Good morning. I'm Brad Reback with the Stifel Equity Research Team on the software side. Thanks very much for joining us here in the room and online. Next up is EverCommerce. With us is Marc Thompson, CFO. Marc and I go way back, about 30 years, when we were both covering environmental services in the mid-1990s.
A different color hair.
Yes, for both of us.
We both still have it, fortunately.
Yes.
But it's definitely a different color.
Some of our colleagues don't-
Mm-hmm
-anymore. So Marc, thanks very much for joining.
Happy to be here. Thanks for having us.
Maybe for those in the room and online, given that you're a more recent IPO, why don't you give us a few minute overview on who EverCommerce is?
Sure.
The niche you serve, et cetera.
Yep.
Probably not a niche, but...
With 690,000 customers, we hope it's not a niche. Actually, we think it's quite a very attractive TAM. But EverCommerce, our roots really start back more than 15 years ago with a company called PaySimple, that our CEO, Eric Remer, founded, which had a very simple mission, which was actually to simplify the lives of small business owners that provided services. They really did this with a very light piece of business software that helped them run their business in different aspects, but most importantly, it really helped those customers capture digital payments. Fast-forward to today, EverCommerce is leading the digital transformation amongst this customer set, and we're doing that by offering a vastly expanded array of solutions that are really vertically tailored software solutions that help our customers run their business.
But we also offer solutions around that that help them grow their business by bringing customers into their business, and then help them better engage with their customers on the back end so that they can drive retention. We operate across three large verticals. Home services is our largest vertical market, and think they're, you know, small business service providers, everything from roofers, HVAC contractors, electricians, plumbers, you name it. If you're getting that service in your home, that's probably a target customer for us. Health services, where our ideal customer profile is really a small physician practice or perhaps a specialty physician practice with up to 100 docs who need solutions to engage with their customers for scheduling, billing, payments, et cetera.
And then, in the wellness area, where we used to be in the fitness solutions business, we divested that recently. Now, our wellness vertical market is really dedicated more to salons and spas, so when you go in to get your hair done and things like that. We have 690,000 customers, as I mentioned, across these vertical markets. Our TAM, we think, is well in excess of $1 trillion globally. And our solutions—I guess the last thing I would say, our solutions have to be easy to use, easy to adopt. 80%+ of our customers self-serve from an onboarding perspective, and we drive very cost-effective solutions to be able to solve the problems that I mentioned previously.
So maybe back to where you started with PaySimple.
Mm.
Maybe walk us through the evolution. You know, because there are. Look, PaySimple was early in the digital payments world, and-
Yeah
... and there are obviously, you know, the likes of Stripe that have made very, very -
Strong equity
... profitable businesses-
Yes
-on just payments. What was the decision to expand?
It's a great question, and our CEO and Founder, Eric Remer, I think, you know, we had built a very successful inbound digital marketing capability to capture leads coming into our shop. But candidly, a lot of those leads were hitting the floor because customers were looking for that digital payment capability, but they were also looking for something that was core to running their business. And that's really what identified the opportunity to say, "Okay, if we really want to drive stickiness and really drive a fuller suite of solutions," if you will, almost thinking like enterprise software solution sales, where I can land with a sticky solution and then expand from there with other solutions. It really pointed to that vertically oriented business management solution. What are these service providers engaging with every day to run their business?
That was the point at which Eric decided to actually reach out to recapitalize the business, looking for a private equity partner who could help drive a strategy that would include both organic development of these types of solutions, but in order to sort of get there in the timescale of relevance, really drive an acquisition program that would help us to identify interesting business management solutions we could, we could acquire, and then use those to leverage and cross-sell our payments capability into those, which turns out to be an incredibly accretive proposition.
So that journey began in late 2016, with the recapitalization of the business, and from there, since then, we've acquired more than 50 different solutions, not just the vertically oriented business management solutions, but also that suite of marketing technology solutions I alluded to earlier as well. But it really does provide us now a much more fulsome set of solutions to be able to bring into our customers, with a business strategy that, again, while it is purpose-built for a micro SMB, think customers that are spending, you know, circa $2,500-$3,000 a year or less with us, the business is purpose-built to drive solutions to those customers and better serve them, again, around helping them to manage their business, grow their business, and retain and engage customers on the back end.
What are the guardrails around which verticals you want to serve?
It's a great question. Starts with service providers. You know, a lot of the people who have just blitzed digital payments, they're horizontal. They've concentrated in, you know, e-commerce or retail, restaurants, things like that. Obviously, you know, we've picked what we believe to be a very large niche, as you say. It's more than 50 million service providers, small business service providers. So the guardrails are really understanding, you know, it's really that model of do these particular customer sets, do they have a need for something that is truly vertically oriented?
Which gives you the ability, just again, like enterprise software, to develop an ownership position and a market position where you can create a bit of a competitive moat, if you will, and use it, especially build that competitive moat by being able to cross-sell these other solutions that they need. But you're not gonna earn the right to sell those other solutions or to be in a position to sell those solutions without that vertically oriented a piece of software. But that's really the identifier for us. What's attractive is, you know, a portion of the market that is sizable enough, but where there are real pain points to actually operate in their business every day.
You wanna be selling them the solution that they engage with every day, they or their small team of people in the office.
If we think about broadly service providers and then the micro verticals in there, you know, maybe pest-
Yeah
solutions, right? HVAC, electricians, plumbers, et cetera. Does it really matter, or it's where it, where you focus, or it's where the, the acquisition opportunity or the, the build opportunity is the easiest?
I think, when we began understanding these are very large markets, we, with our experience of PaySimple, it was a horizontal one-size-fits-all solution, but we, we had observed real concentration around different service providers in pockets of those verticals I just mentioned. So it does matter to the extent that you wanna build a business that has scalability, you know, continuing operating leverage, and an ability to efficiently invest in growth. And I think, you know, you can think about that, that efficiency, both verticals and micro verticals that are adjacent to one another. So from a go-to-market perspective, they look a lot alike. You can also think about them, you know, more from a from an operational sense as well.
I think a lot of what we're doing right now in some of the transformation initiatives that we've talked about publicly, it's really designed—those initiatives are really designed to focus on who those ideal customers are. You don't want those to be 100. That would be defocusing. You'd really like to narrow that set. So, but having said that, again, home services, that's a giant vertical market. It is made up of a lot of smaller vertical markets, all of which are, you know, non-trivial in terms of your ability to grow a business.
If I'm a $5 million or $10 million dollar HVAC contractor, am I gonna typically use your solution and QuickBooks, or is it one or the other?
No, in fact, you probably would be using both.
Okay.
When our business management solutions are more around the operation as opposed to the actual accounting package, and, you know, people have asked us over the years, "Well, why don't you get into payroll?" or, "Why don't you get into accounting?" And our answer is, particularly on the accounting side, you know, there's a little company out there called Intuit with a great product. So we actually integrate there. And what we want our solutions to seamlessly integrate with QuickBooks so that our customers are able to run both and get the benefits of both.
So extending that example, back to PaySimple, QuickBooks is obviously, or Intuit broadly, has made a very aggressive push into payments themselves, right? And it's, it's very tightly integrated in, in QuickBooks, invoice and generation, et cetera. How do you sort of fight that fight and convince someone that your payment solution's the better one?
So typically, it's. We like to think that the value prop that we're offering our customers is just quite a bit different. I mean, accounting is one size fits all. They do not have, to my knowledge, QuickBooks for different micro verticals.
They don't.
It is one product, and it's a great product, but it is one size fits all. Where we're coming into that customer is just a very different vector, and there are some service businesses, don't get me wrong, where, you know, it's interesting, they're too small to have QuickBooks, and they might be using our invoicing and collection through digital payments, and that runs their business. That, that's all of it right there. So we're not gonna compete there. But there are places where HVAC is a great example, you know, where we have two or three different solutions, smaller ends, lighter, let's call it lighter solutions, up to things that are actually, you know, almost a low, low end of enterprise in terms of its functionality.
You know, that's how we're going in the door, and if they're engaging with our software every day there, the customer is probably also engaging with the software as well. So it's that point of sale, if you will, wrong term, but you get the analogy. We just think that's a stickier, better place to go.
Yeah.
I think the customer experience ends up being a little bit... It ends up being different. Whether it's better or not, I think that's a little subjective, but it ends up being a very, very sticky component of the solution we're selling them.
Got it. 690,000 customers, most of them mainly in the U.S. Give us a sense of what you're seeing economically. I know we all know the marketing business has been challenged, not just for you, but broadly.
Mm.
Right, that goes without saying.
Mm.
I'm more interested in sort of what you see on a day in and day out basis, transactional usage, et cetera.
Yeah. So, MarTech for sure, you know, we've just seen macro climate impacting that for some time, and we've been talking about that, you know, too long. We'd like to not be talking about that, and we think we're well-positioned when we stop talking about that. On the SMB side, though, you know, really, certainly coming out of last year, I think, you know, we saw some pockets of demand where our solutions are threaded back to consumer choices. So, for example, I mean, this is part of the macro impact on the lead generation side. If consumers are not out, you know, identifying needs, well, that's gonna affect your leads business. That's part of that.
In other parts of our business, though, we're pretty well insulated from that because we're selling the solutions that these our customers are using to run their business. So, you know, you might see a little bit of effect on payments, and I think we saw some of that last year, but we're doing so much investing in growth around that, that it's sort of being masked by that. So through the last, you know, certainly the last quarter, and even prior to that, as you look at our vertically oriented SaaS solutions and payment solutions, while we may see some dips in usage, we really haven't seen that much.
We also saw, you know, a little bit of degradation around some of our vendor management programs, where, for example, in the HVAC space, we have a program where our customers are purchasing equipment through large manufacturers. We have, you know, 100+ vendors in that program. There, we're able to manage a program where we can get rebates on equipment that's passed along in part to our customers. There, we've seen a little bit of a pullback, which again, goes back to the consumer demand side of the equation. So I think we're fairly well insulated, haven't seen as much of that, and from a new customer acquisition standpoint, you know, we really haven't seen that pronounced effect on.
Let's talk about the growth algorithm, because typically, SMB-focused, and let's even just call it small business-focused organizations like yours, very effective. The high-quality ones, like yourself, get to 500,000+ customers, and then it gets a little harder to overcome the natural churn in the business.
Mm.
Right? So as we think about your growth algorithm, units, pricing, expansion with, you know, payments, et cetera, how should we think about it going forward here?
Yeah.
What does it look like all up?
So, also a great question, and customer acquisition is always top of mind. You always wanna be acquiring more customers. You also wanna be acquiring the right customers. As we've built our business, we've, I think, always foreseen that at some point, you know, while you're always gonna continue to drive new customer acquisition, you really wanna be building a set of solutions that does two things: One, it drives better retention, so you offset some of that inevitable churn in the SMB market, especially around some of our lower-end solutions. I mean, you just experience, you know, a 25%, you know, gross churn just because that's the way that it is. But in other parts of our business, we have much, much lower levels of churn. Health service is a great example.
Physicians don't swap their solutions out, you know, on an annual basis or even every three years. So it's a very different. It can be different market to market. Having said that, what we're really focused on is that expansion algorithm. We think very much land and expand, and that land piece is, again, goes back to the vertically oriented piece of software. Make sure you have the right solution and deriving the right value and customer experience to our customer and their customer, and then expand across with upselling features, functions, and really importantly, things like digital payments, which are 95% gross margin, incredibly accretive. What we find every time is that when we land with a solution, and then we expand by selling them another solution, we automatically change, obviously, lifetime value, but also that retention algorithm.
It becomes much stickier. Just to double-click on that, 'cause I think it, it's somewhat opaque when we say things like expansion, digital payments, 95% gross margin. If you take an example, like our lowest-end, entry solution in contracting, you know, simple to use, mobile app for invoicing, so get them, get them an estimate, get an invoice, get paid. When you enable digital payments, and then they adopt that and drive it, we can expand ARPU. Sometimes it's always a multiple, and it can be up to, like, 5x or 7x. That's a 95% gross margin. Like, that's just very accretive. And again, it drives real stickiness because now that small business is getting paid through your software, so it's incredibly important.
So I think from an expansion standpoint, we think heavily about leaning into what we have, given our customer base, just a giant embedded opportunity. I think about that two ways, really. And we started talking about our embedded opportunity a little bit differently a couple of quarters ago, but the first metric there is really how many of our customers are enabled to take more than one solution? The end of Q1, that was 191,000 customers, which is about 28% of our total customer base. So we've made good strides there. And by the way, that metric grew 27% year-over-year. So when we talk about investing in and leaning into this embedded opportunity, that's sort of the validation point that we're getting traction.
Of that 191,000, though, only 83,000 have actually adopted and lit up and are actively utilizing that second product. So there's a 108,000 , I'm doing the math right, 108,000 customers at the end of Q1 who are enabled. Now we need to drive adoption and utilization. So that creates a near and midterm embedded opportunity that's quite sizable, and then, of course, there is new customer acquisition and just expanding that footprint of 191 into that customer base further.
What's the difference, that 400,000 difference? I would have assumed that all 690,000 are enabled to do multiple things, but you're to some extent telling us that's not the case.
You're never gonna get to 100%. I mean, some of those are marketing services, MarTech customers. The MarTech customers, they're not necessarily, they could be a software customer who's adopted payments, but that's not really how they're coming in the door. So take that, that.
Yeah
... component out. And then there are certain of our solutions where, you know, payments may not be as much of a thing, and some of our higher-end software solutions, as an example, you know, they're doing very specific things, but it may not be collecting a payment through that poll. So you're not gonna get to the 690-... but we're gonna-- we have our eyes set on more than 28% of our, of our base. And obviously, you know, threading that back a little bit to, back to the, to the growth algorithm, a lot of our higher growth solutions, we have a, you know, call it our top five solutions. They're about 30% of our growth. All of them are vertically oriented solutions with integrated payments.
That's where we're always gonna be looking to put more wood behind the area-- arrow. Those 30%, or excuse me, those five solutions representing 30% of revenue, they represent just under 30% of our TPV, but they represent more than 50% of our TPV growth. So we're driving, you know, double-digit growth on not just selling the software and those high-growth solutions, but we're also driving double-digit growth on the payment side and driving obviously, non-linear math, when it comes to profitability at the solution level for those as well. You know, those are the areas that we're gonna continue to be focused on from a growth perspective.
And when you think about the go-to-market playbook on taking someone who's enabled to usage-
Yeah.
There's this 100,000 unit, so very sizable.
Right.
Where do you feel you are in that evolution? Of course, knowing you can always get better-
Yeah.
But there's also low-hanging fruit that goes a long way.
It's a great question, and it does speak to the difference in the solutions, the difference in the way the pieces of software are being used. For example, in a salon, when you integrate payments with—in a salon, it becomes, you know, one system of action, payments integrated. The customer is scheduling an appointment and doing a variety of other things. You'd be surprised how much our software does in terms of running the salon operation, but they're also giving them a credit card, and it's all in one, one piece of software for our customer. We can drive penetration, you know, you know, well above 50%, you know, approaching towards 100% in that particular go-to-market motion. Home services, which means, by the way, people who are enabled are also using.
It doesn't mean that customers aren't paying cash, but in the salon environment, most are not.
Right.
-except for me. So I, I think when you then take that, though, and turn it over to home services, where our customers, you know, we have a lot of customers who have the ability to collect a digital payment, maybe right there on their phone, in the home, that doesn't necessarily mean that the homeowner doesn't want to write a check or it doesn't, they don't want to give you cash. Those happen, and the contractor may or may not care about that, right? So, the motion's a little bit different. The adoption curve for those customers, we have to engage with them differently. We refer to testing and learning in the different go-to-market motions, across our portfolio of solutions to make sure we're dialed in as best we can.
For example, in that low-end solution I mentioned, where ARPU is, you know, think $10 a month, we have large numbers of customers, and you would think you wouldn't necessarily interact with them on a one-to-one basis. Well, it turns out that, you know, we believe there's an opportunity actually leveraging a contact center-type environment, where you can look at the cohort who is actually more sizable based on what you know about them, to be able to reach out to them and actually drive adoption. We see traction with things like that. But it's, there are a lot of different carrot-and-stick motions that you need to deploy, and it is different across the different vertical markets and go-to-market. So it becomes a little bit more complex, and it can take a little bit more time to dial it in, right?
And then obviously refine that algo in each of them.
Let me see if there are any questions. And... Okay, so when we bring it all together, what do you think is the sustainable organic growth rate when the MarTech business-
Yeah
Is back on track?
So, you know, we had before the, the, what we consider to be the downturn, at least in terms of our growth rates, last year, we always felt like double-digit growth was very achievable, very sustainable, and we continue to believe that. And I think that's for a couple of reasons: one, just contextualizing, let's just say Q1 growth, 6%. In Q1, MarTech, 20% of our revenue, probably cost us 200 basis points on consolidated growth. The other thing underneath the hood, we've talked about our, you know, transformation optimization initiatives, and we've also threaded that back to something we started talking about last year in EverHealth, brand and product consolidation. So in the transformation, the way we're thinking about that is really, again, ideal customer profile back into the solutions that we own.
So that inevitably is gonna say, "We don't need four or five practice management solutions. We need two or three that work best for the way we're slicing that market." We're in the process of actively sunsetting one of those solutions, migrating those customers to one of our other solutions. That's impacting this year's guide and results, and that probably costs us another 100 basis points. So all of a sudden, if you just look at the business without those two things, you're a lot closer to double-digit than the headline would suggest. So that's a thing, more context than anything else. It's really that motion of investing in high-growth, high-margin opportunities. I mentioned we already have a lot of our solutions in our portfolio are growing at double-digit rates. Some of them, for a variety of reasons, may have teetered around that.
We need to continue to invest in those places where we see the highest growth, highest margin opportunities, and I think that, that threads actually back to the transformation that we've been talking about. The outcome of transformation, as I see it, is really sharpening our focus from an organizational design perspective, so that we are driving the most value to our customer and the best customer experience, and we are doing that by inevitably consolidating our brands and our products, and even our teams, in the way that we're interacting with these customers. All in an effort to drive better value, better solutions, new products and new features, which drives retention and certainly helps the algo on that end. But also provides us a better platform to drive continuing customer acquisition. So that's sort of the revenue side.
And on the profitability side, the other big outcome is more operating leverage. Q1 2022, our adjusted EBITDA was 16%. The most recent report was 24%. We've, we've lifted 800 basis points in that span. Our guide this year includes continuing increase in adjusted EBITDA margin, more operating leverage in the business. Optimizing how we're doing, how we're operating the business to drive more leverage, more scalability, more efficiency, is gonna be another important outcome there, which all gives us more, more flexibility to continue to drive investment back into those things that we, we have clarified and now can amplify, from an investment in growth standpoint.
So on that last point, and then we'll wrap up on acquisitions, but at mid-20s EBITDA margins for your size, that's best in class. Very impressive. And I was gonna say, you used the words transformation-
Yeah
... consolidation, that point to the ability to drive more, for sure. That being said, wouldn't it be wise to keep the margin stable, and take all that incremental business opportunity, invest it back into the business to try to accelerate the growth rate?
The balance of growth and profitability is like a daily discussion with us, so is capital allocation. You know, if you'd asked me: How do I think about capital allocation, you know, share repurchase versus investing in the business? I'd say I love them both, and we're doing both, right? By virtue of optimizing our operation as much as we have, generating as much free cash flow as we have, it gives us the opportunity to do both. So the way we think about growth and profitability is pretty simple. You know, as we see those opportunities, and again, part of the transformation is to actually highlight and illustrate, like, here is exactly where we need to be driving the dollars, we are gonna see that. And, you know, we're not committing to, you know, some number of operating leverage.
We think 24% is great. We think there's a lot more room to run and accelerate back to double-digit growth. And when we find ourselves in that precarious place where it's so finely dialed in, we might have a different answer to that question. But I think today it's about focusing on continuing optimization, doing the things we need to from an organizational perspective, and, you know, continue to drive dollars into those programs.
Got it. And in the last minute and a half-
Mm-hmm, mm-hmm.
... acquisitions historically were a large part of the story.
Yeah.
They've been a much less pertinent part of the story of late. Are you close to getting back on the M&A horse?
We never got off the horse. We, we have, for the last two years, you know, continued to look at opportunities. I think there was dislocation in the market in two ways. One, activity has slowed. You know, we're seeing some signs that maybe that's picking up, but, you know, the rate environment, I think things are still kind of, you know, bumpy. But what we've also seen is just dislocation in value, valuation, and that certainly is relative to us on some level. But the assets that we're looking to acquire, which, which are not the MarTech, you know, service-type businesses, and it is not, you know, horizontal solutions. It is vertically oriented business management solutions, where we now have the proof in the pudding of land with a vertically oriented solution, integrate the other solutions.
Those tend to be expensive, and people have a lot of investors, lower middle market PE firms in particular, have figured out this is a great opportunity, and they're leaning into that. And frankly, there's valuation dislocation to the side that, you know, is not attractive to us. We are very financially disciplined. M&A is in our DNA, so is financial discipline. I think that underscores our operating results and so forth. Has to be strategically, operationally, and financially accretive for us to move forward. We eyes wide open. I'm sure we will continue to think about that aggressively. We'd love to do it, and everything we're doing from an organizational standpoint just better positions us to execute.
Well, we'd love to see the horse gallop and soon.
Thanks.
Okay.
Thank you.