.5 million included approximately $500,000 of revenue that was previously expected in the second quarter, modestly affecting the pacing of revenue growth in the first half of 2023. At the end of Q1, LTM revenue was $638.3 million, up 20.7% on a reported basis and 13.8% on a pro forma basis. As a reminder, we calculate our pro forma revenue growth as though all acquisitions closed as of the end of the latest period were closed as of the first day of the prior year period, including before the time we completed the acquisition. We believe the pro forma 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 forma growth rate because we did not complete any acquisitions during the period.

First quarter adjusted EBITDA was $31.9 million, representing a 19.8% margin versus 16% in the first quarter of 2022 and 39% growth year-over-year. Additionally, LTM adjusted EBITDA was $128 million, representing a 20.1% margin. In the first quarter, we are clearly delivering towards our full year 2023 objectives by exceeding guidance and achieving 20% adjusted EBITDA margins. 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 $105.2 million, representing an adjusted gross margin of 65.3% versus 64.7% in 2022. LTM adjusted gross profit was $415.7 million, representing an adjusted gross margin of 65.1%.

Adjusted gross profit is seasonally weaker in the first quarter and strengthens over the course of the year. So we do expect gross margins to improve. Now turning to operating expenses. Adjusted sales and marketing expenses were $29.2 million or 18.1% of revenue, down from 20.1% 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 $18.1 million or 11.3% of revenue, down from 12% of revenue reported in the prior year period. The decline as a percentage of revenue is attributable to timing and prioritization of investments in our solutions and centralized IT operations. Adjusted G&A expense was $25.9 million or 16.1% of revenue, down from 16.5% 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 second full year as a public company. We continue to generate significant free cash flow as we invest to grow our business. Our adjusted unlevered free cash flow for the quarter was $22.4 million, representing 50.4% year-over-year growth and a 13.9% margin. For the last 12 months, our adjusted unlevered free cash flow was $92.8 million. Levered free cash flow, which accounts not only for debt service, but also various working capital adjustments, was $7.8 million in the quarter. This was down slightly year-over-year, primarily due to higher interest rates. For the trailing 12 months, levered free cash flow was $46.1 million, 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. 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 of excess cash in Q1 to continue our share repurchase program. In the first quarter, we repurchased 3.1 million shares for a total cash consideration of $29.6 million, an increase from the fourth quarter of 2022 when we repurchased 2.1 million shares. We ended the quarter with $69.8 million in cash and cash equivalents, and we maintain $190 million of undrawn capacity on our revolver.

Our debt is a combination of 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 outlook for the remainder of 2023, beginning with the second quarter. For Q2 revenue, we expect total revenue of $168 million to $172 million, and we expect adjusted EBITDA of $31 million to $34 million. Our full year 2023 revenue guidance remains $680 million to $700 million, and we are raising our adjusted EBITDA guidance to $136 million to $144 million. As we noted on the first quarter call, price increases and new product introductions are expected to drive growth and strong margins throughout the year.

Our 2023 outlook does not include any potential impact of M&A activity that could take place. Before we begin the question-and-answer portion of the call, I want to highlight once again how pleased we are with the first quarter results. 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.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Kirk Materne with Evercore ISI.

Operator: Our next question comes from Matt Hedberg with RBC Capital Markets.

Operator: Our next question comes from Brad Reback with Stifel.

Operator: Our next question comes from Bhavin Shah with Deutsche Bank.

Operator: The next question comes from Alex Sklar with Raymond James.

Operator: The next question comes from Jeremy Sahler with Jefferies.

Operator: [Operator Instructions] Our next question comes from Noah Herman with JPMorgan.

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

Eric Remer: Thank you for that. EverCommerce 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.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.