EngageSmart Inc. Q1 2023 Earnings Call
It has the potential to improve access to mental health care by transforming how solo practitioners in small group practices manage insurance, we are developing an innovative ecosystem that is designed to help practitioners, except insurance at scale and maximize reimbursement rates. So they can focus on what they love most treating patients.
With a pilot program underway, we are making great progress in gathering valuable insurance insight I'm just.
Ending customer expectations and determining the most effective ways to add value to our simple practice solution. We are excited about the initial feedback and we'll keep you updated on our progress as we advance our solution with a goal of achieving strong product market fit.
Now turning to our enterprise segment enterprise continued to perform well driven by steady wins throughout the quarter and ongoing digital paperless adoption of our solutions.
The industries, we cater to utilities financial services government healthcare and giving rely heavily on outdated software that lacks modern features and capabilities. However, whether it's shopping online or paying bills consumers in today's digital age demand a convenient user friendly and seamless experience in these legacy industries.
This is often fall short and providing even basic functionality such as mobile access online payments are automated reminders and notifications and invoice cloud we have address this challenge by creating tight integrations and adding new features on top of existing systems. Our approach enables our customers to deliver a modern experience.
Without the need for expensive overhauls once implemented we partner with our builders to drive digital adoption with them and that's why we win we continued to see robust customer go lives in the first quarter of 2023 and insurance. For example, we went live with our largest customer to date and utilities, we went live with several key.
Customers, including <unk> electric in Alaska Charter Township of Canton, Michigan, and Vigo County, Indiana. In addition, we achieved new records of digital and paperless adoption, notably we are seeing an acceleration of adoption with recent cohorts are testament to evolving customer.
Preferences, and our ability to drive superior rates of digital adoption for our builders. Our first quarter was also a strong bookings quarter for invoice cloud fueled by consistency in the mid market and utilities, we recently signed the town of Easthampton, Connecticut, and the city of Quincy, Illinois and in insurance, we want Lowe.
Workers' comp and tax we signed several new customers in North Carolina, where we benefit from tailwind is rooted in recent customer wins and strategic alliances, forming new strategic alliances and strengthening existing relationships remain important growth drivers as they open new markets add to our top of funnel and.
<unk> sales and implementation cycles once they are onboard. It. Additionally, our network often enables us to move upmarket more quickly one of our key initiatives is to expand our network and further accelerate our strategic move up market through industry conferences. For example in the first quarter, we participated in the invitation.
Only oracle energy and water customer edge conference in San Diego Invoice cloud was one of six companies that presented in the event's innovation showcase a forum that enables forward thinking technology companies to share solutions that shape, the future of energy and water in the past. We've also worked with Oracle energy and water.
Customer service and billing technologies to provide real time integration, new digital engagement efficiencies and increased customer satisfaction to utility customers like the city of Escondido, California. We are excited about potential opportunities to collaborate with Oracle in the future. In addition, Invoiced cloud has joined the <unk>.
Oracle industry lab as a technology collaborator.
Another key success drivers innovation, we are always striving to be at the forefront of product development and thought leadership to meet and exceed our customers' expectations. Most recently, we joined the utility 2030 collaborative the collaborative focuses on helping customer facing and operations focused departments improve their impact on.
<unk> and employees, we look forward to sharing critical insights on customer preferences, and how our solution helps utilities keep revenue streams consistent while assisting payment challenged customers. In summary, we've had a strong start to fiscal 2023, delivering yet another quarter of record revenue with expanded EBITDA margins.
We continue to drive market adoption of solutions that help save costs improve operational efficiencies and elevate customer satisfaction, our suite of vertically tailored SaaS solutions delivered outstanding outcomes fueled by persistent customer demand platform adoption by Payors and excellent customer retention rates.
This demonstrates the strength of our business model and our position as leaders in customer engagement software with integrated payments.
With that I'll hand, the call over to our CFO Cassandra Hudson Cassandra.
Thank you Bob our first quarter results again exceeded our expectations showcasing the continued strength of our defensive vertical and our ability to deliver growth while expanding profitability.
<unk> reported robust growth in revenue and delivered a record breaking adjusted EBITDA and adjusted EBITDA margin in the first quarter.
As a result, we are making the following changes to our fiscal year 2023 guidance.
For the full year, we continue to expect revenue to be in the range of 380 and $384 million or revenue growth of approximately 26%.
We are raising our guidance for adjusted EBITDA for the full year and we now expect to be in the range of 69% and 71 million, which represents an adjusted EBITDA margin of roughly 18, 3% or a 210 basis point improvement over fiscal year 2022.
For Q2 of 2023, we expect revenue in the range of 92.5 to $93 5 million, which implies 26% growth year over year at the midpoint of our range.
We expect adjusted EBITDA in the range of 15, and $15 5 million, which represents an adjusted EBITDA margin of 16, 4% at the midpoint.
We anticipate a sequential decrease in the adjusted EBITDA margin from Q1 to Q2 due to the timing and the concentration of investments in Q2 of 2023.
As you think about the next quarter and the remainder of 2023. Please keep the following in mind.
Regarding SME are simple practice solution remains in high demand within our core mental health vertical driven by an increase in awareness and a growing demand for cure.
This trend has created opportunities for small practitioners to expand their practices and meet the needs of a growing patient population out.
As our customers grow they typically purchase higher priced packages add simple practice seats and process more payments through our solution.
We believe group practices represent a significant opportunity for us and we are seeing continued traction.
We remain focused on enhancing our platform to further strengthen our value proposition and accelerate our move upmarket.
In late Q1 of 2023, we increased the pricing of our integrated payment processing solution by 20 basis points. This.
This increase helps to offset higher payment processing and infrastructure costs and allows us to continue to provide and invest in a seamless experience our customers expect.
As it relates to enterprise, we are seeing consistent demand for our solution and have built a robust pipeline that we believe will continue to feel steady growth.
We also remain highly focused on our sales and implementation execution, enabling us to move up market we.
We are excited about our top of funnel as this market segment is becoming a critical aspect of our growth strategy.
In addition, we are seeing strong traction in our insurance and tax verticals as Bob mentioned, we just went live with our largest insurance customer to date and are encouraged by our progress with several new tax customers in North Carolina, where we benefit from tailwind is rooted in recent customer wins and strategic alliances.
Insurance and tax pillars have traditionally relied heavily on slow inefficient and error prone billing systems and represent a large opportunity for us.
As you know our pricing is customized based on individual customer needs in some cases, we charge a fixed fee per transaction and absorb costs and other cases, we charge, 8% of volume, which increases revenue as the average ticket increases.
And in some cases, we charge a mix of both we regularly assess and adjust our pricing structure for our customers to optimize revenue per transaction, while absorbing higher costs.
Finally, as I mentioned last quarter, we believe that our donor drive solution is more susceptible to macroeconomic disruption and our guidance assumes a slowdown in revenue growth from country anything events in the second half of this year.
Now turning to our first quarter results total revenue for Q1 was $88 4 million, representing 31% year over year growth fueled by an increase in customer count and transactions processed.
As of the end of Q1 2023, our total customer count was 108200, representing an increase of 23% over the prior year.
Our customer growth continues to be primarily driven by new customer adds from our digital marketing programs and word of mouth referrals in our SMB segment.
We also delivered strong growth in transactions processed in Q1, we processed $42 6 million transactions up from $34 3 million in the year ago quarter, representing 24% growth.
Driven by strong secular tailwind that have propelled demand for our simple practice solution and mental health are SMB segment delivered revenue of $49 8 million, representing 36% growth year over year.
A description revenue of $34 9 million grew 39% year over year fueled by new customer ads and a partial uplift related to the pricing and packaging changes that we made in the first quarter of last year.
Transaction and usage based revenue of $14 6 million grew 32% year over year, driven by a higher number of transactions processed on our platform as well as a higher transaction <unk> due to the 20 basis point price increase of our integrated payment processing solution.
Our enterprise segment continued to perform well with reported revenue of $38 6 million, representing 25% year over year growth marked by consistent wins throughout the quarter and continued digital adoption of our solution.
As expected we saw a small step down in revenue on a sequential basis due to the timing of transactions in Q4 of 2022 associated with tax billing and invoice cloud and the concentration of large fundraising events for donor drive.
Our adjusted gross margin for Q1 of 2023 increased slightly to 78, 7% from 78, 6% in Q1 of 2022.
And marketing expenses were $28 2 million up $5 9 million as we continue to invest in digital marketing channels to create awareness for our simple practice solution and drive new customer acquisition.
In enterprise our investments continue to be primarily focused on our strategic alliances as well as sales head count to fuel pipeline and bookings growth.
R&D expenses came in at $13 9 million up 4 million interest ENB segment, we're investing in additional features for group practices as well as the long term opportunities, we see with simple practice enterprise and revenue cycle management.
In our enterprise segment, we're investing in functionality to continuously enhance the experience for our <unk> and their payers and to accelerate digital adoption in all of our verticals.
G&A costs were $11 3 million up 200000.
We've seen significant efficiencies in G&A, driven by lower insurance premiums and leveraged across many of our back office functions.
Net income was $4 1 million for the quarter compared to $2 1 million in the first quarter of 2022.
Sequentially net income decreased by 800000, primarily due to an increase in income tax expense associated with the section 174 tax code changes adjusted.
Adjusted EBITDA was $17 3 million for the quarter, representing 19, 6% margin compared to $10 6 million.
A 390 basis point improvement from the first quarter of 2022.
The expanded EBITDA margin was primarily driven by efficiencies in G&A and to a lesser extent sales and marketing as well as the timing of investments planned in fiscal year 2023.
Free cash flow was $6 4 million, increasing our cash balance to $318 3 million as of March 31 2023.
We typically see lower adjusted EBITDA to free cash flow conversion in the first quarter as a result of our annual bonus payments.
As a reminder, we expect adjusted EBITDA to free cash flow conversion to moderate to approximately 50% in 2023 due to higher cash taxes associated with the section 174 tax code changes and the utilization of our remaining Nols in 2022.
In summary, we believe we operate in defense of verticals that should remain attractive and vibrant even in times of economic uncertainty and F&B. There is significant and widespread unmet need for mental health treatment that continues to fuel growth.
In our enterprise segment. The majority of those are non discretionary in nature and the trend towards Digitization remains strong looking ahead, we continue to invest in our solutions to further enhance our ability to serve the unique needs of both our SMB and enterprise customers. We are confident in our ability to drive profitable growth and create long term value for our stakeholders.
As we execute our strategy and capitalize on the opportunities that lie ahead.
I'll now turn the call back over to Bob for closing comments.
Thank you Cassandra Wicked cool growth and profit expansion.
We found it engaged smart because activities like paying bills scheduling appointments onboarding, new patients and client communications shouldnt be that hard our success is driven by a combination of three simple factors first we have a proven playbook that is centered on our customers and led by top tier talent, we prioritize.
Recruiting retaining and developing our teammates whose exceptional work an unwavering focus on customer satisfaction keep our momentum going.
Second we have a strong focus on product leadership as evidenced by our high adoption and retention rates, our deep expertise in vertical markets allows us to make decisions that prioritize our customers, resulting in innovative industry, leading solutions third we operate in a large and growing market with significant potential for.
The expansion, we have captured approximately 1% of market share of a $28 billion addressable U S market, we look forward to expanding our presence across all verticals and seizing new opportunities as they arise.
We remain focused on delighting, our customers growing our business and creating stakeholder value, while we make a positive impact in the world. We appreciate you all joining us on this call. This morning, and thank you very much.
The floor is now open for your questions. If you would like to ask a question at this time. Please press star one on your Touchtone phone you.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question.
Our first question comes from Bob <unk> Shah with Deutsche Bank.
Good morning, everyone. It's Nick on for Bob This morning, and thanks for taking my questions.
And further on customer growth within SMB can you give us some color on how it mixes developed across the different pricing tiers and simple practice, how has the progression looked for.
Clinicians, graduating up from startup to essentially even answer approaches.
Sure.
So yes.
Yes, we've seen a very I would say stable mix really since we've rolled out a new pricing and packaging in Q1 of 2022.
The majority of our customers are on the top two tiers today.
So.
Some of the upside that we saw in Q1 in particular with just a shift of investments spending from Q1 Q2. It is possible that that happens a little bit again in Q3, but right now we're really seeing that concentration happening in the second quarter here.
Alright, good point involving Cassandra.
Touch on adjusted EBITDA margin during the quarter it seemed to be almost everyone's expectations.
Can you, maybe just discussed a little bit more on where the majority of that surprise came from I know you mentioned deficiencies and G&A, but any additional clarity there would be helpful.
Suddenly really strong profitability in the quarter, we are seeing a lot of efficiency in our G&A function broadly speaking lower insurance costs with a factor.
Made a lot of investments over 21, and 22 to really <unk>.
Invest behind our back office function to support being a public company and also just a growing business, especially one that is growing as quickly as ours and I think those are starting to really drive some efficiency for us across the business and.
And then a little bit just timing related between Q1 and Q2 also some efficiencies in sales and marketing in the quarter as.
As we continue to get more efficient they're.
A little bit more on the enterprise side.
In this quarter, then which was I would say a pleasant surprise.
Okay, great. Thanks, Thanks, Cassandra and then also just.
If you can provide an update on the additional health verticals within SMB. In addition to mental health I know you mentioned speech language pathology.
To be gaining traction.
Faster rate compared to others.
So just any clarity there and then when we think about the SMP segment, you could just remind us to break out between mental health and the other wholesale politicals.
Right.
As Bob the mental health continues to be 90% roughly.
Roughly of the overall Smb's segment.
Speech language pathology in occupational therapy continued to be very strong growth opportunities for us in our.
Our market expansion plans of the emphasis has shifted a bit towards.
Supporting the really strong growth, we're seeing in group practices, so, but we continue to see natural growth coming from new specialties as well.
Okay, great. Thanks very much.
You bet.
One with J P Morgan.
Hi, Thanks good.
Good morning, Thank you for taking my question.
What do you see on the ground in terms of consumer health and on the enterprise.
As well as into April .
Good morning to engine.
Just to clarify your question you're on the enterprise side right for the talking about just overall trend networking yes.
Very strong.
A year ago, plus with aligning R. R.
Our partnerships with selling teams and so forth is having a very strong yield in terms of building top a funnel.
And as we continue to scale that just seems to be.
I appreciate that.
Second question our last question.
Getting a lot of questions around generative so for Bob.
Curious to hear your thoughts on on <unk>.
<unk> in charge of and see what the impact might be on both businesses I'm thinking especially of can be.
What are you thinking in terms of product roadmap and hope I fit their productivity demand or.
And how much would be great. Thanks.
AI bounce across everybody at rate right.
Gerardi of of tickets, if you will or support questions that come in from our customer base are handled already through AI techniques not true people.
Having to deal with it because.
Generally the same questions over and over again.
So I think that there is lots more that can be done there.
As we even shifts some of that towards the enterprise, but.
I think we're we're going to see a whole new age of driving self service, which we think really fits well with with our natural direction of simplifying customer and client engagement.
Okay, great. Thank you makes sense. Thank you.
Thank you. Our next question comes from Terry Tilman with Truest Securities.
Hey, Bob Cassandra ends us similar to what's it called quarter, Bob maybe.
Maybe the <unk> being Terry better being.
Hopefully there.
Thanks for taking my questions. The first question Bob relates to group practice.
And it sounds like small group practice versus very large group practice.
But what I'm curious about is when you brought on simple practice that was like a 4 million dollar business I believe or thereabouts announced exploded and it's very very large and a lot of scale. How does a small group practice compared to the early kind of roots of of the mental health oriented simple practice business from a revenue standpoint.
What does it typically like a number of clinicians for the small group practices and is there anything you have to do differently on like go to market or like how you skew of products for that so Unfortunately, there was a three part question and I can repeat every part of it if you want.
So the group practices as they get larger and we continue to see them get larger within our base somewhere.
Somewhat organically as a collective new video they fill up their schedule. They add another condition that they used to work with at the big clinic or something.
So definitely have more items in more needs. If you will for reporting and hierarchical permissions based rooms that.
They've got to figure out who's going to what room and all that so there's definitely more complexity to it we've seen a natural migration towards groups from the customer base and we continue to expect to continue to see that as we move forward.
Think that it is yes. It was originally built more for a solo practitioner and over time, we've adjusted the solution to to accommodate more and more of the needs and I think we work.
A number of conditions per group over time.
And I would just add Terry.
Certainly the current practices in kinda can range that that's why we see a lot of transaction today.
But we do have a lot of good practices about plenty and.
And even a couple above 100, so I think that's a testament to the demands that may be for her practically begged leaving.
Behind while we're investing in more features specifically for groups. A couple of other features include things like Weightless management.
Payroll simplification things like all his information from.
That's really helpful. I appreciate both of those responses on that button Cassandra one thing is I mean, one way to look at this guidance.
I think broadly speaking we are very encouraged by the performance and the outperformance relate that we saw in Q1 relative to our expectations I think it speaks to the continued strength that we'd be in demand for all of our solution, primarily simple practice invoice cloud of course, if given the concentration that they make up of our business.
Yeah, I don't think our view has changed really unknown or drive just given.
The macro.
Is that the ability there of that solution in particular, we just wanted to highlight the fact that there is a concentration of revenue from fundraising event in the back half of the year and that would be where we would be the impact that's certainly factored in.
Given all of those factors.
Where.
Sticking with the range for now.
Sounds good thank you.
[laughter].
Very pleased with how that turned out a quarter.
I think on the turnpike largely as expected.
SMB price increase so I assume it's going to moderate a little bit cause I think the price increase was smaller this year versus last year, but are there any comments there'll be helpful.
Increase that we found <unk> related to the pricing change on a payment side.
We still see steady increase on the subscription or suicide and I would expect that trend to continue.
Appointments that happen in our business in Q1 is typically the strongest can we start to see that step down after out the rest of the year, So that will impact the Ark, who as well. So I think we'll see certainly more moderate <unk> as we work through the balance of this year as a result of those back.
Actors.
Okay, great. Thanks, and one more question for Bob.
We continued to be active Terry.
But we continue to see opportunities.
If you are a utility and somebody.
The the payment files overnight you might not you might send attracted somebody to just paid that morning. So it real time integrations are stronger that's sort of a simple example of it but so.
You talked about the pricing increase the processing the payment processing I know, it's very modest very nominal.
We have customers that are over 80% so.
Several and growing very fast.
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