EverCommerce Inc. (NASDAQ:EVCM) Q4 2023 Earnings Call Transcript March 14, 2024
EverCommerce Inc. misses on earnings expectations. Reported EPS is $-0.1237 EPS, expectations were $-0.03. EVCM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to EverCommerce’s Fourth Quarter 2023 Earnings Call. My name is Daniel, and I’ll be your operator today. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Thursday, March 14, 2024. And I would now 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 December 31, 2023. For a link to the live or replay webcast, please visit the Investor Relations section of the EverCommerce website, www.evercommerce.com. The slide presentation and 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 GAAP historical measures is provided in both our earnings press release and our earnings call presentation.
I will now turn it over to our CEO, Eric Remer. Please continue.
Eric Remer: Thank you, Brad. On today’s call, I will highlight fourth quarter results and discuss EverCommerce’s strategic transformation and optimization initiatives, which includes the recently announced sale of our fitness assets, and finally end with a discussion of our key customer trends before turning the call over to Marc to dive deeper into our financials. At its core, EverCommerce provides business management software that supports end to end business processes for service SMBs. Our SaaS solutions support highly specialized workflows in each of our verticals, enabling our customers to automate manual processes, generate new business and create more loyal customers. Our solutions are ERP tools for our customers and are critical to our customers’ businesses.
We enhanced the value of our business management solutions by upselling and cross selling additional features such as robust payments integration, customer engagement solutions, lead generation and group buying programs. Keeping to our mission statement, we are simplifying the lives of those service providers that support us every single day. Full year revenue growth was 9%, and most importantly, we significantly expanded margin throughout the year. Our 2023 adjusted EBITDA margins of 23% represented as 380 basis points of expansion when compared to 2022 and absolute 2023 adjusted EBITDA grew 30.7% in 2023 exceeding guidance given 1 year ago by $17.6 million at the midpoint. Turning to our fourth quarter highlights, our fourth quarter adjusted EBITDA also exceeded the top end of our guidance range.
Adjusted EBITDA grew 22% year-over-year and equated to a 25% margin. As we’ve highlighted in the past, we’ve seen headwinds in the more transactional aspects of our business, and this was true in the fourth quarter as well, specifically in our Marketing Technology Solutions revenue streams. Due to both macroeconomic pressures and weather-related impact, our MarTech revenue was down nearly 10% year-over-year impacting overall revenue growth rate. Consolidated revenue growth in the quarter was 5%. Subscription and transaction revenue, which excludes marketing technology services, was approximately 10%. With sustained growth and profitability, we are creating the opportunity to incrementally invest in our higher growth, higher margin, larger market opportunities.
One of our biggest opportunities is to invest to drive growth in payments. Driving payments adoption continues to be a key element of our strategy, and for the fourth quarter we increased our payment revenue by 20%. Before we dive deeper into fourth quarter performance, I want to highlight an important transaction we announced yesterday that will impact our business moving into 2024. We signed an agreement that will result in EverCommerce’s exiting the fitness vertical. As we discussed publicly for the past 12 to 24 months, the fitness vertical is less than 4% of our total revenue, but it’s one of our most competitive markets and our solutions have not recovered to pre-COVID levels of operation. This has resulted in a flat revenue performance negatively impacting our overall growth rate and creating a drag on our consolidated profitability.
We believe that selling our fitness software solutions to a leading large player in the fitness space is the best outcome for our customers, employees and investors. This enables us to allocate resources to our higher growth, higher margin, larger market opportunities within EverCommerce. The sale of the North American fitness assets closed yesterday, while we expect that the sale of international assets will close following regulatory approval in third quarter. We will exclude the fitness assets from the guidance Marc will provide in a few moments. So when comparing growth rates, it’s important to note that these assets contributed approximately $24 million of revenue in 2023 and a breakeven contribution to adjusted EBITDA. The sale of our fitness assets is the first step in our plan to simplify our business and invest in assets that can provide the best growth and strongest returns to our shareholders.
In addition to this sale, we are also taking steps to transform and optimize our operations. The fourth quarter, we engaged a third party advisor to help us assess our operations and identify specific initiatives and strategies to simplify, optimize and better scale our operations. With this, we will sharpen our customer centric vertical market focus to better position us to accelerate growth. There are 2 main components to this program. First, we’ll be doubling down on our customer centric vertical go to market structure, increasing investments in our key verticals such as EverPro and EverHealth. This includes simplifying our organizational structure and consolidating products and legacy brands, as well as investing in our go-to-market engine.
Our ongoing consolidation of solutions within EverHealth, which began last year, was really the beginning of this evolution. With help from our third-party advisors, we developed plans to fast track similar strategies with EverPro. We believe this will help us improve our execution by streamlining functions ranging from sales, marketing, product development and really help accelerate growth in 2025 and beyond, as well as improve our ability to allocate capital while also enhancing our customer experience. Second, we’re going to continue to optimize our operations and cost structure and improve its scalability which will help fund key growth investments and allow us to continue to expand margins and cash flow generation over the coming years.
As I mentioned, we completed our initial assessment in the fourth quarter 2023 and have already begun implementation of several initiatives. We expect these transformation optimization initiatives to continue through the next 18 to 24 months. Turning back to our fourth quarter highlights, we continue to execute on our land and expand strategy. We land with a core business management software and then upsell cross sell our existing customers additional features, services and products. This enhances our value to our customers receive from the relationship with EverCommerce and drives additional revenue. As we’ve shown in various examples in previous earning calls, this translates to lower churn and higher retention. As of the end of fourth quarter, we continue to see an increase in customers utilizing more than one solution to approximately 82,000.
In addition, the number of customers that have contracted and onboarded for two or more products grew 26% year over year to approximately 183,000. The payments enabled customers in this grouping represent a significant near-term opportunity for payments processing and payments revenue growth for EverCommerce. Customers that purchase and utilize more than one solution are naturally some of our most profitable and stickiest customers. This is because we provided significant value to them and their businesses. This fact presents itself through strong net revenue retention. Looking back over the trailing 12 months, our annualized net revenue retention or NRR for our core software payment solutions was 100%. Embedded payments is our most accretive cross sold solution and stands to be a long-term driver for EverCommerce revenue growth and margin expansion.
Year-over-year, our payments revenue grew 20%, accounting for approximately 70% of our overall revenue. We report our payments revenue on a net basis and as a result payments revenue contributes approximately 95% gross margin and is a meaningful contributor to our overall adjusted EBITDA margin expansion. Fourth quarter annualized total payment volume or TPV was approximately $11.9 billion representing a 9% year-over-year growth. We expect TPV and overall payments revenue to grow as we continue to embed our payment solutions in our core system of actions. I would like to end my portion of the prepared remarks by highlighting organic growth opportunity for the company that we are incredibly excited about, EverPro Edge. EverPro Edge is a new solution that provides customers the opportunity to save, learn and grow, create a community and trusted brand for engagement with them.
The genesis of EverPro Edge was a customer rebate program that existed within our home and field service solution set. Because of the SMB nature of our customer base, they lack the buying power of typical midsize or enterprise scale business operations. Now, through their association with EverCommerce, our customers can benefit from the collective buying power of more than 350,000 home and field service providers. Our customers will benefit from real savings in parts and supplies to already purchasing, and for EverCommerce, we benefit from a revenue share of the rebates and the increased value our customers see from the use of our software. As part of the EverPro Edge community, our customers also receive targeted business growth and education content to help them drive performance to their business.
Over time, we believe EverPro Edge has the ability to accelerate revenue for EverCommerce and decrease churn as customers realize more value for the EverCommerce ecosystem. EverPro Edge was launched in the second half of 2023 to our choice customer base and today we have over 7,500 customers using it. In 2024, we will expand this solution to additional system of action. Now, I’ll pass it over to Marc, who will review our financial results in more detail as well as provide first quarter and full year 2024 guidance.
Marc Thompson: Thanks, Eric. Total revenue in the Q4 was 169.4 million, up 4.7% from the prior year period. We continue to experience demand driven headwinds in our marketing technology solutions. We also experienced slower growth in our fitness solutions, underscoring our decision to part ways with this piece of our business. Within total revenue, subscription and transaction revenue was a 133.5 million, up 9.8% from the prior year period, and revenue for marketing technology solutions was 30.1 million, a decrease of 9.5% from the prior year period. The solid performance in subscription and transaction revenue was largely due to continued execution of our growth strategy to provide customers our core system of action software solutions and driving expansion by promoting cross sell and up sell opportunities leading with payments.
To reiterate a point that Eric made earlier, full year 2023 payments revenue represented 17% of total revenue, an increase from 14% of revenue for the full year 2022. Full year 2023 revenue was 675.4 million, up 8.8% year-over-year on a reported basis. And excluding marketing technology and fitness solutions, our growth would have been 12.2%. In the fourth quarter, we continued to deliver on our full year 2023 objectives by exceeding EBITDA guidance and achieving record EBITDA margins. Fourth quarter adjusted EBITDA was 43.1 million representing a 25.4% margin versus 21.7% in the fourth quarter of 2022 and 22.4% growth year-over-year. Adjusted EBITDA outperformance in the quarter was underscored by our focus on actively managing our operating expenses, driving operating leverage and cash flow generation.
Additionally, full year 2023 adjusted EBITDA was $155.6 million representing a 23% margin and a 30.7% increase compared to 2022. 2023 full year adjusted EBITDA finished 17.6 million or 12.8% higher than the midpoint of our initial 2023 guidance given approximately a year ago. Adjusted gross profit in the quarter was $114 million representing an adjusted gross margin of 67.3% versus 66.7% in Q4 2022. Full year 2023 adjusted gross profit was $444.4 million representing an adjusted gross margin of 65.8%. The increase in gross margin is partially attributable to an increasing mix of higher margin payments revenue and a decreasing mix of lower margin marketing technology solutions revenue. Now turning to operating expenses. Adjusted sales and marketing expense was $29.6 million or 17.5% of revenue, up from 17.2% of revenue reported in the prior year period.
Due to timing of spend, we had anticipated a modest sequential increase in sales and marketing expenses going into the fourth quarter. Adjusted product development expense was $18.3 million or 10.8 percent of revenue in line with the prior year period. Adjusted G&A expense was $23 million or 13 0.6% of revenue, down from 16.9% of revenue in the prior year period. Adjusted G&A costs declined both as a percent of revenue and in absolute dollars as we continue to achieve cost savings from ongoing consolidation activities, benefit from the reduction in force announced last quarter and as we anniversary the investments made in 2021 and 2022 to support our public company infrastructure. We continue to generate significant free cash flow as we invest to grow our business.
Leverage free cash flow was $29.8 million in the quarter. This was up approximately $7.1 million or 31.3% year-over-year due to both growth in operating income and changes in working capital. For the trailing 12 months, levered free cash flow was $81.5 million which represents a 12.1% margin and a 74.5% increase over the prior year, continuing to underscore the efficiency of our business and enhancing our balance sheet flexibility. Strong free cash flow generation allows us to continue to invest in our growing business and deliver strong returns to our shareholders. It also allows us to efficiently allocate capital across the spectrum of opportunities, including the outstanding buyback authorization and M&A prospects. In the fourth quarter, we repurchased approximately 2.7 million shares for a total cash consideration of approximately $26 million at an average price of $9.65 per share.
As of December 31, 2023, we had approximately $40 million remaining in our repurchase authorization that runs through year-end 2024. We ended the quarter with $92.6 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 is calculated per our credit facility at the end of the quarter was approximately 2.6 times consistent with our financial policy. We have no material maturities until 2028. I would now like to finish by discussing our outlook for 2024. We’re pleased with our ability to actively manage bottom line results that exceeded expectations as demonstrated by our record adjusted EBITDA and margins. However, we were disappointed in our slower growth impacted by revenue headwinds in certain parts of our business.
We believe EverCommerce is undervalued in the market. And we take our fiduciary duty to create shareholder value very seriously. As yesterday’s announcement regarding the sale of our fitness assets illustrates, we are not and will not be shy about taking additional actions to simplify our business or increase growth and margins to unlock value. As we navigate this transformation and the future of EverCommerce without a fitness vertical, we expect 2024 to be a transition year. While growth may be more muted, we will further expand margins and profitability. A portion of these efficiency gains will be used to reinvest in our products with the goal to accelerate growth in 2025 and beyond. The following non-GAAP guidance excludes our fitness assets, which as we stated contributed approximately $24 million in revenue and near zero contribution to adjusted EBITDA in 2023.
Our guidance also assumed near zero growth in our marketing technology solutions on a full year basis. For the first quarter of 2024, we expect total revenue of $160.5 million to $163.5 million and we expect adjusted EBITDA of $36 million to $38 million. For the full year of 2024, we expect total revenue of $676 million to $696 million and adjusted EBITDA of $167 million to $176 million. Before we begin the question-and-answer portion of the call, I want to thank the entire EverCommerce team for their efforts in delivering bottom line results that exceeded expectations despite a challenging environment. Our focus for 2024 continues to be centered on balancing growth with profitability and the transformational initiatives we described today should allow us to do that in a way that preserves continued margin expansion while allowing for growth acceleration in 2025.
Operator, we’re now ready to begin the question-and-answer section of the call.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from Bhavin Shah with Deutsche Bank.
Bhavin Shah : Tim, I appreciate the comments you talked about on the marketing side of the house. Can you maybe just elaborate a little bit more on the core business software and what you’re seeing maybe from a new logo side and then retention aspect? Any changes that you’re seeing relative to last few quarters from a demand perspective on Pro Health?
Eric Remer: Appreciate the question. Thank you so much. Matt, you want to take that?
Matt Feierstein: Yes. I think quarter over quarter, I don’t, I wouldn’t say there’s any significant changes in trends from a demand standpoint. Again, we’ve talked about how we go to market, largely digital acquisition based in both Pro and Health. Not a significant change from a trend standpoint there from a new customer acquisition standpoint. Obviously, we also remain incredibly focused on customer expansion. Certainly pleased but see a lot of opportunity for growth, specifically on the payment side of the house. And you heard our comments about EverPro Edge, specifically on the EverPro side being a real opportunity for growth that we see in the future. So no major change in trends that we’ve seen quarter-over-quarter.
Eric Remer: And just to add to that, on either the customer acquisition or on the customer retention, it seems to be pretty steady for the last several quarters.
Bhavin Shah : Eric, maybe just given the demand backdrop, particularly on the marketing side of things and now the elevated focus on EverPro and EverHealth given the sales fitness. How, if at all, does that change how you’re thinking about the timing or the size of M&A kind of going forward?
Eric Remer: Well, it’s another great question. I mean, we’re always going to be focused and open to opportunities. In Q4, in November, we closed the deal focused within the EverPro vertical. And we think again EverHealth and EverPro has big opportunities. So we see a situation, and an asset that makes sense that we think can accelerate both growth and overall value to our customers, we’ll continue to look at those. So we remain active when they make sense, but we’re going to be very, very focused on those specific verticals that we think are going to have the biggest acceleration opportunities.
Operator: Our next question comes from Ryan MacWilliams with Barclays.
Ryan MacWilliams: Thanks for taking the question. Great to see the focus on doubling down your strengths while improving some operational efficiencies from here. Eric, how do you view the potential for other areas of, perhaps portfolio rationalizations or potential sale of assets from here?
Eric Remer: Again, as art said really well, we’re always going to be focused on maximizing value both obviously for the operations and for our shareholders. And it will continue to monitor what makes the most sense organizationally. I do think as we’ve said several times already in the call and in our prepared remarks that EverPro and EverHealth are really great verticals and really great organizations with excellent Tier 1 softwares and opportunity to really grow. So those are the areas that we are double tripling down. We do have very good solutions also in our salon spa assets within the EverWell, which was fitness was a part of, so no, those are kind of standalone. Those are growing at really nice cases and provide really great value to our customers as well.
So those three areas with kind of a reason when we kind of talk about EverPro and EverHealth, much greater than on the EverWell, it’s just the percentage of business that we have. That represents about 75% of our business and the greatest opportunity for us to grow going forward. So, we’ll always look for rationalizations where it makes sense. We talked about some of the areas that have been dragged in our business, and we’ll continue to monitor those to see if there’s an opportunity, again to accelerate growth in investments, as well as increase shareholder value.
Ryan MacWilliams: And one for Marc. How do you feel about the growth rate of the marketing technology assets from here? Like, do you feel like you’ve seen the worst of the macro impact at this point? And do you view these marketing technology as, like, is this a core part of the EverCommerce portfolio or it would be separate from like we’ll give you the add-ons like an EverPro or an EverHealth customer? Thanks.
Marc Thompson: So look, I mean, obviously, as we shared in our guidance or in my guidance comments, thinking about it, the trend that was this year flat, thinking about that into next year, we’re always trying to be prudent with our guide, particularly around this particular solution set. We have seen volatility. There is a lot of exogenous demand driven variables that are harder to predict in that business. We do having said that, I do think we sort of talked about in the second half of last year stabilization there. And I think our performance to be quite honest, we feel pretty good about our performance in terms of stabilizing the operation. I think going into this year, the team has some nice ideas on how to reduce some of the volatility on the revenue side and continue to work hard on margin.
So we’re doing the best we can relative to the backdrop. And I think we have positioned ourselves for upside should it come from some of those exogenous positive factors, hopefully with the macro tailwind instead of a headwind. I was just going to say on the other part of your question, Ryan, marketing technology, the investment thesis there remains true. These are solutions that our SMB service providers do need. They are a third derivative. And when we talk about driving dollars into our highest growth, largest market opportunities, we always lead with payments because of the scalability and the profitability and the TAM available to us in that regard. Some of our horizontal SaaS solutions fall into that same category. Marketing Technology Solutions that cross-sell motion is a different motion and requires more investment to get there.
So we don’t think of it as something that’s not required by our customers. We think of it as something that absolutely is and we work to connect those dots. But I would say it is that third derivative, if you will.
