EverCommerce Inc. (NASDAQ:EVCM) Q1 2024 Earnings Call Transcript May 11, 2024

EverCommerce Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by and welcome to EverCommerce First Quarter 2024 Earnings Call. My name is Marvin and I'll be your operator for today. After this speaker's presentation, there will be a question and answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, May 9, 2024. Now, I'd like to turn the conference over to Brad Korch, SVP and Head of Investment Relations for EverCommerce. Please go ahead.

Brad Korch: Good afternoon, and thank you for joining. Today's call will be led by Eric Remer, EverCommerce's Chairman and Chief Executive Officer; and Marc Thompson, EverCommerce's Chief Financial Officer. Joining them for the Q&A portion of the call is EverCommerce's President, Matt Feierstein; and EverCommerce's Chief Operating Officer, Evan Berlin. This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended March 31, 2024. For a link to the live or replay webcast, please visit the Investor Relations section of the EverCommerce website, www.evercommerce.com. The slide presentation and earnings release are also directly available on the site. Please turn to page 2 of our earnings call presentation where we review our Safe Harbor statement.

Statements made on this call and contained in the earnings materials available on our website that are not historical in nature may constitute forward-looking statements. Such statements are based on the current expectations and beliefs of management. Actual results may differ materially from these forward-looking statements due to risks and uncertainties that are described in more detail in our filings with the SEC. We undertake no obligation to publicly update or revise these forward-looking statements, except as required by law. We will also refer to certain non-GAAP financial measures to provide additional information to you, our investors. A reconciliation of non-GAAP to GAAP historical measures is provided in both our earnings press release and our earnings call presentation.

Before we discuss first-quarter results, I'd like to highlight the presentation of results in KPIs included in the earnings call slides and our prepared comments. As discussed last quarter, we announced the sale of our four fitness industry solutions in early March. The sale of the two North American solutions closed simultaneously with deals signing. While the two international solutions are expected to close in the third quarter, they have been classified as held for sale prospectively from the date of signing. As we also discussed last quarter, the revenue guidance given excluded the fitness solutions, and we noted that the EBITDA contribution of these solutions was near zero. As a result, the revenue, revenue growth, and operational metrics such as customer count, TPV, and customers enabled more than one solution that we will discuss today have all been adjusted to exclude the fitness solutions on a pro forma basis, except where specifically noted as GAAP reported revenue.

We will continue this basis of presentation for the remainder of the year. I will now turn it over to our CEO, Eric Remer. Please continue.

Eric Remer: Thank you, Brad. On today's call, I will highlight first-quarter 2024 results, discuss EverCommerce's presence in the SMB market, our continued strategic transformation optimization initiatives, and finally, end with a discussion of our key customer trends before turning the call over to Marc to dive deeper into our financials. Turning to our first-quarter results, our Q1 reported revenue exceeded the top end of our guidance range with growth of 6% year-over-year. Within this, core subscription and transaction revenue grew 9%. Adjusted EBITDA grew 28% year-over-year, beating the top end of the guidance range and exceeded the midpoint of guidance by $3.9 million. Adjusted EBITDA margins expanded more than 420 basis points to 24% compared to 19.8% in the first quarter of 2023.

With continued growth and profitability, we are creating the opportunity to invest in our higher growth, higher-margin, large market opportunities. Payments revenue grew 11% year-over-year, driven by 9% growth in TPV and modest take rate expansion. Driving payments adoption continues to be a key element of our strategy. Last week was National Small Business Week, and given that, I wanted to take a few moments to highlight the scale of our customer base, all that we do to support our customers, and the tremendous market opportunity in front of us. Service-based businesses is the backbone of the economy and small businesses employ the majority of service professionals. There are more than 450 million service-based small businesses globally, which translates to a total addressable market of well over $1 trillion.

EverCommerce provides business management software to support end-to-end business processes for service SMBs. Our SaaS solutions support highly specialized workflows in each of our verticals, enabling our customers to automate manual processes, generate new business, and create more loyal customers. We enhanced the value of our business management solutions by upselling and cross-selling additional features such as robust payment integration, customer engagement solutions, lead generation, and group buying programs. The products and services we provide are focused on the biggest areas of opportunity. The global addressable market for our business management software solutions is $900 billion, and the payment processing represents an additional $200 billion.

Moreover, in most cases, the opportunity in front of us is greenfield. We estimate that the penetration of service SMB market with fully integrated software solution is in the very low double digits. We continue to focus on simplifying the lives of those service providers that support us every single day. Our goal has always been to empower the rapidly growing and evolving SMB market. EverCommerce offers tremendous value to our customers by providing solutions tailored to the unique workflows and interactions that various services require. Our software solutions not only provides a system of action necessary to run the daily business processes, but also the marketing solutions to attractive business to billing the payment solutions to collect effortlessly and the customer experience solutions to create predictable convenient experiences.

Our solutions are cost effective, easy to implement, and purpose-built for service businesses. We provide end-to-end solutions that our customers need to compete and grow in a marketplace that is rapidly transforming. As we discussed last quarter, we're taking steps to transform and optimize our operations. In the fourth-quarter 2023, we engaged a third-party advisor to help us assess our operations and identify specific initiatives and strategies to simplify, optimize, and better scale our operations, with an eye towards sharpening the customer-centric vertical market focus that will better position us to accelerate growth. With respect to the optimization, defined initiatives will provide a long runway for continued margin expansion and free cash flow generation.

Embedded in our 2024 guide is just a small fraction of the overall expected benefit, which should phase into full run rate by the end of 2026. These initiatives include optimizing third-party vendor spend, which will continue through the end of the year as well as operationalizing other significant cost-saving opportunities. These savings will not only fund key growth investments, but also allow us to continue to deliver long-term margin expansion and significant cash flow generation over the coming years. With our transformation initiatives, we'll be taking the lessons learned from our ongoing EverHealth consolidation and apply them to the rest of the company. This includes simplifying our organization structure and sunsetting certain legacy brands, as well as investing in key sales and go-to-market gaps that have impacted our growth rate.

Given our focus on executing these initiatives, we expect 2024 to be a transition year. While growth may be more tempered, we'll work to further expand margins and profitability. A portion of our efficiency gains will be used to reinvest in our products with the goal to accelerate growth in 2025 and beyond. Turning back to our first-quarter highlights, we continue to progress well against our land-and-expand strategy. We land with the core business management software and then upsell, cross-sell our existing customers' additional features, services, and products. This enhances the value of our customers receive from their relationship with EverCommerce and drives additional revenue. The KPIs we regularly share our earnings call illustrate our progress.

As a reminder, these KPIs have been restated in both our current and year-ago periods to exclude our finished solutions. As of the end of the first quarter, we continue to see an increase in customers utilizing more than one solution to approximately 83,000. In addition, the number of customers that have contracted and onboarded for two or more products grew 27% year-over-year to approximately 191,000. The payments-enabled customers in this quarter represented significant near-term opportunity for payment processing and payment revenue growth for our EverCommerce. Customers that purchase and utilize more than one solution are naturally some of our most profitable and stickiest customers. This is because we've provided significant value to them and their businesses.

This fact presents itself through the strong net revenue retention. Looking back over the trailing 12 months, our annualized net revenue retention, or NRR, for core software payment solutions with 99%, embedded payments is the most accretive cross-sell solution and stands to be a long-term driver for EverCommerce's revenue growth and margin expansion. Year-over-year, our pro forma payments revenue grew 11%, accounting for approximately 17% of overall revenue. We report our payments revenue on a net basis. And as a result, payments revenue contributes approximately 95% gross margin and is a meaningful contributor to our overall adjusted EBITDA margin expansion. First quarter annualized total payment volume, or TPV, was approximately $11.7 billion, representing 9% year-over-year growth.

We expect TPV and overall payments revenue to grow as we continue to embed our payment solutions in our core system of action. Now I'll pass it over to Marc, who will review our financial results in more detail as well as provide second quarter and full-year 2024 guidance.

Marc Thompson: Thanks, Eric. Total reported revenue in the first quarter was $170.1 million, up 5.6% from the prior-year period. Within total reported revenue, subscription and transaction revenue was $134.7 million, up 8.8% from the prior-year period and revenue from marketing technology solutions was $30.3 million, a decrease of 4.7% from the prior-year period. We managed the business for a sustainable organic growth and selectively utilize strategic acquisitions to augment the trajectory of this growth. As a result, we believe it is important for investors to evaluate our business growth on a pro forma basis, which is how we measure and manage the business internally. We calculate our pro forma revenue growth as though all acquisitions and divestitures closed as of the end of the latest period were closed as of the first day of the prior-year period, including before the time we completed the acquisition or divestiture.

We believe the pro forma growth rate provides the best insight into the underlying growth dynamics of our business. For the first quarter of 2024, pro forma revenue was $164.7 million, up 5.7% year-over-year. Pro forma subscription and transaction revenue was $129.4 million, up 9.1% year-over-year. The solid performance in subscription and transaction revenue was largely due to continued execution of our growth strategy to provide customers our core system of action software solutions and driving expansion by promoting cross-sell and upsell opportunities leading with payments. While we believe that our Martech solutions are stabilizing amidst continuing headwinds, their results negatively impacted consolidated revenue growth in the first quarter.

Excluding Martech, pro forma revenue growth would have been 8.3%. As Eric noted, we also exceeded the top end of our adjusted EBITDA guidance range. First quarter adjusted EBITDA was $40.9 million, representing a 24% margin versus 19.8% in the first quarter of 2023 and 28% growth in adjusted EBITDA year-over-year. Adjusted EBITDA outperformance in the quarter was underscored by our focus on actively managing our operating expenses, driving operating leverage, and cash flow generation. Adjusted gross profit in the quarter was $113.3 million, representing an adjusted gross margin of 66.6% versus 65.3% in Q1 2023. The increase in gross margin is partially attributable to an increasing mix of higher-margin payments revenue and a decreasing mix of lower-margin marketing technology solutions revenue.

Now, turning to operating expenses, which are reconciled in the appendix for this presentation. Adjusted sales and marketing expense was $27.7 million, or 16.3% of revenue, down from 18.1% of revenue reported in the prior-year period. There was a timing benefit to sales and marketing expenses in the first quarter, which we expect to increase for the remainder of the year. Adjusted product development expense was $19.6 million, or 11.5% of revenue, in line with the prior-year period. Adjusted G&A expense was $25.1 million, or 14.8% of revenue, down from 16.1% of revenue in the prior-year period. Adjusted G&A expenses declined both as a percent of revenue and in absolute dollars as we continue to optimize our operations. We continue to generate significant free cash flow as we invest to grow our business.

Levered free cash flow was $8.5 million in the quarter, which was up approximately $600,000, or 7.9% year-over-year. Levered free cash flow growth was negatively impacted by the timing of items related to the sale of the fitness solutions and certain working capital items. For the trailing 12 months, levered free cash flow was $82.1 million, which represents a 12% margin and a 78.2% increase in levered free cash flow over the prior year, continuing to underscore the efficiency of our business enhancing our balance sheet flexibility. Adjusted unlevered free cash flow was $29.8 million in the quarter and $118 million for the last 12 months, representing 27.4% and 25.7% year-over-year growth, respectively. Strong free cash flow generation allows us to continue to invest in our growing business and deliver strong returns to our shareholders.

It also allows us to efficiently allocate capital across the spectrum of opportunities, including the outstanding buyback authorization and M&A prospects. In the first quarter, we repurchased approximately 1.2 million shares for a total cash consideration of approximately $12.1 million at an average price of $9.65 per share. As of March 31, 2024, we had approximately $27.9 million remaining on our repurchase authorization that runs through year-end 2024. We ended the quarter with $90 million in cash and cash equivalents, excluding cash and cash equivalents related to our international fitness solutions. We maintain $190 million of undrawn capacity on our revolver. Our debt is a combination of floating and fixed rate. And total net leverage as calculated per our credit facility at the end of the quarter was approximately 2.5 times, consistent with our financial policy.

We have no material maturities until 2028. I'd like to finish by discussing our outlook for the second quarter of 2024. For the second quarter of 2024, we expect total revenue of $169.5 to $173.5 million, and we expect adjusted EBITDA of $39 million to $42 million. We are leaving our full-year 2024 guidance unchanged. We continue to expect revenue of $676 million to $696 million and adjusted EBITDA of $167 million to $176 million. Our guidance assumes near-zero growth in our marketing technology solutions business on a full-year basis. Before we begin the question-and-answer portion of the call, I want to once again thank the EverCommerce team for their efforts in delivering both top and bottom-line results that exceeded expectations. And I want to thank all of you for participating on today's call.

Our focus is on continuing to execute our strategic priorities and deliver consistent profitable growth that we believe can generate significant value for our shareholders. Operator, we're now ready to begin the question-and-answer section of the call.

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