EverCommerce Inc. (NASDAQ:EVCM) Q4 2022 Earnings Call Transcript

EverCommerce Inc. (NASDAQ:EVCM) Q4 2022 Earnings Call Transcript March 15, 2023

Operator: Thank you for standing by, and welcome to EverCommerce’s Fiscal Year 2022 Fourth Quarter Earnings 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, Wednesday, March 15, 2023. 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. 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, 2022. 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 to GAAP historical measures is provided in both our earnings press release and our earnings call presentation.

I will now turn the presentation over to our CEO, Eric Remer.

Eric Remer : Thank you, Brad. On today’s call, I will highlight fourth quarter results and discuss key economic trends and metrics before turning the call over to Marc to dive deep into our financials. EverCommerce finished the year strong, beating the top end of the fourth quarter guidance for both revenue and adjusted EBITDA. For the quarter, our reported year-over-year revenue growth was 19%. And normalizing the effects of M&A, our pro forma revenue growth was 14% for the quarter. For 2022, our year-over-year pro forma revenue growth was 16%. We continue to operate the business balancing growth and profitability. For the fourth quarter, our adjusted EBITDA and adjusted unlevered free cash flow margins were higher than previous quarters at approximately 22% and 16%, respectively.

For the full year, adjusted EBITDA margins were 19%, while adjusted unlevered free cash flow margins were 14%. Customer payments growth are a key part of our business strategy. Our total payment volume, or TPV, grew 90% year-over-year. We continue to see increased uptake of payments processing within our core vertical system of actions. Our annualized net revenue retention, or NRR, was also steady at 100% in the quarter. EverCommerce provides vertically tailored end-to-end SaaS solutions that support the highly diverse workflows and customer actions that professionals in home services, health services and fitness and wellness services use to automate manual processes, generate new business and create more loyal customers. At the core, we provide system-of-action software across many market verticals.

This is the ERP for these smaller vertical service-based businesses and the way in which our customers generate new business, fulfill services, manage day-to-day operations and engage with their customers. Our vertical software solutions not only provide a system of action necessary to run their daily business processes, but also the marketing solutions to track new business, to building a payment solutions to collect effortlessly, and the customer experience solutions to create predictable and convenient experiences. Our business thrives through two motions, acquiring new customers and expanding our revenue base with existing customers by selling more seats, more features and cross-selling other solutions like embedded payments. We ended the year serving approximately 690,000 customers across our many diverse verticals and sub-verticals.

We acquire customers at strong economics as overwhelming majority of our customers are acquired digitally. Our large customer base represents an incredible opportunity for continued expansion of cross-sell upsell of our solutions. Over the past year, the average ARPU at the solution level grew approximately 8% year-over-year. One of the biggest drivers for ARPU expansion is our land-to-expand motion of selling core system-of-action software to our customers and then upselling them new features and cross-selling them new capabilities, such as payments and customer engagement solutions. We measure our cross-sell progress by looking at the growth in the number of customers that are taking more than one solution. We ended the quarter with more than 71,000 of our customers using more than one solution, a 29% increase year-over-year.

Embedded payments is our most accretive add-on solution, representing the lion’s share of our cross-sell activity today. Measure and report our payments ecosystem growth through TPV, we ended the quarter with an annualized TPV of approximately $10.9 billion, which represents 19% year-over-year growth. We expect TPV to grow as we continue to embed our payment solutions into our core systems of action. Our priorities for 2023 underscore our focus of providing premier systems-of-action software across many verticals, embedding payments and adding ancillary services that promote our customer successes. We often discuss our TAM with you. And in doing so, we cited greater than $500 billion opportunity in the U.S. and over $1.3 trillion opportunity globally.

With nearly 690,000 customers currently using our software and solutions, we have a tremendous opportunity right in front of us to provide more value and sell additional services to existing customers. We are prioritizing our investments towards our best opportunities to achieve our growth objectives, and at the top of this list is driving adoption of embedded payments. Embedded payments not only drive continued organic growth, but also provide better customer economics as customers who have embedded payments yield higher ARPU and improved retention. Entering 2023, we expanded our EverCommerce payments team to accelerate payments adoption across our solution set. To do so, we are taking steps to improve the seamless onboarding of payments capabilities for our customers.

And later in the year, we’ll be introducing new capabilities. Recognizing the environment we’re in, we’ll be even more deliberate on price. Our pricing philosophy at EverCommerce has been to price to value, that is increment price over time as new features are added and the customer value proposition is enhanced. In 2023, we will keep this philosophy at our core, but we’ll be pressing harder on the price lever where appropriate. We’re also doubling down on the notion of balancing growth and profitability by institutionalizing a disciplined focus on cost controls, particularly in the areas of people costs, general and administrative spend and sales and marketing costs. We continue to target 20% EBITDA margins with an eye towards operating leverage-driven margin expansion beyond 2023.

Finally, we will continue to optimize our solution and product mix, including utilizing M&A where appropriate to add capabilities in targeted market verticals and compound consistent organic growth. Now I’ll pass it over to Marc, who will review our financial results in more detail as well as provide guidance for the first quarter and the full year 2023.

Marc Thompson : Thanks, Eric. Total revenue in the fourth quarter was $161.8 million, up 19.3% from the prior year period. Within total revenue, subscription and transaction fees were $121.6 million, up 22% from the prior year period, and marketing technology solutions were $33.3 million, up 13.5% from the prior year period. For the full year, revenue was $620.7 million, up 26.6% on a reported basis. We manage our business for sustainable organic growth and selectively utilize strategic acquisitions to augment this growth. As a result, we believe it’s important for investors to evaluate our business growth on a pro forma basis, which is how we measure and manage the business internally. 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 year-over-year pro forma growth rate for the fourth quarter was approximately 14.2%, while our year-over-year 2022 pro forma growth rate was approximately 15.6%. Fourth quarter adjusted EBITDA was $35.2 million, representing a 21.7% margin, while full year 2022 adjusted EBITDA was $119 million, representing a 19.2% margin. During the fourth quarter, we took several actions, including the implementation of a temporary hiring freeze, to tightly manage costs and deliver against our profitability objectives. In 2023, we plan to continue disciplined active management of our operating expenses as we look to drive profitability and cash flow generation.

Adjusted gross profit in the quarter was $107.9 million, representing an adjusted gross margin of 66.7%. Full year 2022 adjusted gross profit was $403.4 million, representing an adjusted gross margin of 65%. Adjusted gross profit is seasonally strongest in the fourth quarter while seasonally weakest in the first quarter. Now turning to operating expenses. Adjusted sales and marketing expenses were $27.9 million or 17.2% of revenue, down from 18.5% of revenue in the prior year period. This was driven largely by managing growth investments while working to meet our profitability objectives during the quarter. Adjusted product development costs were $17.5 million or 10.8% of revenue, roughly flat compared to 10.5% of revenue reported in the prior year period.

Adjusted G&A expense was $27.8 million or 17.2% of revenue, down from 17.8% of revenue in the prior year period. This was also driven by disciplined spend management during the quarter. 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 $26.1 million, representing 17.4% year-over-year growth and a 16.1% margin. For the full year, our adjusted unlevered free cash flow was $85.3 million. Levered free cash flow, which accounts not only for debt service but also various working capital adjustments, was $22.7 million in the quarter. For the full year, levered free cash flow of $46.7 million underscores our balance sheet flexibility. This balance sheet flexibility provides optionality as we look to efficiently allocate capital in our business.

Our strong free cash flow generation allows us to operate our business with an optimal capital structure that includes modest levels of leverage, which allows us to deliver enhanced equity returns to our shareholders. In the fourth quarter, we repurchased 2.9 million shares for a total cash consideration of $21 million. During the full year 2022, we repurchased approximately 5 million shares for $43 million, leaving us a remaining authorization of $57 million approved for year-end 2023. We ended the quarter with $93 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 3.5 times, consistent with our financial policy.

We have no material maturities until 2028. As I’m sure we’ll get the question in Q&A, let me comment briefly on our relationship with Silicon Valley Bank. EverCommerce has accounts at SVB, but based on our diversified account structure, our relationships with other global banking partners and the fact that we generate excess cash from operations and have substantial capital, we did not expect the potential failure of SVB to disrupt our business operations, and it hasn’t. Today, we have full access to our balances that were held at SVB, and we’ve already transferred the majority of these deposits to other large banks. I’d like to finish by providing our outlook, beginning with the first quarter. For Q1, we expect total revenue of $157 million to $160 million, and we expect adjusted EBITDA of $27 million to $29 million.

Our full year 2023 guidance is $680 million to $700 million for revenue and $134 million to $142 million for adjusted EBITDA. Our first quarter guidance reflects the seasonality inherent in our business, which can be summarized by seasonally slower growth and lower margins in the first quarter, seasonally higher growth in the warmer months and seasonally higher margins in the fourth quarter. Our 2023 outlook does not include any potential impact of M&A activity that could take place. In summary, we’re very pleased with our fourth quarter financial results. We executed well and delivered top line growth that exceeded our most recent guidance while also tightly managing our cost base to deliver better-than-expected profitability. Looking ahead, we believe the core of our business, vertical SaaS solutions and embedded payments, is quite resilient.

We intend to focus on both investing in the areas of our business that will produce the best growth in returns, but also double down on optimizing our operations and managing costs in order to balance this growth with profitability. We believe EverCommerce is well positioned to be a primary beneficiary of the digital transformation that is just getting underway amongst SMB and service SMB companies. Our continuing focus is to execute our strategic priorities and deliver consistent profitable growth that we believe can generate significant value for our shareholders. Operator, we’re now ready to begin the question-and-answer section of the call.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. Our first question comes from DJ Hynes with Canaccord. Please go ahead.

DJ Hynes : Hey, guys. Thanks for taking the question. Marc, I might have expected to see a bit more operating leverage in the 2023 guide, just kind of as an offset to slower growth. I mean you highlighted cost controls. We haven’t seen any recent M&A. Look, 20% EBITDA margins is very solid, but were running below kind of 2021 levels. Acknowledging now, we have public company costs and all that sort of stuff. Maybe just touch on kind of the puts and takes of the margin guide. And if we end up seeing faster growth, is it right to think that a lot of that upside would flow through to the bottom line?

Marc Thompson : Yeah. Thanks for the question, DJ. So I think, first of all, just comparing the year ’22 versus ’21, remember, there are a couple of things going on there. One is ’21 didn’t include a full year of public company costs, and ’22 actually included , which, as we described, was $4 million to $5 million in ’21. So we’re transitioning that in ’22. So that just is a little bit of a level set. I do believe that we baked in a lot of the investments we need to make, certainly around being a public company and a lot of investments in scalable operations such that what you just described should be true. Obviously, we’re trying to be prudent in the way that we guide given the continuing environment that we’re seeing. But we absolutely believe that we want to be in front of our cost structure to make sure that we can drive that kind of drop through that you’re describing.

DJ Hynes : Yeah. Makes sense. And then the second question is just around net revenue retention, right? So when you guys went public, I think NRR was in that 90%-95% range. Since then, we’ve seen really nice improvement, right? I think we’re kind of plus or minus 100%, which is great. That said, with the marketing business turning against you guys a little bit, I’m surprised we haven’t seen any degradation in NRR. So I guess the question is like, has there been success elsewhere with cross-sell that’s maybe being underappreciated given the headwinds in marketing? Or maybe just help me understand kind of how you’re keeping NRR whole at 100%.

Matt Feierstein: Can you hear me all right?

DJ Hynes : Yeah, we got you.

Matt Feierstein: You highlighted other areas of the business where cross-sell is performing, as you can see. From our continued focus on payments and the results in payments, payments cross-sell is clearly a place where that — the expansion of the customer base is certainly doing NRR from that perspective. Obviously, upsell continues to be a strong motion in the business. That also buoys NRR as well. So yeah, certainly in the past, there may have been some drag from that — some of that martech slowness in the past, but we feel really good about the parts of the business that are driving that up from a customer expansion standpoint.

DJ Hynes : Got it. Helpful color. Thank you, guys.

Marc Thompson : Thanks, DJ.

Operator: Our next question comes from Samad Samana with Jefferies. Please go ahead.

Jeremy Sahler : Hey, guys. This is Jeremy on for Samad. Thanks for taking my question. So first on the customer count growth from 12%, that’s down from 20% last year. I guess, what should we kind of expect in terms of net adds going forward? And I guess, which of your three verticals are you seeing most of these net adds coming from? Or if you can just provide some color there.

Eric Remer : Was the growth. You talk about the vertical.