EverCommerce Inc. (NASDAQ:EVCM) Q2 2023 Earnings Call Transcript

EverCommerce Inc. (NASDAQ:EVCM) Q2 2023 Earnings Call Transcript August 7, 2023

EverCommerce Inc. misses on earnings expectations. Reported EPS is $-0.02689 EPS, expectations were $0.08.

Operator: Thank you for standing by, and welcome to EverCommerce’s Second Quarter 2023 Earnings Call. My name is Michelle, and I will be your operator for today [Operator Instructions] As a reminder, this conference call is being recorded today, Monday, August 07, 2023. And, I’d now like to turn the conference over to Brad Korch, Senior Vice President 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 June 30, 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.

I will now turn it over to our CEO, Eric Remer. Please continue.

Eric Remer: Thank you, Brad. On today’s call, I’ll highlight second quarter results and discuss key customer trends and metrics before turning the call to Marc to dive deeper into our financials. EverCommerce continues its strong start of 2023 with solid revenue growth, particularly within our Software payment solution and a very robust adjusted EBITDA against the top end of the second quarter guidance. We achieved strong bottom line performance by doubling down on balancing growth and profitability, through both active management of our cost base with the focus on efficiency, we deliver 23% of adjusted EBITDA, margins while supporting 13% year-of-year subscription transaction revenue growth, which includes our core software payment solutions and 8% year-of-year total revenue growth, with upside to profitability, we are creating the opportunity to incrementally invest in areas that can accelerate growth in 2024 and beyond.

In addition to officially growing our customer base, our strategies to lead with our course system of action, SaaS solutions and then upsell and cross sell additional solutions and features to enhance customer value while driving customer expansion and revenue growth for EverCommerce. Payments is the best illustration of the strategy. During the second quarter, our payments revenue grew 32% year-over-year. EverCommerce provides virtually 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, generating new business and create more loyal customers. As the leading service commerce platform, we provide system of action software across many micro verticals, which, in turn, drive the workflows to help our customers, generate new business, fulfil services, manage day-to-day operations and engage with our customers.

Upsell and across sell in our existing customer’s additional features, services and products is not only important for ARPU growth, it is important because it enhances the value our customers receive from the relationship with EverCommerce, which ultimately translates to lower-churn and higher retention. For several quarters, we’ve disclosed a number of customers that are utilizing more than one solution, but this is a data point we continue to measure, we believe a metric that is even more reflective of our current cross-sell progress is a number of customers that have contracted and imported for more than one solution. While this is a measure with a track progress slightly higher in the follow-up customer revenue realization, for areas like payments enablement specifically, it marks the critical milestone in the customer’s journey towards integrated set of solutions that power more than business.

As of the end of the second quarter, while we continue to see expansion of customers utilize more than one solution to products with 75,000, the number of customers that have contracted imported for two or more products with 29% year-over-year to approximately 162,000. And with over 685,000 total EverCommerce customers as at the beginning of 2023, we continue to have a very large and better opportunity to continue to grow this space of multi-solution customers. Finally, when looking back over the trailing 12 months, our annualized net revenue retention or NRR for core software payment solution remains above 100%. Embedded payments is our most mature and accretive cross-sell solution and is a key element of our land and expand strategy. Year-over-year, payment revenue includes 32% contributing to our margin expansion, given its gross market profile.

Additionally, payments revenue is percent of total revenue grew more than 300 base points over the past 12 months. Second quarter annualized total payments value or TPV, was approximately $11.4 billion, representing a 30% year-over-year growth. We expect TPV and overall payments revenue to grow as we continue doing better payment solutions into our core system of actions. Accelerating payments attachment and utilization are key elements of our long-term growth plan and we continue to see success throughout our course system of action solutions. We are actively testing and implementing new strategic initiatives, designed to increase the attachment for payment capabilities to drive more payment-enabled customers back to processing and further increase the wallet share of customers that are already processing.

And lastly, I want to briefly touch upon our current progress in integrating generative AI into our business operations, both within the solutions combined to our end customers, as well as with the development of our products and services, support our customers and operational scalability. As an example, in Q2, we launched AI driven capabilities within our surveyed products that create significant efficiencies for our customers, now to analyze, interpret and act upon large quantities of raw and unstructured survey feedback. These insights allow customers to more quickly and efficiently implement programs to accelerate revenue as well as generate recommendations for risk mitigation from negative feedback. Early customer feedback has been incredibly positive relative to even greater efficiency that our solutions can now bring to their operation.

We are excited about this early progress. We will continue to leverage AI to drive greater efficiencies in our operation even more innovative and impactful offerings to our customers. Now, I’ll pass it over to Marc, who will review our financial results in more detail, as well as provide third quarter and update a full year of 2023 guidance.

Marc Thompson: Thanks, Eric. Total revenue in the second quarter was $170.1 million, up 8.1% from the prior year period. Within total revenue, subscription and transaction revenue was $130.3 million, up 12.7% from the prior year period, and revenue from marketing technology solutions was $34.5 million down 2% from the prior year period. The strong performance in subscription and transaction revenue, at 12.7% growth and in line with our long-term target, was largely due to the solid execution of our growth strategy to provide customers a core system of action software solutions and driving expansion by promoting cross sell and upsell opportunities, leading with payments. Since the second half of 2022, we’ve seen headwinds to growth in our marketing technology solutions, and while this continued through the second quarter, we are starting to see early signs of stabilization.

The end of the second quarter, LTM revenue was $651.1 million, up 15.2% year-over-year on a reported basis, and 11.7% 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 Q2 was equivalent to our pro forma growth rate, because we did not complete any acquisition during the relevant periods. Second quarter, adjusted EBITDA was $38.8 million, representing a 22.8% margin, versus 19.6% in the second quarter of 2022, and 26.2% growth year-over-year.

Additionally, LTM adjusted EBITDA was a $136.1 million, representing a 20.9% margin. In the second quarter, we’re clearly delivering towards our full year of 2023 objectives by exceeding guidance and achieving record EBITDA margins. Adjusted EBITDA performance in the quarter was underscored by our focus on actively managing our operating expenses, driving operating leverage and cash flow generation. The timing and pacing of investments through the first steps was a more modest factor, and we expect to make targeted investments in the back half of the year that should enable us to enter 2024 on a solid growth footing. For example, one area of incremental investment is resources to accelerate payment adoption among our systems of action software solutions.

Adjusted gross profit in the quarter was $111.9 million, representing an adjusted gross margin is 65.8%, versus 65% in Q2 2022. LTM adjusted growth profit was $425.9 million, representing an adjusted growss margin of 65.4%. The increase in growth margin is partially attributable to an increasing mix of higher margin payments revenue. And now turning to operating expenses, adjusted sales and marketing expense was $28.7 million, or 16.9% of revenue, down from 18.2% of revenue in the prior year period. Absolute adjusted sales and marketing expenses were approximately flat year-over-year due to a combination of optimization and economies of scale. Adjusted product development expense was $17.7 million, or 10.4% of revenue, down from 10.8% of revenue reported in the prior year period.

Absolute adjusted product development expense grew 4.7% year-over-year, as we continued to invest in our solutions. Adjusted G&A expense was $26.6 million, or 15.7% of revenue, down from 16.5% of revenue in the prior year period. As we anniversary, the investments made in 2021 and 2022 to support our public company infrastructure, we’re beginning to see meaningful operating leverage. We continued to generate significant free cash flow as we invest to grow our business. Our adjusted unlevered free cash flow for the quarter was $27.1 million, representing 21.2% year-over-year growth, and a 15.9% margin. For the last 12 months, our adjusted unlevered free cash flow was $97.5 million. Levered free cash flow, which accounts not only for debt service, but also various working capital adjustments, was $22.6 million in the quarter.

This was up approximately $16.1 million year-over-year due to both growth and operating income and changes in working capital. For the trailing 12 months, levered free cash flow was $62.2 million, continuing to underscore 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 second quarter, we repurchased approximately 900,000 shares for a total cash consideration of approximately $10 million at an average price of $11.10 per share. The end of the quarter, with $83.1 million in cash and cash equivalents, and we maintain $190 million of undone 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 2.9 times consistent with our financial policy. We have no material maturities until 2028. I’d like to finish by providing our outlook for the remainder of 2023, beginning with the third quarter. For Q3, we expect total revenue of $174 million to $178 million and we expect adjusted EBITDA of $34.5 million to $37.5 million. Our full year and 2023 revenue guidance remains $600 million to $700 million, and we are raising our adjusted EBITDA guidance again by an additional $5 million to $142 million to $148 million. As we noted on our first quarter call, continuing to execute our growth strategies, price increases and new product introductions are expected to support growth and strong margins throughout the year.

Our 2023 outlook does not include any potential impacts of M&A activity that could take place. Before we begin the question-and-answer portion of the call, I want to thank the entire EverCommerce team for their efforts in delivering these strong results. Our focus continues to be optimizing our operations, managing costs effectively and delivering on our strategic priorities. Operator, we’re not ready to begin the question-and-answer section of the call.

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Q&A Session

Operator: [Operator instructions] The first question comes from Kirk Materne with Evercore. Your line is open.

Kirk Materne: Yeah, thanks very much. Eric, I was wondering if you just talk about the level of activity with you all in your customer base this quarter, maybe versus the prior two quarters, just in terms of pipeline generation, how you’re feeling about sort of top of funnel activity, realize marketing is still a bit challenge, but just kind of curious if you’re seeing anything from a macro perspective that makes you feel perhaps a little better heading in the second half of the year if it’s still that the same. Thanks.

Eric Remer: Yeah, thanks Kirk. I appreciate the question. Yeah, I think we felt pretty good going to Q2. We saw some things specifically in the marketing service part, which is why we guided with guided and achieved what we achieved. But I think the stabilization both in that part and the continued consistency in the pipelines that were seeing in the core business of software payments, really remains on plan. So we felt really good about going to the second half, and I think that’s kind of showing the guidance. Matt?

Matt Feierstein: Yeah, I think you nailed that. Even that core software and payments specifically to systems of action and the addition of payment to that where from a top of funnel perspective, we see opportunities that often double down on investments, even those core areas where we see large-end markets, lots of opportunity, strong unit economics set of areas point, exactly where we expect it to be with opportunities in the second half to continue to drive top of funnel activities beyond where they are today.

Eric Remer: And Kirk, just one thing to add to Matt said and just to answer that specifically, from macro perspective and the core verticals that we serve, we’re not seeing any continued degradation that we might have saw last year.

Kirk Materne: That’s great. And then Marc, one follow-up for you, you mentioned obviously some spend that was supposed to have in the first half is going in the second half. I guess just how should we interpret sort of the EBITDA guidance for the back how are the implied, I guess, for the fourth quarter, adjusted EBITDA guidance, somewhat flattish versus 2Q, is that just spend that you’re maybe holding back on the first quarter coming in the model and how do you think about just sort of operating leverage in general? Thanks.

Marc Thompson: Yeah I’ll start and then, if you think about, we raised after first quarter, we raised again after second quarter. We feel really good about where we are right now and then I think we’ve been prudent throughout the year. Obviously, we still live in that volatile world and we want to be consistent and conservative and prudent as we look at the second half.

Eric Remer: Exactly Kirk, coming out of last year, the world was obviously changing before us and we wanted to make sure that we are actively managing our spend and pace of investment through the year. I think we’ve done a great job in the first half, is this the opportunity to hit the gas funnel on some initiatives that are really going to underscore the core growth strategies, payments enablement, all of that sort of stuff. So, feeling as though it’s time to put a little bit more into the back half to make sure that we continue to set ourselves up for a nice ’24 and beyond.

Operator: The next question comes from Brad Reback with Stifel. Your line is open.

Brad Reback: Great. Thanks very much. I believe it was during Marc’s prepared remarks, you talked about accelerated investment in payments adoption in the back half of the year. Can you maybe walk through what you’re going to do differently going forward versus what you’ve done to try to help drive that linkage? Thanks.