EverCommerce Inc. (EVCM) Earnings Call Transcript & Summary

Hi, everybody. Welcome back. Hopefully, you're able to enjoy lunch. With us for the afternoon session to kick off here, we have EverCommerce's CEO and CFO joining us. So gentlemen, thank you very much for being with us today. We appreciate you joining us.

Well, thanks a lot for having us. We appreciate being here as well.

Great. So Eric and Mark, for those that may not be as familiar with the company, you just recently completed your IPO. Congratulations on that.

Eric, I think it would be great for you to maybe give a brief overview of the business for those that may be less familiar with EverCommerce and its evolution.

Yes. No. I appreciate it. I think it's helpful, always just to go back, just kind of talk about the evolution, how we got to where we are, and then what we're doing on a high level and equally important where we're going. So just give a quick and dirty on that background. As for the background, the predecessor EverCommerce as a company has started in 2006 called PaySimple, and Simple was a SaaS platform focused on helping service-based small businesses, build, collect, manage and ultimately grow their business. Really great platform. It was growing nicely. But about 6 years ago, as I was speaking to our customers, what I realized was the needs of the service-based businesses to becoming more verticalized, even more microverticalized. So if we had 1,000 field service contractors and wanted to grow that to 5,000, 10,000, because we're a horizontal solution, we just seen other workflows. That could be dispatching inventory management. It's very similar across many verticals. So if you look deeper into the marketplaces that we're serving, what I saw was a bunch of fragmentation and a lot of point solutions and nobody was really bringing it all together. So it is really what EverCommerce set out to do. Connect the dots and create end-to-end solutions, allowing the service-based, vertical and micro-vertical, small businesses be more successful. You fast forward to today, we've really created the largest service commerce platform in the world, serving the needs of our 500,000 businesses around the globe. But a couple of really interesting points to kind of note, we really feel like EverCommerce is at the edge and really at the forefront of this digitization of the service economy. It is happening. The wind is blowing hard at this point and the kind of the evolution of these service-based small businesses of digitizing their business is coming along a strong, and EverCommerce has built software and solutions that are really managing their ability to kind of go online. And then our goal is to fill in not only the core solutions they need to run the business, but also a digital white space. So as they continue with that digital evolution, we are the provider of choice for all those services.

Great. And I think you kind of touched on it, but why has the service-based SMB market been so slow to actually modernize? Like what is EverCommerce doing differently than the other companies that target SMBs that's helping accelerate that change?

I think we've been focused on this market, like I said, for 15-plus years as we were at PaySimple. And if you would ask me 5 years ago, so what's your biggest competition? Who is your biggest competition out of that inertia, just getting these guys to come online. And you heard this great analogy yesterday. You could have the best boat and a beautiful sail, but if there's no wind, you're not going anywhere. And the reality is, over the last 18 months, the winds are blowing, and what has really been accelerating, now look, we've been growing for years. And so people have been coming online. But the real big kind of growth that we've seen in the last 18 months that I don't think is going to stop because it's not necessarily driven by COVID, it was just developed and really accelerated and accentuated by what happened over the past 18 months, was the kind of -- when you think about the no contact, the things you need to do to drive your business, be able to interact with your customers from a service standpoint and having technology to kind of bridge that gap between that face-to-face interactions we've had historically. Those are the products and services we've been building for many years. Now to become even more valuable. So I would kind of say the need -- the kind of the products and services went from a really good -- really big nice to have, to really a need to have to compete in the verticals that we're providing right now.

So I was going to ask on the vertical side a little bit later, but I'll jump ahead just since it's an easier transition. Can you maybe level set what are your primary verticals that you're focused on and why those verticals?

So the 3 main verticals that we're focused on and when I say main, like the larger verticals, and there's a lot of subverticals, only home field services, which is our EverPro group, that is our largest category, about 58% of our business. Our second largest is we call it EverHealth, which is health services broadly defined, and that is both traditional medical as well as behavioral health. And then EverWell, which includes fitness, wellness and -- so fitness, wellness, salon and spas. And that kind of all falls into that. That's our smallest category, about 14% of revenue. The reason why those 3 categories, again, getting back to the background of PaySimple, we've been serving these marketplaces for quite some time. And so as we started EverCommerce, and we're looking to go deeper into some verticals that we saw major gaps in, we both looked at both market opportunity, fragmentation and also adoption opportunity. And so based upon those 3 things, those are the verticals we focused on. We also have the advantage amount of seeing -- we understood cost of acquisition, we understood ROIs, we understood LTVs, in these core verticals that we already were serving. Now we have better solutions, more vertical-focused solutions, which allows us to penetrate these markets even deeper.

That's helpful. And so Mark, maybe one for you. The company has laid out some long-term growth targets. And the framework is, let's call it, 25% to 30% total revenue growth, and that's got a normalized growth component in M&A. Can you maybe just help us understand what underpins that long-term 25% to 30% growth outlook?

Sure. So the core of what we're doing is really focusing on driving that organic growth component to that and then supplementing that with acquisition. And acquisition, it is -- we are not built to consolidate or built to acquire. We are very good at it. But acquisition is just another growth strategy for us. Our organic growth strategy is really 3 foundational elements, new customer acquisition, up-selling those existing customers more, and then cross-selling our horizontal solutions like integrated payments and customer engagement solutions within that existing customer base.

Great. And then maybe as I think about those 2 individually. So let's maybe talk about the normalized growth first. When I think about within that, that's largely, as you mentioned, new customers, cross-selling, upselling. Seems like plenty of runway for both. Which motion do you think is more important maybe in the short term versus the long term?

Well, I think -- well, first of all, they're not mutually exclusive. We're going down all avenues simultaneously. And that's really when we talk about investing in scale of operations and leveraging our centralized platform, that's really the core components underlying these 3 growth strategies. But clearly, new customer acquisition, we -- as Eric said, we've been doing this for a long time. Digital acquisition of SMB service providers has been in the company's DNA for the last 15 years. We have a very efficient machine as expressed by that 10x CLTV/CAC ratio. And we do a nice job managing our customer relationships with a greater than 99% at monthly net revenue retention. So those 2 components, it's a well-oiled machine, and we are fueling that machine. At the same time, the cross-selling motion, that's where the acquisitions really create the flywheel effect, right? So we bring more solutions, onboard them into our centralized platform. It gives us more opportunity to drive cross-sell. The key metric we really focus on there is the sort of penetration of that space. We have 500,000-plus customers today. If you exclude 1 low ARPU solution, about 17% of our customers are consuming more than one of our solutions. We think we have a long way to go in that regard. But the objectives are really to again be going down parallel pads.

Great. And we're going to dig into the M&A side a little bit, but maybe a couple of the other organic growth drivers. So if I think about payments, we've seen this convergence in software where there's this opportunity at the point of transaction to monetize that. We've seen other software companies do it as well. And so I'm just curious how you think about the payments opportunity in your installed base?

It's -- first of all, payment is 14% of total revenue. So it's clearly an important contributor to both growth and profitability. And as Eric said, I mean the company PaySimple, the predecessor company, that's what it was all about, right? So we understand that business very well. Mostly, what we understand is how the user experience can be enhanced by integrating payments with vertically oriented software to make a much better customer experience on our customers' customer end, which leads to better retention and helped me one of those 3 key objectives for us in terms of value prop. We're currently processing more than $7.5 billion of payments, and that represents only about 10% of the opportunity at full penetration. So again, we have a slate of horizontal solutions. We're very focused on selling into that base. This is the flagship. It's the one it's sort of our most mature opportunity. We've been doing it the longest, and we think there's a very [ long tail ].

Great. And maybe kind of switching gears into a different direction on the organic side. I think mostly we're -- we've been thinking about this from U.S. terms, but I know international is another big leg of growth. So where is the company today in terms of international? And how should we think about that progress over the next couple of years?

So I'll address sort of where we are today and probably it makes sense for Eric to address kind of thinking about geographic expansion through the M&A arm. So international markets, they're very attractive, and we're certainly in that. In the first half of '21, international revenue was about 8% to 9% of total revenue, I believe. And many of our solutions are used outside of the U.S., specifically Canada, the U.K., Australia, now New Zealand with our acquisition of Timely in July. And while those -- some of those markets right now are experiencing a headwind given the Delta variant. But by and large, many of our solutions, whether they're the ones I just mentioned or ones just being used domestically because it's a digital acquisition model, we could be having customers in all over the world consuming our solutions. So it's an important component of opportunity for us. And we see those -- the growth characteristics to be quite robust. You might want to talk a little bit about...

Yes. I mean, look, we size the market. There's over 400 million service-based small businesses that fit our categories globally. We haven't -- obviously, even with 0.5 million customers, which we feel great about, we haven't scratched the surface on the actual opportunity at 0.1% penetration. So we look at both short term and long term. Short term, the easiest way to penetrate the new marketplace is through M&A, and we're really good at it. A great example of that Mark had mentioned, we are already in the salon spa business in the U.S. with the company that we own. And we wanted to -- we saw an opportunity to grow geographically, and we bought the largest provider of salon and spas software, New Zealand, Australia with operations also in the U.K., which expanded our geographic footprint. That software, we think, is an opportunity to expand throughout Europe, already having operations in the U.K. So we utilize that platform to grow into it. So kind of in the short term, we'll see opportunities to expand in new geographic areas, bring them into our central operating system that allows us to quickly be able to penetrate new marketplaces. Long term, the same pain points our customers are having in the U.S., they're having globally, and to the localization opportunity for many of our solutions, as Mark discussed, that are already being utilized outside the U.S., localizing them for marketplaces we want to go into. We think that's a longer-term opportunity from a tech development standpoint.

Great. Now you've mentioned acquisitions a couple of times, and I know that it's a key part of the company's strategy. So maybe let's switch to that discussion. Over the last 5 years, you've completed, I think, just over 50 acquisitions. You've clearly proven there's both an ability and willingness to do it and more importantly, successfully integrating it. Can you talk about maybe your M&A process and how you think about the deals that you're pursuing?

Sure. I'll do that on a couple of levels. Again, if I step back even further, I mean our goal as an organization was to build the largest service commerce platform in the world, providing needs for the specialized service businesses vertical and micro-verticalized. We believe the quickest way to get there was the M&A and build that platform, but we do run this as one centralized organization. As we look to expand via M&A, there's really 3 main criteria. Number one, it allows us to provide different additional products and solutions within verticals that we currently are in. Secondly, as I discussed with Timely, allows us to expand within the verticals we're in from getting geographic diversity within those verticals. And third, enter a new vertical or subverticals. So those are kind of the 3 higher ends. As you take a step down, the kind of criteria we look at organizations is number one. It fits one of those top 3 categories that we just talked about. Secondly, we're incredibly confident that EverCommerce's infrastructure, customer base, ecosystem could add value to that organization. Number three, it allows that company, whether that's the product, solution or customers are going to add significant value of the ecosystem that we built. Number four, from a value standpoint as a stand-alone business, the price to value makes sense for us. And so those are kind of the parameters we put around looking at deals. And fortunately, we've been doing this for 5-plus years now. We're tracking over 10,000 companies across our kind of core verticals at this point. And we have a pretty robust pipeline to continue driving value throughout the ecosystem that we've created.

It feels like about the size of my coverage list. So I have a lot of empathy for you there. Maybe talk a little bit about your integration process, right. So because it's happening at a relatively frequent pace, can you just talk about how you operationalize it? And maybe what's the focus in harvesting once you -- just right after you've completed the actual acquisitions?

Great. I'll jump on that. So to start, I mean, important context. We think of these as really onboarding products and solutions as opposed to integrating large companies, largely because they're not large companies. These are things -- these are -- it's all about the solution itself as we bring it on board. Our playbooks kick in immediately upon closing and they're designed to really help us rapidly and efficiently integrate these solutions. And one really important context is we're bringing them on to our centralized platform. We are not technically integrating, for example, the vertically oriented business management solution onto a single code base, nor are we letting these solutions operate stand-alone. So the upshot is, again, we really quickly begin benefiting. And as you said, Samad, we've been doing this for more than 50 acquisitions. So the playbooks are getting pretty well refined at this point. If we start off with the functions that we centralize right upon completing an acquisition, that happens really quickly like immediately. So it's certainly within sort of the first 100 days. This includes all marketing and growth initiatives are being immediately taken over by our centralized growth engagement team, that sales -- excuse me, sales management, but marketing, business development, customer success, et cetera. And then as well, product development oversight around the road map, begins taking hold immediately. And then of course, we immediately begin leveraging our G&A teams, finance, accounting, legal, IT, et cetera. And then in terms of that technical integration, wherever it makes sense, we're going to use APIs to very efficiently integrate with our EverCommerce horizontal solutions, like payments or customer engagement solutions, to integrate with the vertically oriented business management software. What doesn't change and what remains intact is that vertically oriented solution. That's the point of sale, the customer value proposition that really differentiates us versus a horizontal player trying to attack, for example, home services. We're delivering purpose-built software to roofers, which is different than security alarm providers, which is different than remodeling contractors. That's a huge distinction, and we need to leave that intact as well as leaving intact the customer-facing sales and support teams that have been selling that product as well as the product development folks who actually created the product, and then obviously are investing in growth. So within the first 100 days by keeping the solution vertically focused remaining so, and then wrapping it on to our centralized operating platform, we're very quickly benefiting from each of the solutions we acquire.

Great. I'm going to throw this next question as a jump ball because it's part finance, part philosophical. But unlike a lot of your peers, you guys generate pretty healthy cash flow margins, and profitability has been something the company has also maintained while growing. So can you just speak to maybe that balanced growth, profitability, philosophy and how we should think about that going forward?

He handed me the ball. So I -- it's super important to us. And it is one part operating philosophy and discipline and it's another part, practicality and really driving the returns. The operating philosophy is, look, we are PE-backed. We're a company that has been driven to not only make money, but drive operational efficiency as manifests through our centralized operating model, and the way we go to market. So it's always been important that we're driving our organizations -- our solution organizations and the centralized functional groups to create operating leverage, while driving the growth objectives that we set every year. So that's -- that is sort of the philosophical piece. The practical piece of that is being profitable helps us, we think, drive better leveraged equity returns. Leverage has always been a part of our capitalization. We believe that modestly leveraged equity returns are better for all of us as shareholders. And to do that, obviously, you need to be making money. Going public has afforded us the opportunity to reduce our cost of debt capital pretty dramatically, more than a couple of hundred basis points. And it's created access to the largest, brought us capital pools and instruments available so that we can very surgically, if you will, assemble what we think is the optimized capital structure to fund our growth, both organically and through acquisition.

And the only thing I'll add to that, thanks, Mark. Just a little finer point on how we view it philosophically. I mean at the end of the day, our view is every company at some point needs to get profitable, and needs to run a profitable sustainable business, and we're already there. And so we will continue to kind of grow as you touched upon high-teens organic growth rate for years to come and supplement that with M&A growth. But our M&A growth is part of our strategy. I mean it's utilization of capital, right? You utilize that capital to throw a bunch of stuff against the wall and see if it sticks. We're very thoughtful to create sustainable, scalable, repeatable marketing programs that we know we're going to generate profitable returns for our business and ultimately, our investors.

Great. And then maybe if we zoom in a little bit more on the short term and kind of recent trends, EverCommerce, despite being a digital-first company, you're serving largely the in-person economy, right? And so the pandemic's had a weird impact on your business. So I'm just curious, maybe -- again, I'll kick it to you first, Eric, and then Mark, I have a follow-up for you. But how do you think that it's changed the behavior of your customer base? Like what pain points is it exposed to them that they either need to adopt more modern solutions? Or what lessons maybe came out of your customer base from this?

It's a great question, and we touched on it a little bit earlier in terms of what the rate of adoption historically versus what we're seeing it today, is that digitization of the recognition there, number one, not only to compete but also even to survive in a world where no touch becomes more important. We talked about it's a face-to-face business, sometimes it's not anymore. I'll give you a great example of that. We are -- we provide solutions in the health service space and think about specialty medical practices as well as general practices. And now nobody wants to sit in a waiting room because someone next to them may have COVID. Well, who want to sit in the waiting room with someone who has got a flu, right? So it doesn't change, just kind of accentuated. So we've created virtual waiting room to integrate into our practice management solution, so people don't have to go sit in the waiting rooms. Similar, we really expanded our telehealth practice, our software. Again, doctors have now a way to connect when people are in-person and not in person. And it's very similar across all the categories in the fitness space, giving them the ability to connect, member engagement, off-line and online. Nobody knows what the world is going to be like going forward, but not having the tools to connect whether you need to or don't need to, giving the consumer and the members or the patients an option is absolutely critical for future growth in all of these businesses.

I would say that the first half of your sentence was absolutely correct. Who wants to sit next to somebody in a waiting room? Here, period. Maybe, Mark, we'll end it with you with just the last couple of minutes. So look, the company recently issued guidance and reported results not too long ago. Clearly, the trends are healthy and the tailwinds [ I think ]. But just how should we think about maybe more short-term trends, given kind of the uneven pace of the reopening and just the confidence may be underlying the outlook the company is getting?

Well, I think probably the best way to think about that is just unpacking the verticals, right. I mean we had some really strong growth accelerating through the second half. I feel like our guidance is solid for the balance of the year. I think in each of our verticals, home services has performed very well, certainly into the first half of this year, and was a champ right on through COVID, and into this year. Those trends -- and it's really those underlying trends of digitization that are driving demand there. We see those going forward nicely through the balance of this year and into the foreseeable future. Health services, that clearly was impacted back half -- well, last year and then back half of last year, accelerated through the second half into the first half of this year. I feel quite good about that as being back at sort of pre-pandemic levels of demand. So other than some very, I'd call them micro impact in certain geographies where they're experiencing some significant headwinds with Delta for the most part, feel like that's back. And then lastly, on the health and wellness market, where -- excuse me, fitness and wellness market, clearly, the hardest hit. I would say spas, salons, that portion of our business, pretty close to pre-COVID levels and starting to see nice growth there. And then the gym part of the business domestically, I have seen estimates of sort of 80% to 90% traffic back in the gyms. I mean we're not experts to be able to see that, but it feels as though that has happened domestically. I do think internationally, certain geographies where we are exposed, we will see a headwind in that particular portion of the market. But by and large, the underlying trends of digitization across all of our verticals and the underlying -- or excuse me, the value prop we're delivering to customers in each of these markets, we think we're incredibly well positioned to take advantage of the market and the growth trends.

Great. Well, we're at time, so we'll leave it there. Really appreciate having both of you and share more about EverCommerce today. Congrats, again, on the recent IPO, and wish you all the best during now and our next conversation.

Terrific.

Thanks, Samad. Appreciate it. Take care.

Thank you.