Good morning, everyone. My name is Alexei Gogolev, head of Vertical Software team here at J.P. Morgan, and today I'm delighted to have Mark Thompson, CFO of EverCommerce, with us. Mark, welcome.
Thanks for having us.
For those here that are somewhat less familiar with your incredible success story, could you give us a quick overview of EverCommerce and what has been the evolution of the business?
Sure. EverCommerce, really our roots are way back to PaySimple, which was founded by our CEO, Eric Remer, about 15+ years ago. The mission of PaySimple was really to simplify the lives of small business service providers by enabling digital payments. It was pretty simple to use software to help them run their business, but the real special sauce was being able to capture a digital payment and get paid frictionlessly. Well, today, EverCommerce has a vastly expanded portfolio of solutions, but our mission remains the same, which is really to simplify and empower the lives of those business owners that provide services to us every single day, whether it's in our home, in the doctor's office, and whatnot.
And the solutions that we offer today to our more than 690,000 customers across three different verticals, they really run the gamut. That the core is the system of action business management solution, which is what they're interacting with every single day to run their business. But we complement that with a variety of solutions to help them grow their business, bring more customers into their business, as well as capture digital payments, offer them other value-add services and solutions, and then on the back end, help them engage with their customers so they can drive retention. We're selling these solutions across three large verticals today, four verticals, actually. Home services, our largest category, where we're providing tools and solutions to everything, you know, from roofers and contractors to landscapers, et cetera.
Health services, where our primary customers are small physician practices. The wellness vertical, which after the divestiture of our fitness solutions, really revolves around the wellness portion, which are mostly salons. And then we also have a large set of solutions really around marketing technology, which are those solutions that our customers can turn to, to again, help them grow their business. As I mentioned, we have about 690,000 customers, and our vertical markets comprise a global TAM in excess of $1 trillion.
Great, Mark, and quite a few divisions of your business, obviously, they all have different trends that you're seeing right now. Could you maybe talk about top-of-the-funnel trends for each of them?
Sure. So home services, our largest vertical, more than 50% of our revenue. You know, there again, we're serving a variety of different micro verticals. That will be HVAC contractors, plumbers, electricians, roofers, landscapers, pest control services, a litany of solutions that really provide services again, or excuse me, solutions to micro vertically oriented customers. The top of funnel there continues to be quite robust. I think in home services, you know, one of the important things to remember about our business, we're not really subjected or correlated so much to new home buying trends. We're sort of countercyclical in that the vast majority of our customers are really break- fix, or maintenance-type contractors. And we see, you know, very attractive penetration opportunities here. The market in home services is low penetration.
We estimate it to be kind of in that circle, 11%, so a lot of room to grow. It truly is a greenfield opportunity, and many of these contractors that we sell to in the home services category or service providers, this is the first time they're stepping into the digital transformation, and that, again, is where EverCommerce is really helping to pave the way. So, home services, biggest category for us, biggest vertical market, largest revenue component of our business, and frankly, probably the largest opportunity from a new customer acquisition standpoint. Health services, there our ideal customer profile is really a small physician practice, think kinda 1-10 docs, but specialty practices, which might range up to 100 physicians as well.
Here, you know, the top of funnel, this is a market that is frankly a little bit more mature, just going back to the days of Obamacare, where electronic medical records and things like that needed to be implemented. Our solution set here really runs the gamut of patient engagement solutions, practice management solutions, and the like. Here, top of funnel, again, you know, pretty consistent, nice trends there. It's a very well-defined market, and it's a market that's a little bit more educated, and less of a greenfield opportunity, more competitive in the sense that you really need to be driving a focus on your customer and a value prop that really delivers what they need, where they are in their life cycle.
And then wellness, you know, similar to health services, it's a rapidly growing global market opportunity. For us, our solutions are international and domestic. We have some great market share internationally with our Timely solution. We have some very attractive solutions here domestically. And that particular market, growth dynamics are quite robust. Top of funnel is again quite attractive. These are some of our faster-growing solutions, and the value prop there is very much like home services. In salon, have a solution that helps them run their business, all parts of their business, capture digital payments, et cetera. But, you know, when we look across kind of the top of funnel characteristics, kind of across all of them, you know, I would say we continue to see pretty good demand across all of them.
The place where we've seen a little bit of a difference is more in the marketing technology solutions, as we've talked about previously-
Mm-hmm
... where demand continues to be somewhat muted.
... And, I would imagine that competition is different for each of those verticals. Could you maybe elaborate a bit more who you're competing with, and what is the value proposition?
Yeah. That's yes, happy to do that. So, in home and field services, a lot of times, because it's so greenfield, you're competing with a spreadsheet or maybe, you know, handwritten invoices. It's it can be that simple and that old school. So there, the digital transformation is really starting to take hold. But where we're competing, there are other competitors in the market who are offering home and field service applications similar to ours and connecting digital payments. Nobody has got tremendous market share. As you start to move up market, you will find competitors that look more like small enterprise software vendors. That's not our customer. Our customers tend to be much smaller. They need out-of-the-box, easy, easy to use, easy to onboard, easy to engage and drive value quickly in their business.
So there, I would say primary competition for us is probably not coming from another solution, it's probably coming from nothing. Health services might be a little bit of a different situation. Again, it's a more mature market in that solutions have been available for quite some time, and I think their customers are switching from other solutions, where we can offer a better experience, generally mobile first, given our practice management suite of solutions. And part of what we've talked about previously is what we're doing from a brand and product consolidation. With EverHealth, where we're really trying to double down and focus on that ICP so that we can seamlessly deliver under one umbrella, a suite of solutions that our competitors can't.
That I think will become very powerful, from practice management, patient engagement, right on through to collecting payments for co-pays and things like that. Then in the wellness sector, again, I would say, you know, a defined set of competitors that is its own vertical. It's different in different markets. So where we compete in Australia and New Zealand, actually, we're the big dog. Have very nice market share in those markets. Go into the UK, there are players like Fresha and Phorest perhaps, and then domestically, there's a variety of different players in the market. Then MarTech, you know, there again, a lot of different service-based companies that provide, you know, all kinds of lead gen opportunities for customers.
So our solution set there is really packaged to be able to deliver to our ICP within our vertical markets. So home service contractors mostly, and then also health services, the physician practice.
You've mentioned plans to consolidate brands in the health segment. What about other divisions? Like, is there logic behind consolidation under one umbrella?
Yeah, there's tremendous logic in each of our verticals. And, you know, we've talked publicly about EverHealth because it's an easy one to articulate, where you, again, think about a small physician practice, 1-10 docs, what do they need? Well, they need something to actually bill their schedule patients. They need something to bill them. They need to be able to communicate them with via text message and follow up. They need clearinghouse capabilities. We can bring all of that under one solution set, under the EverHealth brand eventually, where they can show up and say, "This is what I need, 1, 2, 3, 4 sets of solutions." That model, taking that over to marketing technology as an example, we've actually already we're further along there. Thank you very much.
We're further along in that one than we are in even EverHealth, where we've streamlined the organization through demand channels and are targeting our customer based on the various vertical markets, but being able to deliver a seamless set of solutions to our customers, and increasingly able to allow them to buy multiple solutions within that overall suite of services. When we come over to EverPro, we'll do the same thing. It will be a little bit more complex because some of the vertical markets truly are a little bit different. So it's that ICP that I think will change, and once you consolidate around that ICP, it gives you the opportunity to really think about: What are the best solutions? What drives the best value? What drives the best experience?
And consolidate around those, and then work backwards.
Perfect. And, consolidation of the brands, it sounds like it's also part of this broader internal optimization that you've started. Can you remind us, what prompted those initiatives? What has, been done so far, and how long do you think this transition may take place?
It's a great question. So EverCommerce, no surprise, we've grown through acquisition, and we've acquired more than 50 solutions. Along the way, our vision always was, within vertical markets, operationally consolidate these products around a defined customer set, and then deliver a centralized set of functions, marketing, business operations, all the back-office functions, to each of these vertically oriented product groups. So over time, while we've acquired 50+ solutions, we've operationally consolidated down to far fewer groups than that, although there will be multiple brands. The idea, what I just articulated in EverHealth, that idea translated is really about, taking those solutions and saying, "All right," again, "start with the customer. What does a customer really need? What's gonna drive the most value?" And to our earlier discussion, "What's gonna competitively differentiate us?"...
Because we feel like we have all of the solutions they need, but we might have more than one. So in the case of EverHealth, as an example, we're consolidating brands such that we have two or three different practice management solutions. We're gonna bring that down to one, maybe two. There's a third, we've talked about previously, where we told our customers last year, we're gonna sunset this by the end of this year. And that actually is unfortunately built into our guide, so it's bringing revenue down as we migrate customers over. That kind of action will drive some real economic benefit to us going forward, and I think our ability to do that in each of our different vertical markets is gonna be key to driving overall optimization.
It's also gonna be key to clarifying where we need to invest, what new features, what new functions, what do we need to be bringing to that customer set to, again, you know, drive more value and ultimately, of course, accelerate growth.
Mm-hmm. And when you think about midterm growth outlook for each of those main segments, could you break down growth components in terms of volumes and price?
Yeah. So for us, our growth algorithm is always gonna be about driving new customer acquisition, which is important, but the most accretive thing that we can do, which also in turn drives better growth through retention, is sell them more than one solution. We refer to that as expansion. So, we've been leading with digital payments because it is very, very accretive for us, but we are also selling them other solutions as well. So new customer acquisition will drive growth. We want to do that as efficiently as we can, always, but we also wanna be landing. This is the land and expand strategy. Land with the new customer, and then expand by upselling and cross-selling other solutions. To us, those are gonna be the two primary components of growth, with expansion really leading the way in a lot of cases.
You know, the other thing, obviously, is just improving retention, things like that as well. Once we, once we sell them a second and a third product, we know that they tend to be stickier, which improves retention, of course, which comes back to driving revenue growth as well. Price, always a factor, you know, low single digits factor for us. These are not customers where, you know... Enterprise software, being a consumer of enterprise software, I'm sort of shocked at some of the price increases that we're seeing year to year. You don't get away with that at this part of the market. It's more measured, but it is consistent, but it's, you know, 1%-3% type effect.
Okay. Could I shift gears to payments? Obviously, it's such an important part of your story. Could you discuss your overall strategy, and how does this ACH help you improve stickiness of your customers?
Yeah, it's a great question. So payments, incredibly important component of our business because it is the most accretive thing we can do, and it does drive real stickiness and retention. So our strategy is, it goes back to our strategy of growth overall. Land with our business management system of action, expand that relationship, start with payments, because we can integrate right into the workflows of our solution set, a digital payment capability that improves our customer's customer experience frictionlessly, which delights our customer, which means that they, of course, stick around because once you've sold them software that they're using to run their business every day, and now they're getting paid through your software, that's a very sticky relationship, very similar to ERP in the enterprise marketplace.
So the land and expand strategy, that's not something we invented. That was invented in the enterprise software market. We just have built a business such that we can do that frictionlessly for a micro SMB customer, which is, obviously where we're focused. So, that motion provides us an incredible opportunity for growth, which we think about as sort of near and midterm, and then long-term. Near and midterm, and we talk about this on our, our calls quarterly, we have 83,000 customers out of 690 that are taking more than one product. The vast majority of that are payments today, although they are taking other products, customer engagement, SaaS solutions, our EverPro Edge solution, some of the marketing technology solutions, but the vast majority is payments. Of those customers, that ends up being about 12%.
When we think about those payments customers, those that have taken a second product, there's an enablement feature, meaning, some portion of those have been enabled, and then there is... Once they're enabled, they need to adopt. That bridge between we've enabled payments, and now we're driving adoption, that creates that midterm growth opportunity. The long tail is, of course, more penetration, beyond 12%. We're about 28% penetrated from an enablement perspective, so that bridge between, you know, the, the, again, the 12 and the 28, that really creates the opportunity for midterm growth. Long-term growth is really much more about, the ultimate, which is just continuing to drive penetration of more than one product, leading with payments. Payments is about 95% gross margin because we recognize it on a net basis.
Therefore, as we continue to drive payments revenue growth, that drives a better mix of revenue, that will in turn tick up gross margin. That's what we've been seeing in our results quarter on quarter as payments becomes a higher percentage. And then lastly, on the payments front, when you think about it from a unit economic perspective, this is what actually gets me quite excited because, you know, that's where you, you see it play out in a different way, economically. So take one of our entry-level EverPro solutions, it might be circa $10-$11 a month subscription. Easy-to-use tool, small contractor, maybe it's an individual or 1 or 3 guys, something like that. The minute they adopt payments, so we enable them, and then they adopt it, you can drive ARPU 3-5x.
That's significant expansion, which is why I was saying earlier. Customer acquisition always gonna be an important growth motion. Wanna do that as efficiently as you can. Also, really wanna be driving expansion because it has such a geometric effect.
But what, what methods do you use to persuade some of these customers to switch to your methods versus alternative payments that they're using?
It's again another great question, and it'll differ by solution and go-to-market. So, in certain solutions, we've mandated it, where mandate might come in the form of, "It's time for renewal. If you take our payments, your software price is X.
Mm.
If you don't take our payments, your software price might be 2 or 3x." Surprisingly, you drive
Of course
... a lot of enablement with that, and then people start to understand, "Okay, here's, here's real value." And I think with our customer set, because these are, these are not high-touch customers. These are small businesses. You don't interact with them like you do in an enterprise fashion. So, educating them on the value prop and what it does for their business, takes different, different, different approaches, again, for different markets. So there's the mandate approach, that's more of a, excuse me, a carrot and a stick. But there are other motions where, you know, we've, we've tested and learned into solutions where we thought it might not make sense, to, to sort of, beyond drip marketing and things like that, to actually be in, in contact through a call center or something like that.
There are portions of our cohort where actually that does work quite well. So investing in that kind of capability to help, again, educate customers, so that they drive adoption after they've been enabled, that's a great way to drive adoption once they've lit it up, but now they need to understand why it's valuable to them. So reaching out to the right cohort and actually interacting with them one-on-one also works. So, the motions will vary, and as we continue to think about driving that penetration and really taking that move from enabled to adopted, we are testing and learning into a variety of different means to be able to achieve that.
Great. Mark, if I could, go back to consolidation efforts, any metrics you can give us that highlight some of the progress that you've achieved so far?
Well, I think, you know, we think about transformation and optimization as kind of moving together, and I know we started a year ago talking about the EverHealth consolidation, and then, last quarter and this quarter, we're talking about transformation optimization. The transformation really captures it all. It's a more holistic way to think about it. So the first thing I would point to is just improvement in operating leverage, right?
Mm.
Meaning, these, a number of these initiatives have been going on for some time, and you can look at our, just look at Adjusted EBITDA. Q1 of this year, it was 24%; Q1 of 2022, it was 16%. So, we've done a very nice job, I think, increasing operating leverage. That's a great metric to look at. Top-line growth has not, it has not moved that direction. It's moved a different direction. Obviously, a lot of what we're doing, really focusing and doubling down within our vertical markets and around the ICP and around consolidating brands, is all about driving a sharper focus on where we need to drive investment dollars to re-accelerate growth. So we do think that over time, we'll start to see that come through in the growth metrics. And then as well, NRR, right?
I mean, the components of NRR, which include expansion and retention, those are gonna be important, important metrics where we believe they don't move quite the same, in terms of, you know, absolute moves. But we believe over time, we'll see improvement across the board there as well. I think one of the most exciting things for me within these transformation initiatives is really that clarity, and I know that is a little harder to understand from the outside looking in, but, we do have a lot of solutions to bring to our customers, rationalizing those, identifying what they really need, sharpening our focus, moving resources to those, to those growth opportunities much more efficiently, because there will be efficiency gains there, will drive a much better ROE.
You've mentioned NRR. That's a great, ratio that a lot of our investors track. Is there sort of a north star NRR level that you feel this business should be at once it goes through this transition, which I think you mentioned is probably going to take another year or two?
Yeah. I mean, we look out 12-24 months. I mean, through the balance of this year, we expect to get a lot of work done, and I think we start to see the realization of that, you know, in the years after. You know, we've been around 100, and I think that's, you know... My personal belief is you'd like to be better. And I think with our business, though, with so many different customers, and it is, you know, an SMB customer, where you have inherent churn issues with businesses going out of business, things like that. I mean, there are some, I don't wanna call them headwinds, there are just some structural dynamics of that particular customer base-
Mm
... that we're never gonna be 110, right?
Yeah.
That's just not gonna happen. But if you can move that 100 methodically up from there, that obviously has great impact on overall value creation.
Obviously, you had strong improvements in margins, as you mentioned, but does this strategy, especially around consolidation, require sales and marketing efforts?
It does, and I think, there's kind of two components to that. One is that you're consolidating brands and products and we're moving, you know, centralized marketing into vertical market units and things like that, there might actually be a period of a little bit of dis-synergy. It would be very modest, and I think that's gonna be quickly overcome with efficiency. We will just become much more efficient that much more quickly. So there's that vector, but then the other vector is, now that you've done this, where do you go drive your dollars? And today, we are absolutely investing, you know, behind those higher growth solutions and all of that sort of stuff. We do that every single day of the week.
I think as we really refine our product set, it's going to, again, become much more obvious where we're going to be driving more dollars. Once we identify... For example, we talked about leaning into the payments opportunity. You know, if there are new approaches that we can take to drive customer adoption for those customers that have enabled the digital payment, those will be great areas to invest in, and those will become, I think, more visible as we continue to rationalize our organizational design and just sharpen our focus.
Mm-hmm. And so we spoke a lot about the bottom line, how it will be impacted by those initiatives and consolidation. What about the top line? Is there a way to improve recognition of the brand that could drive revenues?
Yeah, I think, I mean, I think for sure. I think, sharpening our focus around that ideal customer profile, but really tightening what it is we're offering them, and identifying those features and functions that we don't have today, but that we know that they need, that'll drive to better growth prospects, as well as, again, that, you know, that cross-selling of other solutions. I believe, you know, beyond payments, we have a lot of opportunity with our other solutions to also bring into that. That becomes a lot easier, again, when you, when you sharpen your focus and you narrow your focus, you consolidate your groups within the vertical markets just to tighten the actual go-to-market motion. I think we will see improvements over time there.
I think, you know, in certain parts of our business, marketing technology is an example. You know, there, I think, we're gonna see growth as the tide rises for everybody. In our belief, that's a true demand side equation, that when that comes back, we'll see a very different picture as well.
The other segment that you mentioned, sort of seen headwinds in the last year or two is MarTech. But, I remember in the last earnings call, you highlighted that you're finally seeing some stabilization. Could you elaborate a bit more on that?
Yes. So, it's a funny thing. Unfortunately, MarTech shrank 5% quarter-over-quarter or year-over-year in Q1. Actually, it was ahead of our plans internally, so we continue to see that, which is part of what's leading to the stabilization comment. But we haven't seen things get worse, and I think for a while there, particularly end of 2022 into 2023, we were seeing things get worse quarter-over-quarter. That started to ease in the second half of last year, and that trend has sort of continued, and we're starting to see within our customer cohort, people return to bring marketing dollars in to spend around new campaigns, new initiatives. And some of these will be, you know, some of the larger customers we serve.
In that particular portion of our business, we serve a lot of franchises where, you know, these can be larger transactions for us because it's one franchise with many locations, things like that. So we're starting to see that activity pick up. And the team, you know, we believe our team has executed quite well. The business was flat last year. We got it at flat this year. Executing to that level in this demand environment, we think is actually pretty good. And what we're really pleased with is the setup for the demand environment changing, meaning our team has done a nice job of self-funding through price increases and things like that.
A variety of different initiatives, which are new offerings, which will, I think, one, spur growth, two, reduce volatility of that revenue stream because it does tend to be more volatile than the SaaS solutions in the payments business. And it will also increase margin. So there's a lot of things that they're doing, that I think really well position us for when that market does start to come back a little bit more from the demand side.
Is that the part of your business where you think AI application could be quite useful, especially to improve margins?
We do. AI for that, for sure. So SEO, you know, paid search, I mean, there are tools that we're already using there that make it more attractive for us. I continue to think that's a little bit more inward focus in that business. Those are tools we're using to drive more efficiency in our own operation on behalf of our customers. And that's where I think we will see AI today. Our solutions that our customers are buying, the opportunities for AI there, I'm sure, exist, and I think we'll get there. I think today, AI, if you think about our whole business model, to be able to take a land and expand, almost enterprise software model into the micro SMB, you have to be very efficient.
And I think that starts with marketing, but it goes right on through to development, to operations. I mean, everything has to be very, very efficient. So AI provides us an opportunity to really drive a lot of efficiency. We just talked about it on the marketing side. We've been using predictive analytics around lead scoring from the days of PaySimple. I mean, their inbound digital marketing capability was a special sauce that they created. They got really good at it. We've extended that into our other offerings, and we've been. We just didn't call it AI. We called it predictive analytics.
Mm-hmm.
Now it's AI. So, that has always been resident there. I think we're finding other places, though, where we can really drive efficiency with it in our development programs, things like that. Because if you think about our solutions, again, these are not monolithic enterprise-grade software solutions. These are applications, downloadable apps. These are lighter versions where those kinds of tools can really help us accelerate development timelines, but it also drives real efficiency.
Any data points that you feel are worth mentioning?
I mean, I think most of it's gonna be reflected in the margin. And again, that seems like a little bit of a weird answer, but not really, right? Because for us internally, it is about driving efficiency. So resident within, you know, the continuing growth we're seeing in both Adjusted EBITDA and free cash flow, I think this is where we're seeing some of this play out. I think today it's having some small benefit. I think in the mid to long term it'll continue to have benefit, and it'll probably increase.
So sounds like demand side, things are gradually stabilizing. You know, you're going through a transition that management sees as important, considering how many different brands you have, how many different services you have. Longer term, you know, once you complete this transition, this optimization, where do you see margins ending up over the next two or three years?
Yeah.
What is the normal state of growth for this business?
I think, you know, coming public and then, you know, before things started to change pretty dramatically in 2022, I think the metrics we were really trying to get people to focus on mid-teens organic growth and, you know, you know, EBITDA margins well in the 20s and, and opportunities for upside from there. We don't see anything that's really changed from that equation. I think things that need to change for the consolidated growth, it does include a return of MarTech, to where it, it—not necessarily to where it was, but better than zero, to be very candid. These were businesses that were growing, you know, 15, 20%, before the downturn. And when I look at the operation, nothing's changed.
It's only gotten better, hence my comment that I think we're very well positioned when we start to see demand turn back the other direction. So that obviously will continue to be an impact on our overall growth rate. But when we look at our core operating systems of action and where we're driving the right land and expand motion, you know, we see growth rates that are well in excess of what I just shared. And now our challenge is to get the rest of the pieces moving that same direction. We think we've got everything we need to be able to do that, so that mid-teens, you know, growth certainly in the long term should be an opportunity, even at this scale. You know, getting back to double digit is obviously a stated objective.
I think on the profitability side, you know, this can be a very efficient machine. We already are proving that out, having, again, you know, taken EBITDA margins in the last two years from 16%-24%. We've guided up on the bottom line this year, despite, you know, a lower revenue growth guide, for a variety of different reasons. And we expect that, you know, we'll continue to drive in the mid to long term, continuing operating leverage and free cash flow.
M&A is obviously an important part of your DNA. How do you consider capital allocation strategy in this environment?
So we're always point-in-time allocators of capital, so whatever seems to be, at the moment, the best use of capital, that's where we're gonna deploy it. M&A, you know, we continue to be active in, in looking at transactions and always being aware of what's in the market. And I think the transformation initiatives we have underway, frankly, just better position us to execute on M&A, which will be great. The last, you know, year to two years, the market, there was some destabilization. For a lot of the solutions and assets we were looking at, we didn't really see price rationalization, even though obviously our price has been rationalized like other public software companies. So I think we're not the only ones who are a little frustrated by that. I think other public vendors that acquire companies were as well.
So we didn't really see that, and what I am seeing now is, you know, activity is picking up. I think it's, you know, slow to build, but I do think, you know, we're looking at probably better days from more transaction activity, but I don't think that's gonna affect price. So price is still gonna be perhaps a little out of whack. For us, it's got to be strategically, financially, and operationally creative, and if it doesn't ring the bell across all three, we're probably not gonna move. So we have been disciplined to get here. We will remain so, and we think the organic growth prospects of our business are really, really attractive.
I think we've been demonstrating that in the rearview mirror just with what we've been able to do on operating leverage, and I believe, you know, everything we're doing will give us opportunities to re-accelerate the top-line growth. You know, when you think about the metrics that we're delivering and what we believe we can deliver, this is a really attractive business from both a strategic, operationally, and obviously financial standpoint, with a giant market ahead of us, so...
Thank you very much, Mark. It was great to have you at our conference.
Thank you, Alexei. Really nice to be here. Thank you.
Thanks.