EverCommerce Inc. (EVCM) Earnings Call Transcript & Summary

Okay. I think we'll get started here. Thanks, everyone, for joining us here at JPMorgan's 51st Annual TMC Conference. With me today, we have EverCommerce's CFO, Marc Thompson. Marc, thanks so much for joining us here today.

Thanks for having me.

Yes, really appreciate it. Maybe you can just spend a moment or 2 just to introduce the company and yourself to the audience.

Sure. So I joined the company in December of '16 when Provident strategic growth, our largest investor, recapitalized the business, and we really began a new journey. I was previously heading up Oppenheimer's investment banking team. So I spent a number of years on Wall Street and some other operational roles. But super excited to join the company to really lean into their vision of becoming a leading service commerce platform, which we are today. We are -- our mission is really to simplify and empower the lives of those business owners that support us every day through services they provide to us. And we do that by offering vertically tailored business management solutions, which are really that the solutions they interact with every day to help them run their business. And then we also sell them other solutions that help them grow their business, in the form of marketing technology solutions that help them generate demand and new customer acquisition for their own business. And then, of course, we help them with another range of solutions on the back end to retain and engage their customers so that they can drive retention. We have about 685,000 customers, more than that today, have been growing quite nicely and really look at ourselves as across the arc of 3 big verticals, home services, health services, fitness and wellness, again, really being that leading player today in terms of providing these services to small businesses.

No, that's a great overview. So you mentioned you really have 3 core verticals, EverPro for home services, EverHealth for health and EverWell for fitness and wellness services. Can you maybe just elaborate on what you're seeing in terms of the demand trends within those each of core verticals?

Sure. And obviously, the last couple of years, it's been interesting coming into COVID and then out of COVID. But far and away, our largest vertical for us and the fastest growing in home services. It continues to be a wildly fragmented landscape. I mean there are literally millions of contractors and home service providers doing a range of things and just providing a range of services. But that is probably the least penetrated from a technology standpoint and we just see a tremendous tailwind of the digitization of their work streams. Followed by health services, which is, I'll call it, a more mature market. That's a market that actually has been experiencing a range of technology solutions in the physician practices and specialty practices that we serve really starting with Obamacare. So it's further penetrated. And the growth profile there has moderated. It's gotten back to that pre-COVID sort of level, if you will, really was doing that sort of through the second half of '22 into this year. But continues to be a nice, stable market. And then fitness and wellness, for us, it's really a tale of 2 parts of that market. On the fitness side, that is a sector that we don't think has really fully recovered coming out of COVID. There's not as much new gym formation, still rationalizing spend in those markets. But on the wellness side, where we cater to salons and other beauty service providers and things like that, growth is actually quite nice, and it continues to be very attractive and, again, at or better than pre-COVID levels actually.

And I guess within those verticals, you definitely are facing a few different competitors. Who do you typically compete with? And why is it so difficult to replicate your value proposition?

Yes. So -- and it's different by -- within each vertical. As I mentioned, home services, largest vertical, wildly fragmented both in terms of workflows and services that folks are providing. And it is our strong belief that what we do differently is meet them where they are. So we're vertically tailored business management solutions. Landscapers need something different and roofers who need something different than an HVAC contractor. Our belief is that you will win the day when you show up with the business management solution that is tailored specifically to their needs. And then you're embedding things like digital payments so that they can get paid faster. You're cross-selling them other solutions again, to help grow their business, and that's really our competitive differentiator. Really, we are in that place where they can come to us for each of those solutions, and we can bring it to them and meet them where they are. In terms of competition in that market, though, again, wildly fragmented, I would say the biggest competition in home services is inertia. I mean, there's still just a lot of paper and spreadsheets or a variety of different solutions. At the higher end, there are other competitors. It's just not where we compete. Most of our companies -- or excuse me, most of our customers, more than 80% spend less than $2,000 a year with us. So we are very much at the lower end of the market. In the health services world, the competition there again, well-established more upmarket providers of solutions, specifically for larger healthcare providers, hospitals, things like that. We're down in the physician practices, small physician practice, specialty practitioners and the like. And there are a range of other competitors, particularly around practice management and EMR, EHR. This is -- these have been technologies that have been around for some time, particularly with the advent of Obamacare. And a lot of these practices have adopted and are using something. But there, again, what we're really trying to provide, and we're doing this through our branded EverHealth brand, really trying to bring together simplified solutions that help them manage their business, so lead with a practice management and billing solution, combine it with electronic medical record and health record, and then surround that with patient engagement solutions to again help them make it create a better experience for their patients. And then fitness and wellness, again, fitness is probably the most mature in terms of digitization. They figured out a long time ago you should accept a credit card in the gym so that you can just continue to spend that monthly because customers like me will show up sporadically to experience that gym, and it's a great way to continue to get paid. So in that particular sector, you'll see some bigger competitors who have been there for quite some time. Where we're playing again is really around providing that holistic experience to our customers. So they have customer engagement solutions on the front end, member engagement solutions to be able to manage their membership base and even take payments along the way.

Got it. And you mentioned payments a few times. I know that, that has been a pretty strong growth lever for the business. And at the same time, also expands your addressable market opportunity. So really 2 questions. How are you driving more acceleration of payments adoption within the business? And how does that really expand your total addressable market? How should we think about that?

Yes. So the opportunity for payments, I mean, as I said, more than 685,000 customers. I mean, we think this is the opportunity set, if you will, from a TPV standpoint. And today, we're currently processing, at the end of Q1, we've mentioned were $11.1 billion annualized total payment volume. That represents about 10% of the total penetration of the market as we see it or that opportunity as we see it. So there's a tremendous opportunity to lean in. And I would remind everybody that payments, for us, is 95% gross margin. So one of the most accretive things we can do, perhaps the most accretive thing we can do to grow our business and drive profitability is monetize a customer who's already purchasing a business management solution, monetizing that with an embedded payment. So huge opportunity. A major focus of the company. We're putting -- continue to put more woodbine in that arrow because we see it as a tremendous growth driver and certainly one that will lead to bottom line optimization as well, particularly through gross margin. The way we do that is look across our ecosystem at each of these business management solutions understand that point of engagement with the customer's customer, if you will, and create a seamless integrated workflows so that they can get paid however they need to get paid, check, credit card, ACH, whatever the motion may be, but ensure that it is very easy for those -- the customer's customer, if you will, to create a payment either out of point of sale or over time with a recurring payment, what have you. We have a dedicated group within our ecosystem over Commerce Payments, which is a team of folks who have done this for years, driving adoption, not just new customers, once you embed the solution, obviously, you're looking to attract those new customers coming on to the platform to adopt payments, but also going back into the base and driving adoption there. And then working with customers to expand market -- or excuse me, wallet share by helping them understand how they need to get paid, to make sure that they are able to get paid in a variety of different ways. If you think about a home contractor, they might take a check. They might take a credit card depending on the size of the job. It might be wire transfer, I mean, it could be a variety of different motions, but ensure that our customers have the ability to collect payments in whatever motion makes sense for their workflows and their customer base.

And sort of you mentioned that, within a year, customers typically spend less than $2,000. So when they are adopting payments, as another product. What is really the incremental ARPU uplift you get from that?

Well, it can be significant. And if you think about some of our solutions, I mean, -- we have 1 solution that might be less than $10 a month, very simple invoicing and estimating solution. It might be less than $10 a month for subscription. Then you think about if a customer takes or if that particular customer who's using that solution and there might be a home service contractor and they might be billing out $5,000 to $10,000 a year. And we're getting paid on that TPV. I mean you can see a meaningful multiple of your subscription through the form of payments revenue because our take rate, which is up around 90 bps right now, that just creates a very, very attractive revenue stream to complement, which are already getting paid on the subscription. Now that will vary, obviously, by solution. We have -- that's the lower end, let's call it, lower end micro solution. We have obviously some solutions that are a few hundred dollars a month per seat where that math changes. But we know every single time, very accretive motion to drive ARPU expansion meaningfully. And secondly, it also improves retention, right? Because it's a minute, and we have about 10% of our customer base is taking more than one product. The vast majority of that are payments. And we know that when you -- when a customer has a business management and the embedded payment capability, retention also goes up meaningfully on that customer.

Got it. And to that point, 10% of your customers are only taking more than one product. You cited that, that is one of the largest growth drivers of the business potentially going forward. So what's required to -- not asking you to guide anything today, but how are you able to expand that in order to accelerate it to maybe 15% or 20%? What's that at a high level?

Yes. I think -- again, it's looking within each of our solutions and some of our solutions, you might have very high penetration of their existing customer base, highest greater than 50%. And those would be solutions that have been more mature where we've been at this motion for some period of time. Other solutions, which are newer where we just started driving adoption, it might be far lower than that. So the opportunities that takes into consideration all of the various solutions and their overall aggregate opportunity. But the way in which you do it is engage with these customers, again, at the -- for new customers, as they're coming in the door, you want to make sure that, that they understand both the business management aspect and then they understand that this can be coupled in and make sure that they understand that overall value prop and drive adoption at the sale of the new customer. Within the existing base, we do marketing campaigns. Again, we're a, digital acquisition is the way we drive growth in our business from a marketing standpoint, and digital interaction is also a way we continue to interact with our customers. So a variety of different campaigns. You might do it through campaigns and pricing and bundling, might be drip campaigns but a variety of different marketing methods to just ensure they understand this feature is available and they understand the value that it can drive to them and their business.

And I think is just as part of the go-to-market playbook, last quarter, you began to have a more consolidated EverHealth brand. Can you just walk us through the benefits of this? And what have you been seeing from traction from customers?

Yes. So a couple of things. One is the customer facing, which is the most important reason to do this, right? We talk about simplifying, empower the lives of the business owners that are providing these services, while simplifying mean simplifying the value prop, right? So we have a number of different brands within health services. And by branding EverHealth, we're able to really simplify the value prop and sort of break it down into 2 components. One is lead with the business management solution. So in that vertical market, the practice management solution and the billing solution and then their electronic medical record solution, which are integrated in our ecosystem, that's where you land, and then you want to expand with other solutions. It could be embedded payments, but it also could be another software-oriented solution, patient engagement, where you're interacting around scheduling, communication, text and so forth with your customers to enhance an overall customer or patient experience in that case. By simplifying that, we're finding that, obviously, customers, you're just simplifying it when they come in the door, so their ability and time to buy is driven down, which is obviously an improvement for our customer acquisition. And again, I think -- thinking about the overall experience, they don't have to filter through a bunch of different brands. They are able to say, "okay, I'm going to go to ever Health, and I'm going to get these 2 things." And then what's underneath the hood is less relevant rate. The second part of this is an economic part of the equation and real optimization in our business. Over time, and we called this out on our last call because it is starting to happen, but it's a multiyear journey. There's really this notion of brand and product consolidation. As you have 2 or 3 or 4 different PM, EMR solutions in that vertical, yes, some cater to specialty clinics, some cater to small physicians, et cetera. As you start to bring those together, you're going to be able to drive real efficiency in the operation, everything from customer acquisition, customer support right on through the organization, kind of hitting every slot along the way in the organization, which, over time, will, we think, streamline and create a lot of efficiency, which hopefully will be manifested in the bottom line improvements and expansion.

And would you say that just -- I guess, how should investors sort of track the improvement with that consolidation opportunity?

I mean, you will look at OpEx as a percent of revenue, is my guess, the primary metric that investors will look at in terms of, let's call it, efficiency gains at each of the lines. Now sales and marketing and product development, over the arc of time, that is where you should see some of that. The G&A is a little bit different, but there's a component of that in the G&A as well. I mean we think, over time, we've been continually improving our G&A as a percent of revenue. I expect that to sort of methodically continue because as we've talked about really the last couple of years preparing for and going through the public offering and now being a public company, just investing in public company infrastructure and then infrastructure just to scale of the business has been a big series of investments over the last couple of years. The growth of those will just moderate pretty dramatically. So we don't need -- we don't expect that, that spending curve will be the same. So we would expect to get a different form of leverage there, but some of that again, over the mid- to long term, that optimization from brand and product consolidation, it will hit that group as well in the form of everything right on through the back end.

Got it. Shifting gears here a little bit. Just wanted to talk a little bit about the macro-environment. At this point, as you're talking to customers and different partners, it seemed like last quarter that the macro-environment, it seemed relatively consistent with Q4 as well. Can you just help us get a better sense of what you're seeing? And how are you sort of thinking about that as we think about the guidance for the year?

Yes. I mean, I think, Q3 and Q4 of last year is where we started to see some of the moderation particularly around the marketing technology. And in Q1, software and subscription grew 15%, and the marketing technology grew 6%. And I think that, that story is kind of the story the last couple of quarters, and I expect that to be the story going forward and that's kind of the way we thought about guidance. I think, again, back to the verticals, home services continues to perform nicely. I do think health services has moderated some. And I believe the fitness portion of fitness and wellness continues to be somewhat challenged. So our expectations there are very muted and very tempered, consistent with kind of what we saw exiting the last half of the year. And then the other, the wellness portion of our fitness and wellness, while doing well, I mean it's a smaller piece. So it's not going to have as much of an effect.

And just maybe related to that, I mean, obviously, the company has quite a track record of doing M&A, different tuck-ins. How has the macro-environment really impacted, the valuations from your curve view? And, at this point, what is really the M&A philosophy going forward?

The M&A -- I mean nothing's changed. We have a very vibrant and active Corp Dev team. We're constantly looking at opportunities that will be strategically, financially and operationally accretive for us. The market certainly backed up quite a bit in '22 coming out of '21 and sort of the correction that took place. And what I would say is, a lot of the solutions that we're looking to acquire, and in terms of what we're looking to acquire focuses on those business management solutions where we can pattern recognize land with that, expand with the cross-sell of embedded payments and other solutions that we have to offer to be able to drive customer expansion and retention. So that -- those solutions, vertically oriented, obviously, our experience in '22 was that the disconnect in valuation. We were more disconnected in terms of valuation from a public market than they were as a private market. That disconnect really didn't solve itself. There's a ton of liquidity in the lower middle market. Private equity world chasing some of these solutions. I think they are quite attractive targets for those types of investors. So we never really saw valuations decline a lot. What has changed, obviously, for us is our valuation has changed, which has been helpful in bridging that gap, if you will, to a certain extent. But I think we see the market as improving gradually. And what I can say is I think this first half of the year that we're in is just feeling quite a bit -- it's feeling better, I don't want to say quite a bit, that's probably over my skis a bit. But it's feeling better than it did last year. And we saw some gradual improvement through the year. But, look, there continues to be a very, very fragmented universe of solutions out there. We're monitoring them constantly, and we are active, but we are very, very disciplined. And we will -- we have been, as we've built the company to the scale, and we will continue to be.

Maybe talking a little bit about just AI. It's coming up in every conversation here at the conference. There's just a lot of excitement around it in general. I mean how should investors really think about how artificial intelligence really applies to your business? I mean do you see it as an opportunity? Do you see that as a threat? Just help us kind of get a better sense of that.