EverCommerce Inc. (EVCM) Earnings Call Transcript & Summary

All right. Thanks, everybody, for being here today at the Barclays TMT Conference, Day 2. We made it. Good stuff, guys. So I'm Ryan Mac, mid-caps software analyst here at Barclays. With me today from EverCommerce is Brad Korch, Head of IR; and Evan Berlin. Evan, it would be great if you could start off and just give us a little bit about your background and why you joined EverCommerce.

Yes. First, thanks for having us. So Evan Berlin, EVP of Solutions Group Operations. So I run our EverPro, EverHealth and Payments business. We talked a little bit about the origin story in a second, but I joined EverCommerce really at the beginning, spent 8 or 9 years prior to that at PaySimple, which was the predecessor company in EverCommerce. So all in, 15 years of working with Eric and the team and ran corporate development for the first few years as we started to make vertical SaaS acquisitions and have been in general kind of operating roles at different levels for the past few years.

Excellent. So like when you view the development of EverCommerce, how do you think the product platform has broadened since you started?

Yes. So if you go back and you really go back to 2006, Eric Remer, our Founder and CEO, started the company called PaySimple. And I joined in 2008, we were focused really on being a horizontal business management platform for service-based SMBs to manage their business, bill and collect from their customers. Scaled that business nicely, tens of thousands of customers. But I think what we realized over a period of time as we were watching the market is we couldn't be all things to all people. We are trying. If we had 500 field service contractors, we want to have 5,000 or 50,000 we just didn't have the workflows. We didn't have the feature and functionality that was specific to that vertical. So take the EverPro business, our home service contractors, for example, the feature and functionality and workflows that an HVAC contractor needs are actually different from landscaper, which is different from a pest control operator. So we started making acquisitions in 2016 after we recapped the business and kind of built that business up from there. And today, we've got 600,000 global small business customers in 3 main verticals. So I talked about EverPro. Those are primarily break/fix contractors. EverHealth, those are medical practitioners think kind of GPs behavioral health clinicians and then our EverWell business, which is focused on both fitness and wellness, so kind of boutique, gyms and studios and then salon and spa. And then given the lineage of PaySimple, we really layer on a set of horizontal solutions, embedded payments inside of those vertical SaaS businesses as well as marketing solutions and customer engagement solutions with the goal being that those horizontal integrations enable our small business customers to attract and acquire new customers to get paid from them to manage their businesses and then ultimately to retain and grow their customers. So again, 600,000 small business customers. And if you look back at PaySimple, the mission has always been simplification and empowerment. And that's the mission of EverCommerce today is really to help the lives -- make the lives easier of the service providers that kind of support us in our daily lives every day.

I think one of the interesting -- just a riff on that a little bit. Interesting parts of the EverCommerce story was when PaySimple was kind of hitting its heyday, what Eric realized was that there were a lot of inbound business, a lot of leads were hitting the floor because they didn't have those workflows. And so the thought process, when we talk about our system of action was really around, okay, if you own those workflows end-to-end, then you own the right to offer payments, you own the right to offer marketing services, you own the right to offer customer experience solutions. And so when you think about our business, focused on the SMB market and vertical service providers, it's not that different from an enterprise market, enterprise software, right? You think the most investors in the room are used to understanding that the enterprise land-and-expand strategy goes and that's what we're doing, right? It's a different layer of the market, but we land those customers and then we sell them more stuff over time. And then as they buy more stuff, not only do they become more attractive to us from an ARPU standpoint, but the retention improves and increases. And so we -- it's a really unique story and it is very parallel to the enterprise stack.

And I think when people hear SMB software SMB-oriented, like people worry about like churn risk or pressures in a tough macro. But Brad, would you mind just discussing how like what EverCommerce does core to those businesses and very hard to…

No. I mean, look, we've used the phrase mini ERP or the ERP system for these businesses. But if you're a plumber and whether you're using our Service Fusion product or something - Fieldpoint, which is higher market or whether you're entering and you're using like a Joist or Invoice Simple product when you wake up in the morning and you're running these businesses, this is what you go to. This has what your schedule looks like. This has your route management, your inventory, your task if that's for billing, your payments, everything you need to do is run within this business in this software platform. And so when you think about like everyone is always talking about the recessionary environment where we are, it's a binary thing for our customers if you're using our software, right? If you're in business, you need to use our software. If you're a plumber and its okay recession, your business is down 5%, 10%, it doesn't matter. You're using our software. Your business is doing well, you're at 5% to 10%, it doesn't matter, you're using our software. So that's a positive, and that's 1 element of sort of the recessionary impacts as well. The other is just the diversity of our customer base, right, which is we have Evan said 600,000, that's the last number we published, but you can back into some numbers we've given you, it's well over 600,000 at this point. Customers spread across not just EverWell, EverPro, EverHealth, but many, many micro verticals within those. And we have made over 40 discrete solutions that we're selling to these customers, right? So they're sticky in their own mind, but then we're spread across a lot of functions. And then back to your original question, just on the environment and the stickiness, we're servicing essential services in many cases. Kevin talked about break/fix within EverPro. No matter what's going on in the economy, if your AC is broken or more importantly, your heat is broken, like, you're going to get it fixed. Someone's sick, you're going to go to the doctor. You're probably going to get your hair cut. And you can debate whether you're going to the gym or not. But our core gym business is anytime fitness, world gym-type stuff, not Equinox. So we feel like we're -- the distribution of our customers, the breadth of the customers, the distribution of our solutions provides us a fair bit of insulation.

Oh Brad, I've been in gym in the first 2 weeks of January. Don't you worry. Everybody else in this room will be sick but not the third week. No, not the third week. Not that Monday, no way. So Evan, just given your background, I'd love to hear about like why those prospective owner operators are interested in joining EverCommerce? Like what about your flexibility makes it easy for them? And then post acquisition, what comes next with those upsell opportunities?

Yes. I mean I think we service small businesses, right, and probably more towards the DAS of SMB, right? These are single owner operators that may have a couple of trucks if they're an HVAC business. Might be a few locations if they own salon or spa but it's not bigger than that. It's kind of a general rule. They're looking for simple, right? They're looking to solve a problem. And they're generally going to come to us with a pain point, and we probably talk about through the course of the discussion around the vast majority of the customers we acquire are digital and self-serve. So they find us, they buy, they onboard themselves. They can get training and education along the way, online without having to speak to a person. And that just goes back to the simple. So I think they're looking to solve a pain point. They find one of our solutions. And hopefully, we're able to solve not just that one specific feature pain point, but a much larger set of problems that they have. And then as Brad touched on, over time, we can land and expand them into making sure payments is deeply embedded into their workflow, helping them to acquire customers in a more efficient manner by selling them leads and then helping them also run a more efficient business with their customers by selling them customer engagement solutions that just enable them to improve the relationship and ultimately reputation with their customers.

And that's a great segue because as we talk about your most recent results, it seemed like your marketing services business saw a little more pressure due to the macro. Can you just talk about like what that lead generation business is? And maybe like why the last quarter maybe it wasn't what you expected there?

Yes, I'll take this one. Look, just taking a step back, the core of our business is subscription and SaaS services to the software solutions that we're talking about. So we look at our reported revenues, approximately 75% fits into that bucket. That's monthly recurring revenue for these solutions. And then on the payments side, that's kind of regular transactions that run through. That's core. That's performed within our expectations where we want it to be. Then we have about 23% of our revenues, which is this Marketing Services segment, right? And that's predominantly 2 things. The first is lead generation and the second is digital marketing services. So lead generation is exactly what you think it would be. It's us acquiring leases and then selling them to our customers, and that can be both via digital means and it can via more traditional means. And then on the marketing services side, and that could be things like website building, campaigns, whatnot. The difference between that piece of revenue and in the core subscription SaaS is from -- in a recessionary environment, that's more kind of nice to have or does not need to have. We talked about if you're in business, you're using our software. If you're in business, do I need a new website -- my business is down 5%, maybe not. So on the margin that sees a little bit more pressure. Now that's not saying that I think what gets lost in this is the fact that marketing services still grew 15% year-over-year last quarter. It's still performing well, and it's a great add-on service, but we internally thought it was going to grow higher than that. And so when we talk about the slight shortfall we had to guidance, it was in that area because our expectations were higher. As we look forward and we think about, okay, well, what does that mean for 2023 and whatnot? Like we gave some high-level kind of directional view on 2023, and we'll talk about the notion of what's going on in our Marketing Services business, that's contemplated in that view.

You beat to it. That's where I was going next. Yes, you talked about 15% to 20% organic growth rates going forward. I guess how comfortable are you with that even in tougher macro? And can you just help investors with what you said about next year?

Yes. I mean, the 15% to 20%, we believe, based on the market opportunity that's in front of us is durable for a long period of time. But it didn't contemplate a global recession happening in the moment. And so that 12% to 13% that we kind of soft guided to for 2023, we'll give full guidance with our 4Q results in the New Year. That's kind of contemplated everything we're talking about, but that doesn't mean like, oh no, that's the new normal. We expect that as a point in time. We believe that the [indiscernible] business, the market opportunity, the solutions we have for that 15%, 20% can grow for a while. Now if you look at our reported results, I'm sure we'll get to this later, we've grown a lot faster than that, and that's with M&A, we use M&A to compound that growth algorithm.

And just last quarter, you mentioned that given the current macro, you took some cost savings measures that would be reflected in the first quarter. Anything there? And can you just talk about your approach to growth -- or sorry, profitable growth historically.

Yes. I mean there's levers in our business that we can pull at any given time to manage growth, right? And we talk about -- Evan talked about our customers being self on-boarding and that being simple. Well, 80% of our customers are digitally acquired, right, when there's a decent digital marketing spend. That's a lever that we can flex within reason. I mean you don't want to stun your future growth opportunities. But if you're sitting here and it's the third week of December, like you need to spend full bore -- people are really going to waking up on Christmas day and say, hey, I do believe you need a new SaaS solution? Probably not. So you can flex those things a little bit. And then there's some cost things that we'll do, right? I mean we have a portfolio. It's just like all you guys ensure there's some folks from the big platforms out there. If you're doing well, you get more capital, if you're not doing well, you get capital taken away. Same thing with our business, right? If there are businesses that are underperforming then we will look to rightsize the cost structure. We'll look to optimize the spend and then we have the businesses, and that's the but like we talked about the core business doing well, businesses that are well exceeding their plans. And so those business will, okay, where can we invest more? And so managing those costs and then keeping to -- we talked about 12% to 13% growth for next year, 15%, 20% is kind of the longer-term organic target. We also are targeting 20% EBITDA margins [indiscernible]. That will treat over time. But in the near term, that's what we're managing to. So we will look to make decisions as quickly as we can to manage to that number.

And historically, it seems like you guys have put up strong EBITDA margins and profitability has always been a focus. Evan, can you just talk about maybe post acquisition of companies or just over the history, like how you've seen EverCommerce really add value to new acquisitions on the bottom line?

Yes. Maybe I'll give you an example. DrChrono, our most recent acquisition, which we acquired about a year ago, closed in November of 2021, value-based company, practice management, electronic medical record solution for small medical practitioners, behavioral health, chiropractors, things like that, really nice business. The first thing we do is integrate the company into the EverCommerce ecosystem. So think about all the back office, SG&A, finance, accounting, HR, legal, make sure that, that is rightsized to give us kind of G&A and operating leverage. And then over time, we integrate -- are integrating that business into our EverHealth ecosystem where we've got a set of leaders that we've centralized from a sales, business development, product strategy perspective. So that I think Brad kind of touched on this. We're not going to market in EverHealth with just one product solution. We have multiple product solutions for different ends of the market for both horizontal and kind of specialty physicians. And then we've integrated some of the other products that we've acquired over the years, our patient engagement suite that provides electronic faxing, patient communication, secure messaging and testing as well as the payments components of the healthcare process. So both the payor, really, the insurance component as well as the patient payment component, really, the bill that you guys get at the end of the visit that can be paid through our EverCommerce Payment Solution. So all of those integrations that we've completed and are continuing to work on just make the DrChrono acquisition much more accretive to the over EverHealth ecosystem and ultimately add more value to the current and future DrChrono customers as an example.

Let's go there. DrChrono was really interesting from our end than an acquisition. I guess how has that trended at this point? Like has it ahead your expectations? How has that -- about that business for next year?

Yes. I mean it's a great business. I think operationally, it is on our expectations in terms of our performance as well as the steps we've taken to drive integration into the business and integration into the product platform and excited about the results in 2023.

Excellent. Brad, I want to touch on a few aspects of your capital structure, but you mentioned M&A is such a big part of your business, but you recently upsized your buyback. Can you just talk about the decisions there?

Yes. I mean, look, one thing that -- and I think Marc said this maybe at the last earnings call, the one before that, we want to be known as good stewards of capital and very shareholder friendly, right? And so we look at -- so M&A was a really good tool. If we go back to 2016 to kind of build, and Marc will use the phrase, time, scale, relevance and kind of get the platform where we need it to be. And we're good at it. And so we want to continue to do that. But as we look at the market today, there's still a pretty big discrepancy between private and public multiples out there. And we're still active and we're looking at stuff. But to use our capital -- your capital to buy stuff at 8x when we're trading at something less than that, it doesn't seem like there is anything to do. And so we will -- we look at capital allocation as a point-in-time decision. And so we decided, okay, we would do this buyback. As we think about how that fits into our overall cash flow and capital structure, if you look at the sizing of the program, it's roughly -- and the timing of it, it's roughly to fit in the box of excess free cash flow generated over that time period. And so we're not levering up to buy back stock. We're not putting ourselves in place where we can't do M&A. But for right now, that excess cash flow is best used to buy our stock, which we view as an attractive use of that capital.

I would love to go back to the world where 8x is cheap again. We'll see. Evan, any like differences between the opportunity set on the M&A side, like are you seeing more productive outreach? It seems like the valuation spread hasn't really closed yet, but is it getting more interesting?

Yes. I mean -- Brad can certainly take that. I'd say from my end, having been in this business since the beginning, I think we've had good inbound/outbound flow the whole time and certainly built the right relationships, both with professionals in the market as well as just founders that we've had a strong sourcing engine for 6 years that we've built and brought in-house, and that's definitely an asset to help us understand the market because when you look at some of the targets of the acquisitions we've made over the years, they're small technology firms, right? And there certainly are a lot of them out in the market. But many of them have never taken on institutional capital. They're bootstrap kind of lifestyle businesses, not very sophisticated. Sometimes over the years, they've had bankers and representation and in some cases, they've not. Having built relationships with them I think when the timing is right, that certainly will serve us over a long period of time.

I think your focus on verticals definitely helps the synergies, too, because one thing that will also be at least for the first couple of quarters are covering you guys are not proud of saying this, but it's just like the difference between the software for 1 pair salon is different than 3 to 10 salons and then 10 to 50 salons, right? And you guys have products for each of those market segments. Like how does having specialization across different sized businesses help that entire ecosystem of EverCommerce customers?

Yes. I mean I think over a period of time, that really will prove to be a huge support and the durability of the story is that a small contractor who maybe worked for a business who decided I want to go out on my own and hang a shingle can find a solution, can purchase it and on their phone, can be up and running in 5 minutes. And that's -- in the industry to kind of talk about that as Chucking truck, right? And Chuck and the truck can go out there and do their thing and use our solution to power their business and be professional, right, and really look much larger than just Chuck with his truck, doing a great job of servicing our homes each and every day. But eventually, Chuck is going to advance. And he's going to hire more people and get more trucks and have an office and need to professionalize at the next level. He's going to need leads. He's going to want to engage with his customers in a more deep meaningful way. And Chuck's not that sophisticated, right? So Chuck needs easy tools that can help him run all of the workflows in his business, and he also needs the thought leadership and education from people that engage with a lot of Chucks, right? And we've got customer success resources that talk to a lot of Chucks. And I think over time, eventually, these customers grow out of that, too, and they need a solution to power not an enterprise business, but they might have trucks and it might be in multiple market areas. And then eventually, they're going to hand the business off to someone that works for them or maybe to a kid. And I think this is one thing as part of the story that we see specifically in that vertical all the time is that every single 30-year-old that's taken over one of these businesses has had an iPhone for their entire adult life. So whether they have one of our solutions or they're taking the business from mom and dad and they want to in the future, they're running their business on their phone, right? They want to be running their business off the phone because they're running their whole life on their phone. So finding our solutions and enabling them to kind of have that same experience as a business owner as they get in their consumer life, their personal life, we think, is pretty big digital transformation component, I guess, of the digitalization of the service economy that just demographics continue to drive.

Yes, that's a really interesting trend. That's one thing we've been working on in regards to you guys is as business owners get older, they try to sell companies, you don't have a customer list that's in a product like EverCommerce, you can't sell your business, right? So ultimately, like even if you're a pencil and paper guy, right, but if you want to sell, you need to put something in a situation like EverCommerce.

Yes. I think -- I know this is one of your questions, maybe we skipped over. But just from a competition standpoint, a lot of what we're fighting is inertia, right? Like you've got business owners actually in all of our verticals, maybe with the exception of health services, where there was some kind of mandate around medical records in the U.S. over the last 10 or 15 years, you've got people running their business, in-home services with pencil, paper and a white board. And those businesses might be $2 million, $3 million, $4 million, $5 million of revenue. And every morning, they have all the technicians come in and they look at a whiteboard and they get their route and they print it out and they go out and they do their job. And that could be a really nicely profitable lifestyle business for Chuck. But to your point, to really scale it, to monetize that asset because that probably is Chuck's retirement, ultimately they need a solution to value, and they can actually be more profitable and much more efficient with a lot of the tools that we're offering.

And I think it's not just the providers, our customers, but they're customers that will demand it, too. I mean like we're all busy, and we're running around. And like if I have a plumber, I don't want to be sitting around all day waiting for him to come. I want a text message that he -- when he's going to come. I want to know where he is. I want to get the bill on my phone. I want to pay it on my phone. And that you need to have a solution like ours to be able to offer that to their customers.

Yes. And when you're putting in something like inertia, it's not like there's 6- to 9-month enterprise or customer proposal. It's not like they're going to pull back as of a bad macro, right? Like, I need something now, let's put it in. So I think that's something that differentiates EverCommerce from the rest of my coverage. Brad, can you just talk about 19% adjusted EBITDA margins, like why most people are looking at profitability now that's kind of been the history for EverCommerce. What's kind of driven that? And where do you think that could go next year?

Well, I mean, look, it's driven mostly by our funding and our structure, right? I mean we were PE-backed, still had 2 large PE owners in our stock. And we run the business with leverage, right? If you're going to run your business leverage, which can enhance equity returns, then you need to have cash flow order in order to support that. And so it's sort of a business model decision necessity. And so if we look at our ability to buy back stock, we look at our ability to fund our debt load, whatever like you need to have that cash flow. And so that's why we focus on it. And so yes, 19% last quarter, 20% [indiscernible]. And I think of the IPO, we talked about 25 to 30 kind of percent -- I wouldn't say long term, but like medium to long term. And because there will be significant operating leverage in this business over time. If you look at the last 2 years, we went public in '21, there's a lot of public company costs, probably 1% to 2% of revenue that have to get baked in as we get kind of maybe through the second half -- into the second half of next year, you'd say, okay, well, those costs are largely baked in at that point. And so then you can start to think about operating leverage. We're doing things -- we're continuing -- this is -- there's a lot of centralization within our company, and I know Marc talks about this all the time, but there's a lot of costs that we're bringing together, a lot of functions that we're bringing together. And so as we do future brand consolidations as we continue to scale from a central operations that will provide additional operational leverage over time.

And would you mind just touching on like your capital structure? Like how much leverage you have and how you think about the floating rate debt?

Yes. So we're -- it's -- credit agreement definition is 3.7x leverage. It's just 1 facility. It's a $550 million Term Loan B facility. It's L+325, so it's all floating. But in the last quarter, we took advantage of a hump yield curve to create at least in our view of where the market thought was going to be sort of an NPV-neutral activity. So we kind of swapped out $200 million of that debt. So $200 million is fixed the details of the rate in the Q. So now we're at $350 million floating $200 million fixed.

Excellent. And can you just break out the differences between the recurring and reoccurring?

So look, 95% of our revenue is what we call recurring or reoccurring. The recurring revenue is what you think it would be. It's the monthly annual or whatever subscription services to our software or to maintenance contracts. It also includes our payments revenue, which we give you every quarter the detail of that and it's been growing nicely over 20%. And that's recurring. The reoccurring piece is more in that marketing and technology services piece. There's some minor stuff in there that's also recurring. But like from a conservative standpoint, I would view the breakout to be that subscription and transaction is recurring. The marketing stuff is more reoccurring. It happens over and over and over again, it looks like recurring, but there's not like a monthly contract or anything associated with it.

And we talked about the resiliency of the EverCommerce business and your customers, right? To put a finer point on that I think 2020 was a good example about how EverCommerce still performed even when many of the businesses were shut down, but many were also considered essential services. But I guess how would you use that parallel to what we're seeing today?

Yes. I mean I think the metrics are something like 80% of our customers were considered essential services during COVID. I think about a third of the businesses were literally shut down and we still grew over 7% in 2020. I mean I think Brad touched on it, like with the core systems of action it kind of is binary, right? If you're a healthcare provider, regardless of whether business is good or COVID is happening or RSV is surging like it is in Denver, you need a solution to run your business regardless of kind of how much money you're making. So we see that as the core kind of system of action business has been resilient through regardless of the macro.

And how do you view the like addressable market of your payments opportunity just within your existing customer base today?

Yes. So we're -- I mean, we give the stats every quarter. So 70,000 of our customers are using more than one solution. The more than one solution is predominantly payments today. And so that's a 10%-ish penetration rate of the total customer now of the opportunity you're going to have some solutions and customers that are probably not really addressable, like the roof we're selling $30,000 roofs, probably doesn't want to take a 3% hit on the credit card fee. But there's still like a very long runway within the existing base. And then we've been growing our customer base 20% a year so that -- like the opportunity keeps growing, we're not even to a point where we're catching up to that.

And just beyond the marketing and services piece lead generation, just in terms of the macro, is it impacting anything else in your business like you seeing any increases in churn or was it really like a business as usual in the quarter?

No, it's frustrating for you guys, I'm sure. But no, it's actually fine. If we look at -- gross churn, no change. TPV still growing. NRR is still strong. And so like -- and we did -- like we've done extensive reviews of like each solution bottoms-up like look for what's happening. We're like, just a recession out there, we got to find it? And the bulk of it, like you can't find anything. It's really just in those nice to have marketing solutions that we've seen so far.

And maybe just touching on the TPV story because I think that's really important. It's the lineage of PaySimple. And we've got a lot of experience and expertise in the building, they've been doing that for 15 years. But if you think about where we are, we're just in the early innings of embedding payments inside of the systems of action and getting our customers to adopt payments. And I just think there's 3 legs of the stool. First, it's about getting customers to actually sign up for integrated embedded payments, and that takes work. Second, it's about getting those customers to embed that workflow inside of their business, and that takes work to get them to actually fight inertia or move from 1 provider to the other. And then third, it's about getting them to increase their share of wallet, right? If they're taking payments in the field, but they're not doing recurring billing, that's education, both one-to-many and one-to-one that has to happen. And we believe that there's a super long runway with the existing customer base to be able to attack that.

And I don't know this is for Brad or for you, Evan, but is there any changes that you've seen to like Google Ad Spend or digital marketing costs at this point or it's something that you might see next year?

I haven't -- I mean, it always ebbs and flows. I haven't seen anything or heard of anything that's like material in any direction, positive or negative.

Yes, we haven't seen anything there. But that's something we're tracking because that makes customers acquisition a lot easier. Just kind of love to hear your closing thoughts on kind of what's next for EverCommerce, like do you think like acquisitions are required for this business -- and how do you think the macro could impact like all the things we talked about this?

So we'll be very clear. Acquisitions are not required for this business at all. Like we believe the business grow 15%, 20% organically for, in Eric's words, years to come. But M&A is a great compounding engine to that. So that's sort of thing. As we think about like the near term, yes, we're focused on delivering on results. There's stuff we'll talk about. I mean we are pressing harder on payments integration. That's a very accretive lever within our business. And so when we think about strategic priorities for '23, that's an area we're focused on. There's a couple of new products development that we're focused on that. I think we're really exciting. But yes, we're just looking ahead and looking to keep growing the business.

I know it wasn't the easiest to get here today. Brad and Evan really appreciate you stopping by.

Thank you. Appreciate it.