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Thank you for standing by, and welcome to EverCommerce's First Quarter 2023 Earnings Conference Call. My name is Sarah, and I will be your operator for today [Operator Instructions]. As a reminder, this conference call is being recorded today, May 9, 2023.
And now I would like to turn the conference over to Brad Korch, SVP and Head of Investor Relations for EverCommerce. Please go ahead.
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. This call is being webcast with a slide presentation that reviews the key financial and operating results for the three months ended March 31, 2023. For a link to the live or replay webcast, please visit the Investor Relations section of the EverCommerce website, www.evercommerce.com. A slide presentation and the earnings release are also directly available on the site. Please turn to Page 2 of our earnings call presentation while I 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 turning the call over to our CEO, Eric Remer, I want to note that management will not be commenting today on any rumors or speculation that has been in the press, either in prepared remarks or during the question-and-answer portion of the call. Eric, please continue.
Thank you, Brad. On today's call, I will highlight first quarter results and discuss key customer trends and metrics before turning the call over to Marc to dive deeper into our financials. EverCommerce started the year strong, being at the top end of the first quarter guidance for both revenue and adjusted EBITDA. First quarter results benefited from continued solid customer growth and payments penetration as the secular tailwinds that propel the digitization of the service economy continue. We continue to balance growth and profitability as we operate the business, and our first quarter results underscore this mantra. We exceeded our goals for the quarter with year-over-year revenue growth of 12.2% and EBITDA margin of 20%. As we've discussed previously, go-to-market leading with our core system of action SaaS solutions and our upsell cross-sell additional services and features to enhance the value to our customers and drive revenue growth for EverCommerce. Embedded payments continues to lead our cross-selling motion. In the first quarter, total payment volume or TPV grew 17% year-over-year. Strong TPV growth in approved economics grew payment revenue 37% year-over-year in the first quarter. EverCommerce provides sort of tailored end-to-end SaaS solutions that support the highly diverse workflows and customer interactions to professionals and home services, health services and fitness and wellness services used to automate manual processes, generate new business and create more loyal customers as the leading service commerce platform, we provides system of action software across our many micro verticals, which, in turn, drive the workflows to help our customers, generate new business, fulfill services, manage day-to-day operations and engage with our customers.
As we discussed during our fourth quarter 2022 earnings call in March, we ended the year with serving more than 685,000 customers. Our large customer base represents an incredible opportunity for revenue expansion to cross-sell and upsell of our solutions. We measure the progress of this land and expand strategy by the number of customers using more than 1 solution. This metric continues to grow as we embed payments and market our digital marketing and lead generation solutions to our customers. Year-over-year, the number of customers using more than one of EverCommerce solutions grew 22%, providing significant tailwinds in our business. Today, approximately 10% of our customers are utilizing more than one solution, and this continues to represent one of the largest opportunities for growth out of us. As customers purchase add-on capabilities and more than one of our products, we see ARPU expand and our retention of these customers improve. We measure this through our annualized net revenue retention or NRR. Looking back at trailing 12 months, our annualized net revenue retention has remained constant, approximately 100%. Embedded payments is our largest and most accretive cross-sold solution. Year-over-year, our payments revenue grew 37%, outpacing overall revenue growth and contributing to margin expansion in the quarter as payments are booked on a net revenue basis and contribute approximately 95% gross margins. Payments revenue growth is driven by TPV growth and by improved economics given our scale.
We ended this quarter with an annualized TPV of approximately $11.1 billion, representing a 17% year-over-year growth. We expect TPV and overall payments revenue grow as we continue to embed our payment solutions into our core system of action. $100 million-plus revenue company established significant scale across our platform, our vertically tailored system of action, SaaS solutions that are complemented by value-added payments, marketing technology and customer engagement solutions. We have integrated these products onto our centralized operating platform, leveraging centers of excellence across key functions such as marketing, finance, accounting, IT, legal, HR and product development to improve the scalability and optimization of our consolidated operations. Today, I'd like to highlight EverHealth as part of the continued evolution of our service commerce platform. Serving approximately 100,000 small physician, specialty health and medical practices, health service is one of our 3 key customer verticals. Through our integration and consolidation initiative, we have created a platform of connected and customizable solutions in EHR, practice management and patient engagement, empowering our customers and health services to streamline and grow their practices.
The picture shown on Slide 8 is our recent EverHealth booth at HIMSS conference last month. This conference marked the first time that we went to market as one integrated EverHealth brand, allowing us to better focus our efforts at our customers and their needs, providing them an integrated set of solutions under one umbrella. We are bullish on our ability to open up new growth opportunities as we move from providing point solutions in the health care space to integrated suites of solutions. This has become more customer-centric and create simplicity as differentiator in traditionally complex markets. As we execute this strategy, we'll be able to further streamline our operations and track cost efficiencies and margin expansion over time. Now I will pass it over to Marc, who will review our financial results in more detail as well as provide second quarter and updated full year 2023 guidance.
Thanks, Eric. Total revenue in the first quarter was $161.1 million, up 12.2% from the prior year period. Within total revenue, subscription and transaction revenue was $123.8 million, up 14.6% from the prior year period. And revenue for marketing technology solutions was $31.8 million, up 6.3% from the prior year period. The strong performance in subscription and transaction revenue, which is in line with our long-term target, was largely due to solid execution of our strategy to provide customers, our core systems of action software and cross-selling embedded payments, which grew 37% in Q1, as Eric had mentioned earlier in the call. As we've highlighted in the past two earnings calls, we continue to see modest headwinds to growth in our marketing technology solutions, and we continue to take actions to balance growth with profitability within these products and services. First quarter other revenue of $5.5 million included approximately $500,000 of revenue that was previously expected in the second quarter, modestly affecting the pacing of revenue growth in the first half of 2023. At the end of Q1, LTM revenue was $638.3 million, up 20.7% on a reported basis and 13.8% on a pro forma basis. As a reminder, we calculate our pro forma revenue growth as though all acquisitions 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. We believe the pro forma growth rate provides the best insight into the underlying growth dynamics of our business. Our reported growth rate for Q1 is equivalent to our pro forma growth rate because we did not complete any acquisitions during the period.
First quarter adjusted EBITDA was $31.9 million, representing a 19.8% margin versus 16% in the first quarter of 2022 and 39% growth year-over-year. Additionally, LTM adjusted EBITDA was $128 million, representing a 20.1% margin. In the first quarter, we are clearly delivering towards our full year 2023 objectives by exceeding guidance and achieving 20% adjusted EBITDA margins. Adjusted EBITDA outperformance in the quarter was partially due to higher revenue but was primarily due to our focus on actively managing our operating expenses, driving operating leverage and cash flow generation. Adjusted gross profit in the quarter was $105.2 million, representing an adjusted gross margin of 65.3% versus 64.7% in 2022. LTM adjusted gross profit was $415.7 million, representing an adjusted gross margin of 65.1%. Adjusted gross profit is seasonally weaker in the first quarter and strengthens over the course of the year. So we do expect gross margins to improve.
Now turning to operating expenses. Adjusted sales and marketing expenses were $29.2 million or 18.1% of revenue, down from 20.1% of revenue in the prior year period. This was driven by both the timing and pacing of growth investments and expected scale economies as our business grows. Adjusted product development expense was $18.1 million or 11.3% of revenue, down from 12% of revenue reported in the prior year period. The decline as a percentage of revenue is attributable to timing and prioritization of investments in our solutions and centralized IT operations. Adjusted G&A expense was $25.9 million or 16.1% of revenue, down from 16.5% of revenue in the prior year period. This was largely driven by active cost management during the quarter and also stabilizing investments in our public company infrastructure as we are now in our second full year as a public company. We continue to generate significant free cash flow as we invest to grow our business. Our adjusted unlevered free cash flow for the quarter was $22.4 million, representing 50.4% year-over-year growth and a 13.9% margin.
For the last 12 months, our adjusted unlevered free cash flow was $92.8 million. Levered free cash flow, which accounts not only for debt service, but also various working capital adjustments, was $7.8 million in the quarter. This was down slightly year-over-year, primarily due to higher interest rates. For the trailing 12 months, levered free cash flow was $46.1 million, continuing to underscore our balance sheet flexibility. Strong free cash flow generation allows us to operate our business with an optimal capital structure that includes modest levels of leverage. Ultimately, this can allow us to deliver enhanced equity returns to our shareholders. It also allows us to efficiently allocate capital across the spectrum of opportunities. While we continue to appropriately invest in our organic growth, we used a significant amount of excess cash in Q1 to continue our share repurchase program. In the first quarter, we repurchased 3.1 million shares for a total cash consideration of $29.6 million, an increase from the fourth quarter of 2022 when we repurchased 2.1 million shares. We ended the quarter with $69.8 million in cash and cash equivalents, and 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 for our credit facility at the end of the quarter was approximately 3.2x, consistent with our financial policy. We have no material maturities until 2028.
I'd now like to finish by providing our outlook for the remainder of 2023, beginning with the second quarter. For Q2 revenue, we expect total revenue of $168 million to $172 million, and we expect adjusted EBITDA of $31 million to $34 million. Our full year 2023 revenue guidance remains $680 million to $700 million, and we are raising our adjusted EBITDA guidance to $136 million to $144 million. As we noted on the first quarter call, price increases and new product introductions are expected to drive growth and strong margins throughout the year. Our 2023 outlook does not include any potential impact of M&A activity that could take place. Before we begin the question-and-answer portion of the call, I want to highlight once again how pleased we are with the first quarter results. Our focus continues to be on executing against our strategic priorities to deliver consistent, profitable growth and significant value for our customers and shareholders. Operator, we're now ready to begin the question-and-answer section of the call.
[Operator Instructions] Our first question comes from Kirk Materne with Evercore ISI.
Congrats on a good start to the year. Eric, can you just talk a little bit more about the macro environment? Are things pretty much leveling out versus what you saw in the sort of the fourth quarter? How would you kind of characterize how the quarter went? Was there any sort of impact from some of the macro intensity around the banks in March? I was just kind of curious where you think we are on that front.
Really, this quarter, we really felt the continuation kind of the growth of Q4 and really business as usual. We do not see any impact in the core verticals we serve, and we've talked about this before directly. As remember, we -- in that kind of service businesses that we serve and the verticals that we're in from health care, fitness and wellness as well as home services, which is the largest category, it's really been kind of a continuation of very steady growth. And at this point, we expect that for the rest of the year. We have not seen any type of -- any degradation in any core verticals that we serve.
And then, Marc, one for you. Just on the EBITDA forecast for the year, I guess where are you, I guess, year-to-date against your hiring assumptions? Is there anything we should be thinking about maybe in the back half of the year from a seasonality perspective around hiring or any one-off expenses?
So nothing of magnitude. I think, look, coming into this year, just given the climate we're in, we want to be in front of our expense base and managing that tightly. We refer to that as active management. We did a good job of that in Q1. So we're being very deliberate with respect to our hiring and making sure that we're doing that in the right places for the right reasons. I think coming into the quarter -- or excuse me, exiting the quarter, investment pace is a little bit slower than anticipated. So that, I think, will sort of carry through the balance of the year. But all in all, nothing to really call out.
Our next question comes from Matt Hedberg with RBC Capital Markets.
This is Anushtha from Matt Hedberg. Maybe if you could just start by talking about what trends you're seeing on the new customer side of things relative to last quarter. And then how should we think about the net adds going forward?
Really, the continuation, as just talked to Kirk about, the customer acquisition is kind of on pace as expected really based on plan that we thought and is not any team that's been -- anywhere in the funnel -- from top of funnel down to new customer growth that's really been -- really as planned as expected for the first quarter. Matt, anything to add to that?
I'd say similarly, from just the full funnel conversion standpoint to all of our channels, and obviously, digital being our largest reach and largest impact one from digital to partnerships to live in trade shows and conferences, again, we've seen stability quarter-over-quarter and performance of the funnel there. So happy about that progression.
And then you talked about price increases built into the guidance that you're planning to press harder on price lever this year. Could you talk more about that price as a driver for you? And then what has been the customer reception of the price increases so far?
So as we've said on our last call, we always increase prices. We really are focused on value pricing across all of our various products and solutions. I think coming into this year, we have been more deliberate and more widespread with that motion. And we do expect that to have impact through the year, probably more in the second half because, obviously, we're initiating those here in the first half. Thus far and has always been our history, when we raise price, we tend not to see much impact. We usually plan for that noise right around that action. And typically, we really don't see much, and that's certainly been the case year-to-date.
Our next question comes from Brad Reback with Stifel.
Eric, do you see an opportunity to getting back to the M&A strategy, or is your stock so compelling of a value right here that it makes no sense to buy other businesses?
I think we're getting closer. I think it's less to do with our value because I think we will continue to perform, and I think the stock will take care of itself over time. But I do think we're starting to see really, Brad, as we talked about before, just being disciplined and making sure what we're finding there is going to be accretive to the business, both in the near term to long term. And I think the market is beginning to balance out a little bit more now than I've seen in quarters past. And so we're looking at a bunch of things, but we're going to be active as we see opportunities that make sense for the business.
And so following up on that, is there a maximum financial EBITDA leverage you'd be comfortable with or how should we think about adding more debt to the business?
Right now, I think as you saw, our leverage went down slightly. We have cash on the balance sheet that we look at. And so a lot of it is going to depend on the right type of deal, how accretive that is. Some of the deals we're looking at are actually just -- could be on the smaller side of things that we could buy off balance sheet without having to create additional leverage. And so we're going to be prudent, as Marc put kind of the priorities out historically in terms of the ranges, we're willing to kind of gross up to. But at this point in time, we don't see the need to draw down additional leverage. .
Our next question comes from Bhavin Shah with Deutsche Bank.
Just in terms of the consolidation into the larger EverHealth, EverWell, et cetera, brand, can you just talk first from a cost standpoint, what you guys need to do from an integration perspective to kind of consolidate under those brands? And then two, I know it's kind of early, but what are you seeing on the other side of things in terms of -- from a demand generation standpoint and a cross-sell upsell standpoint?
I mean it's a great question. On the cost side of things, obviously, it's still early. What we expect to see is cost efficiency in terms of how we go to market. So as we consolidate brands and we're actually going to market with less of those brands, our digital marketing costs should -- those are costs that we do feel like we're going to be able to consolidate and get more efficiency from as we're going with a consolidated set of solutions versus a less integrated set of point solutions. Think about our motion down funnel from that go-to-market, when you think about sales organizations, implementation, how we service the customer, how we continue to evolve our product platforms, all of those represent cost efficiencies, when we think about consolidating not just the brand but the underlying operations. And again, that's something that we have been underway with, and as we've spoken about in the past, have been most significantly underway from an EverHealth standpoint. Obviously, still early innings. You asked about what are our results there, but the reception in the marketplace has been really, really strong. Obviously, from a customer experience standpoint, that consolidated set of suite of integrated solutions versus what -- previously, we're less integrated, more point solutions. That is a better customer experience, and that really is the kind of whole thesis behind EverCommerce and really the whole thesis behind this consolidation and integration of brands in the underlying operations and products. So super excited about early innings, but customer reception has been good.
Just to double-click on what Matt just described more from a time context. I mean we are in the very formative stages of doing this. EverHealth, and we've said this really over the last couple of quarters, they're sort of leading -- paving the way, if you will, in terms of consolidation of products and organizations within a particular vertical. It is a multi-quarter arc of optimization, though. It does create what we think is a very long tail opportunity and one we're very, very focused on because, as Matt said, it's -- ultimately, it's a lot better for our customers, and it will bring a lot of optimization into our organization and operations. So we are excited about that, but it won't be an overnight kind of experience.
And I guess just one follow-up on this topic. Your customers, as they kind of interface with the products that they use DrChrono, Oregon therapy et cetera, are those [UIs] changing where it's more prevalent that they're seeing EverHealth out there? Or is it still facing DrChrono, et cetera?
Yes, that's going to be an iteration over time, for sure. And we'll obviously be thoughtful about that, obviously thoughtful about the brands that have equity and strong attraction from the customers and others where maybe that don't exist. But yes, over time, in a very considered way throughout the product experience, they would see throughout the -- not just the product experience, throughout their entire experience with EverCommerce, they will see that shift over time. But again, we're very thoughtful about that, and that's going to be a deliberate change. .
The next question comes from Alex Sklar with Raymond James.
This is John for Alex. I wanted to start off with one on the ability to spend in the newer micro verticals. Any opportunities here to stand up new micro verticals using existing solutions without the use of M&A?
The answer is, yes, we're constantly expanding, looking at opportunities within the verticals that we serve. Some of that comes organically, meaning verticals, customers and kind of complementary or adjacent verticals we utilize our solution. As we start getting critical mass, we build additional services on top of that. And a great example of that is in our cost control business that we have, we started getting more kind of tree and tree care type of customers utilize [that] at very similar overlap into the pest control. We saw some things that may need to add to make it even more complete product. We built some of that and now have a really full suite product for that vertical. So we're doing that in several different places as we see the opportunity.
And maybe just a follow-up on an earlier question on the multiproduct success. Any changes in deal sizes on like a like-for-like solution basis given the increased integration of payments into more core systems of action? So basically, are you seeing more multiproduct success at the initial point of sale versus profiling later?
We think about multiproduct take, again, both at the time of sale of a core system of action. That's the whole mantra around its suite of integrated solutions. The more that is integrated, the more we can sell upfront. But again, we also will meet customers where they are. And if system of action is where they are, we're going to have a motion for adding that second product on the back end. So we are seeing nice success, both in the initial sale as well as the add-on cross-sell at a later time when the customer is ready to ingest that. So both strategies, pushing on both and success on both fronts.
The next question comes from Jeremy Sahler with Jefferies.
This is Jeremy on for Samad. First, you guys called out that take rate expansion, and it looks like that was a bigger contributor to that payments revenue and TPV growth. Can you talk about what's driving that take rate expansion? And kind of how much choice is there left for further expansion?
Absolutely, one of the core strategies within our payments -- from a payments growth standpoint. We've seen that really on 2 fronts, merchant pricing. We have had opportunities. And again, you hear us say price to value. So payments is another place that we look at price to value, and we've had opportunity to expand that specifically as the integration and breadth of our payments offering have continued to expand in those integrated solutions. So merchant pricing is a spot there. And with scale, obviously, we continue to have the opportunity to optimize contractual relationships with our back-end providers, which creates an expansion opportunity for spreads. So both of those things together has absolutely led to an increase in net take rate over time on our payments volume.
And then on the reiterated full year guide, you guys called out kind of continuing headwinds to marketing tech. I guess of that reiterated guide, how much of that is coming from incremental strength and subscriptions transactions, or are you expecting any stabilization in marketing tech?
We're basically -- we're seeing kind of -- we kind of talked about this last quarter. Q3 was the kind of time where we saw some market tech come down. It stabilized in Q4 and stabilized in Q1. So as we look throughout the rest of the year, it's really -- we're expecting really continuation of the current trends that we're seeing. I think their trends have been favorable for us in Q1 and we expect that throughout the rest of the year. Being prudent without knowing the macro world. So we feel very comfortable with the guidance we've given at this plan. .
[Operator Instructions] Our next question comes from Noah Herman with JPMorgan.
Just one from our end. What are different steps are you taking to sort of improve the onboarding of payment capabilities for customers?
Noah, can you repeat the question? Unfortunately, it got muffled a little bit. Could you repeat that, please? I'm sorry.
What steps are you taking to improve the onboarding of payment capabilities for customers?
Again, obviously, the important part of the core growth strategy around payments is creating more opportunities for attach rates, driving more attach rates, getting those customers to activate and start processing as quickly as possible, expanding their wallet share, and as I just talked about, growing the net take rate. So from an onboarding standpoint, obviously, that's key right in between the attach and actual utilization. So super focused from that perspective. I think it's an area that we have been pretty strong on. We very much understand that it's not just about the proposition in -- from a marketing and sales standpoint, but getting somebody set up and starting the process is critical. So from all of our touches during the marketing and sales process, educational pieces that we're consistently providing, touches from a customer success standpoint to get people, There are a variety of strategic initiatives that we have across the payments landscape that are really focused on exactly that, getting that attached payment customer onboarded and starting to utilize the product.
This concludes our question-and-answer session. I would like to turn the conference back over to Eric Remer, CEO, for any closing remarks.
Thank you for that. EverCommerce started the year very strong, and we remain extremely excited about our future prospects and really the continuation of the digitization of the service economy. Thank you, guys, very much for joining the call today.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.