Earnings Call Transcript - EVCM Q3 2021

Operator, Operator

Good day. Thank you for standing and welcome to EverCommerce Inc. Third Quarter 2021 Earnings Conference Call. At this time all participants are in listen-only mode. After the speakers’ presentation there'll be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Brian Denyeau. Please begin, sir.

Brian Denyeau, Investor Relations

Good afternoon and welcome to EverCommerce's earnings conference call for the third quarter of fiscal year 2021, which ended on September 30. On the call with me today is Eric Remer, EverCommerce's Chief Executive Officer; Marc Thompson, EverCommerce's Chief Financial Officer; and Brad Korch, EverCommerce's new SVP and Head of Investor Relations. A complete disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website and on our quarterly report on Form 10-Q to be filed with the SEC. Today's call is being recorded and a replay will be available following the conclusion of the call. Statements made on this call may include forward-looking statements regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business, and other matters. These statements are subject to risks, uncertainties, and assumptions that are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. In addition to any risks that we highlight during the call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP historical measures is provided in our press release and investor presentation, which are posted on our Investor Relations website. In terms of the agenda for today's call, Eric will provide a quick overview of our third quarter results, market opportunity for our strategy, and an overview of our recently announced acquisition DrChrono. Marc will provide a detailed review of our third quarter results as well as our guidance for the fourth quarter and full year 2021. With that, let me turn the call over to Eric.

Eric Remer, CEO

Thank you, Brian. Welcome everyone to EverCommerce's third quarter financial results call. Let me start by welcoming Brad Korch to the EverCommerce team. Brad joins us from Denver-based Zayo Group, which some of you may recall was publicly traded until they were taken private at a $14.3 billion valuation. I'm excited to share some updates since our last call, including a strong third quarter and some additional color on our recently announced acquisition of DrChrono, which is a great strategic fit and meaningfully expands our footprint in health services. I would like to begin with a few highlights of our Q3 financial results, which exceeded our guidance for both revenue and adjusted EBITDA. We reported total revenue of $128.5 million, up 44% year-over-year and up 20% year-over-year on a pro forma basis. Adjusted EBITDA of $29 million, representing a 23% margin. We are pleased with this very strong performance, which underscores the power of our suite of software solutions, purpose-built for the service economy. We offer our customers differentiated modern SaaS applications integrated with other value-added solutions such as payments, customer engagement, and marketing applications, and have combined these with best-in-class, digitally driven customer acquisition model. This drives a unique value proposition, enabling EverCommerce to efficiently sell and scale into this fragmented trillion-dollar market. We are just at the beginning stages of helping small service businesses digitally transform how they work and interact with their customers. To drill down into our approach a little more, a key element of our strategy is to deliver vertically and micro-vertically tailored solutions that solve specific business problems for SMB service providers in the home services, health services, and fitness and wellness vertical markets. This sounds straightforward in theory, but is unique in practice as you have to have the right solution for each customer. A physician practice, roofer, beautician, gym owner, and plumber all need software to help run their daily operations, but their needs are different and unique to their markets. To be successful in these markets, you must provide solutions that solve these unique pain points and are ready-to-use out-of-the-box with immediate time to value. Our system of action business management solutions, the core solutions for SMB service providers to manage the business, are how we attract and land new customers. This gives us a huge opportunity to cross-sell horizontal solutions like integrated payment processing, customer engagement, lead generation, and marketing technologies that are broadly applicable to all of our customers. We have seen great success cross-selling our integrated payment solutions. To give you a sense of the scale of our payment business at the end of Q3, our estimated annualized run rate of total payment value or TPV was over $8.6 billion. This represents a 15% increase since the end of 2020. As exciting as the success is, we've only scratched the surface of our opportunity in integrated payments, which we estimate exceeds $77 billion just among our current customers. To further enhance our cross-sell progress in integrated payments and other horizontal solutions, earlier this year we hired Stone de Souza as our Chief Operating Officer. In this role, Stone is spearheading our efforts to take advantage of this huge integrated payment opportunity as well as drive additional product integrations and go-to-market campaigns similar to his experience at both Intuit and Sage. Refining and optimizing our upsell/cross-sell strategy is a key priority and a long-term revenue growth driver for the business. A component of this strategy will be to create consistent branding of our solutions that we believe will raise awareness and simplify the selling process over time. For example, we recently simplified and consolidated the branding of our performance marketing solutions. Under the EverConnect brand, which connects businesses with consumers shopping for services in a local area, we've consolidated three of our existing digital marketing businesses and will make lead generation and branding campaigns simple to tailor to our customers' needs. Looking at the performance of our three verticals during the quarter, we saw positive results from our strategy. EverPro, which focuses on home services, continues to be our largest and fastest-growing segment. Historically, these micro-verticals like plumbing, landscaping, and general contracting have seen some of the lowest technology adoption of any market. But in recent years, as demand for services has grown and consumers have gotten used to digital engagement in all other areas of their life, these small businesses have come to recognize they must deploy technology to increase efficiency and meet customer preferences. The changes that were thrust upon many of these businesses due to the pandemic restrictions over the past 18 months underscore the value proposition of our solutions, which includes a variety of contactless digital solutions. Our SMB customers recognize going back to the old way of doing business is not an option, which we believe will accelerate digitization in the years ahead. We feel we are well positioned to take advantage of this increasing demand for solutions to help SMB service providers better grow their business, manage their operations, and retain their customers. EverWell, our fitness and wellness vertical, experienced sequential improvement despite pandemic-related headwinds due to restrictions in certain micro-verticals like gyms and fitness boutiques in a few select geographies such as the UK, New Zealand, and Australia. While fitness and wellness is our smallest vertical, we are pursuing a number of exciting growth initiatives leveraging the breadth and depth of our vertically tailored solutions. A good example is the expansion of our relationship with World Gym International, which has selected EverCommerce solutions to be their designated supplier of club management, billing, and CRM software at their North American locations. An existing user of our CRM solution, World Gym viewed the combination of the strength of each of our individual solutions and our ability to offer them as an integrated complete offering as a critical differentiator. EverHealth, our health service vertical, had a strong quarter and is benefiting from the growing demand for patient engagement solutions due to patients' desire for more personalized consumer life experiences. In today's world, patients don't want to wait on the phone to schedule or reschedule an appointment or get test results. They want it at their fingertips. Similar to the value they receive through our billing and practice management solutions, physicians and practitioners are recognizing the positive impact of introducing patient engagement solutions to improve their experience, which ultimately drives higher revenue and increases efficiencies for the practice. We also recently announced a significant acquisition that will further build out our capabilities in EverHealth by adding an important system of action. DrChrono is an all-in-one cloud-based practice management EHR billing solution that serves more than 4,600 independent practices and 13,000 providers across various medical specialties. DrChrono is at the forefront of digitizing the patient experience by leveraging mobile technologies to streamline engagement and create a true consumer experience. DrChrono is a terrific example of our strategic approach to M&A and meets all of our key criteria. We're extending our reach in a key vertical market with a robust system of action. With this large customer base, DrChrono also expands our market share within health services. With the acquisition, we are also increasing our opportunities to cross-sell embedded payments and other EverCommerce customer engagement solutions. From a financial and operational perspective, DrChrono's growth prospects are quite attractive, and onboarding their solutions to our centralized platform will drive significant efficiencies. Once we close the acquisition expected to be mid-November, we intend to quickly onboard DrChrono's solutions and are planning to cross-sell embedded payments, patient engagement, and marketing technology solutions to the more than 4,600 physician practices. We continue to execute well in centralizing operations, integrating cross-selling solutions, which are core components of our growth strategy. A great example is Service Fusion, a leading provider of software for field service customers, including HVAC, refrigeration, plumbing, electrical, appliance repair, garage door, equipment, and security businesses. We acquired this solution in October 2020 and immediately began the process of integrating payments, marketing, and customer engagement solutions. The results have been impressive in a very short period of time. We've increased our monetization of payment volume by 38% and attachment rates by 11%. In Q3, we launched an integrated customer marketing module powered by our Customer Lobby software and approximately 80 Service Fusion customers have adopted it within the first 90 days. Finally, leveraging our centralized services, we quickly optimized Service Fusion's marketing tactics and KPI utilization, resulting in a 24% increase in customers acquired through digital channels. The net result has been a 15% increase in ARPU in the short time since the acquisition. These results are an excellent example of how we can quickly optimize newly acquired solutions. Before I turn it over to Marc, I want to finish by reinforcing how pleased we are with our performance. We have momentum across our business and are tracking well against our near and long-term objectives. We're delivering on our organic growth targets, and the acquisition of DrChrono is a great example of our M&A strategy in action. We are rapidly approaching $0.5 billion in annual revenue. We are confident in our ability to grow to many times that size while also generating significant profitability. Our results show our strategy is successful, and we believe we are in a great position to drive incredible value for our customers and shareholders over time. I'll now turn it over to our CFO, Marc Thompson. Marc, over to you.

Marc Thompson, CFO

Thanks Eric. Today, I'll review our third quarter fiscal 2021 results in detail and provide our outlook for the fourth quarter and full year of fiscal 2021. Total revenue in the third quarter was $128.5 million, up 44% from the prior year period and above the high end of our Q3 guidance. And within total revenue, subscription and transaction fees were $91.8 million, up 53% from the prior year period, and marketing technology solutions were $31.6 million, up 30% from the prior year period. Q3 includes revenue from Timely and MDTech, which were the acquisitions we closed during the quarter. And please recall that our guidance for the third quarter was inclusive of Timely, which is a large majority of the acquired revenue in the quarter. M&A is a core part of our growth strategy, and 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, 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. We're very pleased with our pro forma growth rate for Q3, which was 20% year-over-year and 21% for the year-to-date period compared to the same period in 2020. We experienced strong growth across all three of our core verticals and our various products. Now, let's review the income statement in more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP, and we've provided a reconciliation of GAAP to non-GAAP metrics in our press release. Adjusted gross profit in the quarter was $85.6 million, representing an adjusted gross margin of 67%, in line with the third quarter of fiscal 2020. Now turning to operating expenses, sales and marketing expenses were $24.3 million or 19% of revenue, up from 13% of revenue in the prior year period. This increase was primarily driven by continued investments in growth through our various marketing channels and personnel. Product development costs were $12.4 million or 10% of revenue, up from 9% of revenue in the prior year period. This increase was due to investments and additions to our technology teams to support our various solutions, as well as our centralized security operations, information technology, and cloud engineering. G&A expense was $20 million or 16% of revenue, up from 13% of revenue in the prior year period. The year-over-year increase was driven primarily by investments in scalable operations and incremental costs associated with being a public company. Our business is built around our centralized operating model, which aggregates many of the G&A functions of our various operating units, and we believe will drive operating leverage over time. This has also been a key component of our ability to scale as quickly as we have. We have been and will continue to invest in the infrastructure required to support our rapid growth, scalable operations, and being a public company. We expect that these investments will accelerate in Q4 and into 2022 following our recent IPO in July. Q3 adjusted EBITDA was $29 million, above the high end of our Q3 guidance. Adjusted EBITDA margin was 23%, down 10 percentage points versus the year-ago quarter, reflective of our investments in growth and scalable operations and the impact of public company costs. On a GAAP basis, our Q3 loss from operations was $4.1 million compared to operating income of $3.7 million in Q3 2020. Now, turning to the balance sheet and cash flow. We ended the quarter with $98.3 million in cash, cash equivalents, and restricted cash. Total debt at the end of the quarter was $385.1 million. Total net leverage, as calculated for our credit facility at the end of the quarter, was approximately 2.2 times. The purchase price of DrChrono was $182.5 million. We intend to fund the acquisition with $155 million of availability on our revolving credit facility and cash off our balance sheet. Pro forma net leverage is approximately 3.7 times consistent with our financial policy. I'd now like to finish by providing our outlook beginning with the fourth quarter. For Q4 revenue, we expect total revenue of $129.5 million to $131 million, and we expect adjusted EBITDA of $27 million to $28 million. For the full year fiscal 2021, we are increasing our outlook for total revenue to $484 million to $485.5 million, and we expect adjusted EBITDA of $105 million to $106 million. Please note that our outlook for Q4 and the full year 2021 includes approximately half a quarter of contribution from DrChrono. We expect that DrChrono will contribute approximately $4 million to revenue in the fourth quarter and lose approximately $1.5 million in adjusted EBITDA. For 2022, we expect that DrChrono will contribute approximately $40 million of revenue for the full year. To wrap up, EverCommerce delivered strong third quarter results that were a continuing indication of our ability to generate high levels of organic revenue growth and effectively execute on our M&A strategy. We're at the very early stages of digital technology adoption by the service SMB companies that will transform how they manage all aspects of their business. We believe EverCommerce is in a great position to power this transformation and continue to deliver strong top line growth and substantial profitability for the foreseeable future.

Operator, Operator

Thank you. Your first question comes from the line of Brad Reback from Stifel. Your line is open.

Brad Reback, Analyst

Great. Thanks very much. Eric or Marc, I'm not sure who this is best for, but can you just remind us of the seasonal aspect of your business in Q4 if there is any?

Marc Thompson, CFO

Sure, Brad. Thanks for the question. It's Marc, and I'll take that. Are you referring to seasonality that we might experience in Q4 forward, or are you talking about in Q3?

Brad Reback, Analyst

In Q4 going forward, are there seasonal aspects of usage or engagement?

Marc Thompson, CFO

Yes, thanks for the clarification. We do experience seasonality across different verticals, particularly between products and sectors. In home and field services, there are specific micro-verticals, such as roofing, where activity can vary by location. Some categories within home services are influenced by seasonality. Additionally, throughout the payments sector, there tends to be a decline in service commerce activity during the holiday season, which includes both year-end periods and specific holidays in the fourth quarter. This applies to health services, as well as home and field services, and even some fitness and wellness categories. Furthermore, in home field services, it's not only usage-based revenue that may face some seasonal impacts in Q4, but there is also variability in marketing technology aspects like lead generation.

Matt Hedberg, Analyst

Hey. Great. Thanks for taking my question, guys. And Eric, as you’re exposed to obviously wide swaths of domestic SMB markets. I’m pretty curious you gave a great overview of the various categories that you guys go after. Just from a high level though, can you just sort of level set us on how you feel about the overall sort of SMB demand market? I know again it’s driven by vertical. And I guess I’m wondering, specifically, are you seeing churn rates start to improve as we come out of the kind of the pandemic?

Eric Remer, CEO

Well, look, thanks for the question. I’m actually going to introduce Matt Feierstein, our President, joining us as well. Matt, do you want to take that one?

Matt Feierstein, President

Yes, I think you touched on the main point of your question regarding churn in the SMB markets. Q3 was a strong quarter in terms of retention. Our annualized net revenue retention is now around 98%. Previously, we mentioned that our monthly net revenue retention was above 99%. We continued to see strong performance in Q3, and this metric indicates the ongoing health of our ability to support our merchants in using our solutions and growing with them.

Matt Hedberg, Analyst

That's super helpful. Thanks, Matt. And then, maybe one for Marc. Just to be clear, I think you said in your original Q3 guidance you included Timely, but you didn't include MDTech, if I think I heard you right. So I guess I'm wondering, you guys came in, I don't know, maybe $5.5 million above your midpoint of your guidance. Can you help us with how much of that was MDTech versus just sort of organic upside in the business?

Marc Thompson, CFO

Could you repeat that? You broke up there at the end.

Eric Remer, CEO

He mentioned how much of that $5 million was attributed to MDTech within the quarter.

Marc Thompson, CFO

Yes. MDTech is a small tuck-in, I mean, not a huge component of it. And frankly, Timely was in the guidance. You’re correct about that, Matt, so let's level set on that. But when I say small tuck-in, I mean, think less than $1 million.

Matt Hedberg, Analyst

That's great. So effectively what you're saying is that most of the upside that you generated was primarily organic or from elements you previously identified as inorganic.

Marc Thompson, CFO

Correct. That's right.

Bhavin Shah, Analyst

Great. Thanks for taking my question. I guess, just following up on that, just given the strong performance and pro forma growth continues to impress, can you maybe just provide any additional insight into what's driving some of that strength versus your expectations? Anything specific to call out from any of the verticals or from a cross-sell perspective of some of your horizontal solutions?

Marc Thompson, CFO

Sure. Thanks for the question, Bhavin. I'll start and then I'll turn it over to Matt. Generally, we saw solid performance across all the verticals in Q2, and that has continued into Q3. The drivers are primarily the overall economy and the macro dynamics within each vertical we've discussed before. There’s nothing specific to highlight, except that fitness and wellness continues to show improvement throughout the year. Now, I'll let Matt provide more details on this.

Matt Feierstein, President

Yes, and thanks again for your question, Bhavin. From an execution standpoint certainly like in quarters past, new customer acquisition continued to be a strong pillar of that growth. And you mentioned that the embedded growth opportunity from cross-sell into our 500,000-plus customer base. We mentioned the growth in the TPV statistic now north of $8.6 billion, and when you look at that over a year-over-year basis plus-20%. We are absolutely continuing to see strong inroads in that cross-sell growth for payments. And as you heard from the materials as well, the customer engagement applications that we're integrating into our system of action solutions, we're beginning to see really, although, in the early innings, nice uptake in cross-sell there as well.

Eric Remer, CEO

And one thing I'll just add, and this is just a general theme and goes across many of our answers, but we are experiencing and the digitization of the service economy is happening. That tailwind is picking up, and we are on the forefront and leading edge of enabling that digitization.

Bhavin Shah, Analyst

That was very insightful. I’d like to ask a quick follow-up. You mentioned in your call that you've recently integrated and branded some of your performance marketing solutions into EverConnect. Considering the significant product enhancements you've implemented, how should we view the strategy for accelerating the adoption of these marketing solutions from a go-to-market standpoint? Is there anything specific you should focus on to effectively drive more cross-sell adoption?

Matt Feierstein, President

The EverConnect example illustrates our strategy of consolidating branding and operations that were previously separate solutions. This integration is aimed at enhancing the customer experience and improving our cross-selling capabilities. It will also lead to a more efficient expansion strategy in the markets we serve, especially in home services. In our last quarter, we discussed the advancements made in EverHealth, and this quarter we've seen strong progress in EverConnect as well. Moving forward, we plan to leverage the brand equity of our established brands while also promoting the EverCommerce brand to improve our market approach.

Samad Samana, Analyst

Hi. Good evening and thanks for taking my questions. Maybe first just one on the M&A front. But now that you guys have established a solid track record in the public eye, how is that helping your own ability to acquire other companies? And I'm just curious if we should see that flywheel either pick up in cadence or should be pretty consistent with what we've seen. And then I have a follow-up.

Eric Remer, CEO

From an M&A perspective, I think the last five years, we've built a reputation of being great buyers of companies. We do what we said we're going to do and I think being public and being more visible has only enhanced that. I think in terms of what we've done historically this year will be very in line with what we kind of did last year. And I think in the future, history is kind of a good representation. We continue to be very disciplined. You got some high-level numbers of what we expect 2022 of DrChrono and the purchase prices in the press release as well. So we'll continue to be thoughtful and strategic and find opportunities that we feel are going to help the overall ecosystem but also be disciplined in finding those opportunities.

Samad Samana, Analyst

Great. And then Marc, you guys are obviously helping to digitize the physical SMB economy. I'm just curious, as you think about maybe whether it's the fourth quarter guidance itself or maybe even over, let's say, a more 12-month-ish type of outlook, when you think about the growth of the business, how much of it is improvement of health at your existing customers as they continue to get back more and more after what's been an uneven recovery versus the new customer acquisition side? Maybe how should we think about that algorithm over the next kind of quarter and 12 months?

Marc Thompson, CFO

I'll give this a shot, Samad, and then let Eric and Matt add their thoughts since we may all view it a bit differently. To me, they are essentially connected. Digitization is facilitating the acquisition of new customers, as people are increasingly pressed for time and seeking efficiency, which we provide to help them grow and manage their businesses while improving retention. Additionally, within our current customer base, our cross-selling efforts present a significant opportunity that will build gradually. As we offer more than one solution to these customers, it not only enhances retention but also contributes positively overall.

Eric Remer, CEO

Yes. I think we discussed this when we talked last, but we still feel like we’re at the second inning of the opportunity with the upsell/cross-sell. I mentioned in the earnings call we brought on a new COO, Stone de Souza to really focus his energy, his main focus is taking advantage of that opportunity to cross-sell integrated embedded payments, marketing technologies, as well as some of our engagement solutions and created a team around to make that happen. So I think over the next again quarter, year, and then years to come I think you’ll see even more improvement and even more cross-sell and more penetration within those categories.

Matt Feierstein, President

Yes. And just to your question about recovery and where that is from a growth vector standpoint, I think we talked about this last quarter. But we've seen a lot of recovery in past quarters, specifically in the verticals of home and field services not as – certainly, not as long-standing impacted by the pandemic. Health services has been recovering for several quarters, and as we look at fitness and wellness, outside of certain verticals – sorry, certain geographies in Q3 very discrete geographies internationally, where there was still just a little bit of lockdown impact, we really are seeing that recovery as we exited Q3 and into Q4. So we look at that recovery portion of growth as really in the rearview mirror.

Eric Remer, CEO

And just one very last point, Matt mentioned kind of a couple of micro areas. We did acquire Timely, which was – very excited about the opportunity, their main businesses in Australia, New Zealand in the fitness and wellness space. And we definitely had some headwinds in Q3 based on the lockdowns, and that was probably the only kind of headwinds we had. But in spite of that, we still had a really great quarter across all the verticals.

Brent Bracelin, Analyst

Hi, everyone. Thank you and congratulations on the quarter. Eric, could you elaborate on the cross-sell and up-sell opportunities? Specifically, how much of this activity is coming from new clients versus smaller businesses looking to reduce the number of vendors they engage with? It appears that while many are adopting digital solutions, there is also a desire to simplify operations. I'm curious how much this trend toward simplification is reflected in your larger deals involving multiple products.

Eric Remer, CEO

Thank you for the question, Kirk. And I think you hit on something at the end. It's really a twofold answer. I'll start and let Matt kind of go on. On the front end, we deal with a lot of smaller SMBs. And for many of them, we are filling in both their initial kind of digital evolution and then also filling in what we call the digital white space which is an area around that that once they've taken that step and they're utilizing a core system of action that it just makes sense to be taking more solutions that we're providing. As you go a little more upmarket as Matthew's example on the World Gym, the consolidation of solutions and having one provider is actually a huge advantage and one of our kind of core thesis as we continue to kind of scale both down-market and kind of mid-market in the SMB space. Matt, you want to add to that?

Matt Feierstein, President

Yes. Thanks. Appreciate that. I think Eric really did hit the nail on the head. And we have seen this over the course of time in our embedded payments cross-sell. It just does not make sense for these SMBs to have multiple vendors. Certainly, when they're using one of our system of action software, we have seen that in the embedded payments and the uptake of our embedded payment offering. And to Eric's point, the World Gym success that we had is absolutely attributable to the fact that the customer at the end of the day desired one vendor to be doing business with, one partner to help them grow. As we've brought those integrated solution sets to them, they felt really confident going with us in that capacity.

Operator, Operator

There are no further questions as of this time. I would now like to turn the conference back over to Eric Remer.

Eric Remer, CEO

Yes. Just to close, I just want to thank everyone for joining the call today. I also want to thank our EverCommerce team for the great quarter we had. EverCommerce is really at the leading edge of enabling the digitization of the service economy. We are extremely happy with our Q3 results. But at this time really all of our focus and the collective energy has shifted to producing a great Q4 and really setting the stage for an outstanding 2022. Thank you guys all again for joining the call today, and we look forward to additional follow-ups and questions. Thanks so much.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.