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Edited Transcript of ESMT.N earnings conference call or presentation 4-Aug-22 12:30pm GMT

Q2 2022 EngageSmart Inc Earnings Call Sep 9, 2022 (Thomson StreetEvents) -- Edited Transcript of EngageSmart Inc earnings conference call or presentation Thursday, August 4, 2022 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Cassandra Hudson EngageSmart, Inc. - CFO * Josh Schmidt * Robert Paul Bennett EngageSmart, Inc. - Founder, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Bhavin S. Shah Deutsche Bank AG, Research Division - Research Analyst * John Kimbrough Davis Raymond James & Associates, Inc., Research Division - MD & Analyst * Madison Taylor Schrage KeyBanc Capital Markets Inc., Research Division - Associate * Michael Ethan Rackers Needham & Company, LLC, Research Division - Research Analyst * Robert Paul Napoli William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology * Terrell Frederick Tillman Truist Securities, Inc., Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning. Thank you for attending today's EngageSmart Second Quarter 2022 Earnings Call. My name is Aaron, and I'll be your moderator today. (Operator Instructions) I will now turn the call over to Josh Schmidt, Engagement -- with EngageSmart. Please go ahead, Josh. -------------------------------------------------------------------------------- Josh Schmidt, [2] -------------------------------------------------------------------------------- Thank you. Good morning, and welcome to our fourth quarterly earnings call as a public company. With me on today's call are Bob Bennett, Chief Executive Officer; and Cassandra Hudson, Chief Financial Officer. Our earnings press release, supplemental presentation and associated Form 8-K can be found at investors.engagesmart.com. During this call, we will be discussing certain forward-looking information. Actual results could differ materially from those contemplated by these forward-looking statements. Please refer to the Risk Factors section of our annual report on Form 10-K and other SEC filings for more information on the risks regarding these forward-looking statements and risk factors associated with our business. On this call, we will discuss certain non-GAAP metrics, including adjusted EBITDA. A reconciliation of non-GAAP metrics to the nearest GAAP metric as well as statements regarding why management believes these measures provide useful information can be found in our earnings press release and supplemental presentation, both of which are available on the Investor Relations section of our website. This call is being webcast live and will be available for replay on our website at investors.engagesmart.com. I would now like to turn the call over to our CEO, Bob Bennett. -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Josh, for that succinct yet comprehensive introduction. Good morning, everyone, and thank you for joining us on our call to discuss our Q2 results. We are excited to report another strong quarter marked by high growth and outstanding profitability that yet again exceeded our expectations. EngageSmart delivered record revenue of $73.9 million, representing 43% year-over-year growth, all organic, and adjusted EBITDA of $12 million, which is 16.2% of revenue for the quarter. Our success is a result of our strong business model and excellent execution as we continue to simplify customer and client engagement through vertically tailored true SaaS solutions with integrated payments. SMB's strong growth of 56% year-over-year, combined with Enterprise's highly durable growth of 29% year-over-year reflects the strength of our solutions and the dedication of our teammates. Our people are relentless in their pursuit of customer satisfaction. Before Cassandra dives deeper into the details of our financial performance, I'd like to share some of this quarter's highlights. We continue to see great traction in our SMB segment, where we now serve over 89,000 customers and more than 140,000 practitioners in 10 wellness verticals. We delivered outstanding growth of 56% that was driven by a mix of new customer adds and continued revenue growth from our existing customers. In our Enterprise segment, our results were again excellent, showing great durability. InvoiceCloud, our largest enterprise solution, posted another strong go-live quarter, and we continue to see robust growth with our older cohorts through digital adoption from existing customers. DonorDrive, our best-in-class fundraising solution, also had several significant customer wins, successful events held for existing customers and received an award from Salesforce for nonprofit product partner of the year. And finally, as you might expect, the demand environment for our offerings continues to show relative strength, given the predominant tie to mental health and wellness as well as payments of nondiscretionary bills such as real estate taxes and utility. To provide more color on our outstanding results in the SMB segment, our second quarter includes the first full quarter impact of the pricing and packaging rebundling. Our new 3-tiered offering structure is proving successful as it aligns well with where our customers are in their professional journey. SimplePractice continues to experience great traction, especially in our core mental health market. The shortage of mental health and wellness professionals, driven by the large increase in demand for treatment, continues to put a strain on the industry. SimplePractice, with its 140,000 practitioners, is uniquely well positioned to help solve this problem as the solution dramatically reduces practitioners' administrative burdens, allowing them to treat more patients. Our Monarch solution is an exciting extension of our efforts to drive access to care. Monarch creates a network for practitioners and patients, fueling our flywheel by attracting more professionals to SimplePractice and helping them grow their patient base. We see exciting opportunities with Monarch to ease the strain for people who are trying to find practitioners, especially those in their insurance networks, and are seeing interest in our solution from both employers and health plans. Last quarter, we mentioned that we launched a pilot program with an employee assistance program, an EAP. This quarter, we signed contracts with 2 more EAP's. We're encouraged by our progress and continue to develop a robust pipeline of opportunities in this space. You can learn more about Monarch by going to meetmonarch.com. Beyond mental health, we continue to serve our 9 other wellness specialties. Our focus areas are on speech language pathology, occupational therapy, chiropractic and physical therapy, because these practice areas offer the largest addressable market and are attractive segments for us. In addition to our strategy of prioritizing features for mental health group practices, we have found that many of the other specialties we currently serve often operate as multidisciplinary group practices and, therefore, will also benefit from the development of those new features. In the second half of this year, as we balance our opportunities and resources, we plan to continue expanding on our strength and market leadership in mental health, given the ripeness of the market. Additionally, we plan to continue investing in new features across our verticals as well as digital marketing to broaden our brand awareness. We continue to believe SimplePractice has great potential beyond mental health. We have laid the foundation and remain confident in our ability to replicate this model in new verticals over time. As a final thought, we believe that SimplePractice's ability to simplify customer-facing and back-office work fees and to connect practitioners to patients has the potential to become even more valued during the time when labor availability and costs are top of mind. Now turning to our Enterprise segment. We saw strong customer growth in go-lives this quarter. We now serve more than 3,200 customers across our 3 vertically tailored solutions. Success in this space is driven by new customer wins, fueled by our partner-assisted selling motion, customer go-lives and the adoption of our digital solutions. Q2 was one of InvoiceCloud's biggest go-live quarters to date. Notable examples this quarter include Georgia Farm Bureau Insurance and Financial Services and Central States Water and the City of Clearwater, Florida and utilities. Customers choose InvoiceCloud because our solution drives superior rates of digital adoption. What's so remarkable about our solution is how quickly we achieve results. As an example, in the first 9 months of using our product, the City of Escondido, California saw a 69% decrease in payment-related customer service calls, giving staff back valuable time to focus on other high-priority projects. The city also saw an 83% increase in paperless billing enrollment in those first 9 months, significantly reducing print and mail expenses. And we continue to drive digital adoption over time. The city of Escondido has now achieved 62% overall self-service electronic payment adoption. We are seeing great results not only in utilities, but also intact and govern it. Municipal organizations are seeking more robust fintech solutions that are simple for IT teams to deploy and secure, and convenient for billers and payers to use. And they find that InvoiceCloud is a perfect fit for them. As an example, James City County, Virginia saw an 11x increase in electronic payments with InvoiceCloud's innovative payment solutions as well as more than 5x increase in paperless enrollment since 2019. To drive new customer growth in InvoiceCloud, we continue to invest in our strategic alliances to add partners and strengthen our relationships through shared go-to-market strategies. We believe our strong new customer growth and high adoption rates are driven by our product leadership. While most of our competitors are still selling hosted offerings, InvoiceCloud is true SaaS. This enables us to release new features faster and more often and allows us to continuously make further enhancements to our platform. Since 2016, we have released more than 60 new features, all designed to simplify the core biller and payer experience. And we continue to invest in R&D to drive product leadership. We've recently launched functionalities that enhance data reporting, data exchange and data visualization. This is part of our broader ongoing initiative to provide better data management tools to our customers. By establishing processes and policies for data usage and building trust in our data, we are enabling customers to make better decisions across their organizations and respond more efficiently to market changes and their customers' needs. Finally, world cloud data security and privacy are top priorities for us. Our software is dependent upon for managing important financial transactions and sensitive information. And we are committed to upholding and investing in the highest security standards. Another highlight for the Enterprise segment this quarter is DonorDrive, where we signed new marquee customers, held several successful fundraising events for customers in the quarter and developed a strong pipeline. Our focus in this fundraising space is on building strong alliances with nonprofit organizations and it's paying off. New customers signed include Crohn's and Colitis Foundation and Massachusetts Down Syndrome Congress. Customer fundraising events with DonorDrive this quarter included the San Francisco Age Foundation and Canadian Cancer Society. We're seeing this strength due to several factors. The return of in-person conferences and trade shows fuels marketing-generated pipeline growth. Increased interest in live streaming to support hybrid events spurs new fundraising growth areas. And in terms of product innovation, this quarter, we released new advanced recurring donation options. Lastly, we were thrilled to be awarded the Salesforce Nonprofit Partner of the Year award at their Unite Summit in June, a reflection of the strength of our partnership with Salesforce. In summary, we've had an exciting second quarter and first half of the year, during which we have exceeded our expectations. We are balancing profitability and growth and are driving further traction in the market for products that help save labor costs, increase operational efficiency and drive customer satisfaction. At the same time, we are helping people find needed medical care, enabled digital billing and payments and raise funds for worthy causes. We delivered excellent results across our vertically tailored SaaS solutions driven by strong customer growth, payer adoption on our platform and customer retention. We believe that this is a testament to the strength of our business model and our market leadership position and customer engagement software with integrated pain. With that, I'll hand the call over to our CFO, Cassandra Hudson. Cassandra? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Bob. We delivered outstanding Q2 results that well exceeded our revenue and adjusted EBITDA guidance. We saw strong momentum in SMB and Enterprise, driven by new customer adds and an increase in average revenue per customer. As you know, we meaningfully increased our guidance last quarter. This quarter, we are again raising our outlook for revenue and adjusted EBITDA for 2022. We now expect revenue to be in the range of $295 million to $297.5 million, or 37% growth at the midpoint of our range. We are also raising our guidance for adjusted EBITDA for the full year to $42.5 million to $43.5 million, which represents an adjusted EBITDA margin of roughly 14.5%. Total revenue for Q2 was $73.9 million, representing an increase of 43% year-over-year, fueled by growth in customer count and transactions processed. As of the end of Q2 2022, our total customer count was 92,600, an increase of 29% over the prior year. Our customer growth was mainly driven by new customer additions from our digital marketing programs and word-of-mouth referrals in our SMB segment. We also delivered strong growth in transactions processed. In Q2, we processed 36.1 million transactions, up from 26.6 million in the year-ago quarter, representing 35% growth. Our SMB segment continues to perform well, the second quarter revenue coming in at $40.8 million, representing 56% growth year-over-year. Subscription revenue of $29.2 million grew 66% and was highlighted by strong new customer adds and higher revenue from existing customers, fueled in part by the pricing and packaging changes we made in Q1 and continued expansion with existing customers purchasing add-on subscriptions. With the timing of our new SMB pricing and packaging, we are seeing a pull-forward impact this year that is driving a stronger result on revenue growth than we originally anticipated. Our new price bundling has been well received by our customers. Our starter package at $29 per month provides practitioners with an easy means to try SimplePractice and start moving back-office functions online such as paperless intakes. We are beginning to see new customers use this package more frequently. Our mid-priced bundle provides the ability to seamlessly perform advanced online functions such as online appointments and client communications. To date, the mid-priced bundle at $69 per month is frequently chosen by solo practitioners, making it our most selected package in terms of customer purchases. And our Plus package at $99 per month gives practitioners the option to add billers, supervisors, schedulers and, of course, additional practitioners, making it a popular choice for group practices. Notably, the Plus offering is our highest revenue contributor at SimplePractice, given the high number of practitioner licenses that tend to be purchased by groups. Since rolling out the new bundles, revenue churn is within our expectations and has normalized to 2021 levels. We are seeing healthy adoption from new accounts and strong referrals that continue to scale with our customer growth. Transaction and usage-based revenue of $11.2 million grew 38% year-over-year as practitioners continue to process more transactions on our platform. Our Enterprise segment also delivered strong results with reported revenue of $33 million, representing 29% year-over-year growth. Transaction and usage-based fees came in at $30 million, representing 31% growth year-over-year. As a reminder, Enterprise customers typically invoice and process recurring payment transactions, resulting in a visible and durable revenue stream for us. Our pricing is customized and based on individual customer needs. In some cases, we charge a fixed fee per transaction and absorb costs. In others, we charge a percent of volume, which increases revenue as the average ticket increases. And in some cases, we charge a mix of both. Due to our pricing structure, we believe that rising inflation will lead to offsetting trends for our Enterprise business, and we therefore do not expect a material impact. To provide further color on the top line, I'd like to outline the primary growth drivers for SMB and Enterprise going forward. For SMB, we see strong top-of-funnel trends in our mental health vertical, driven by the shortage of mental health practitioners and an increase in the demand for mental health treatment. We continue to be excited about our opportunity in our core market and are investing in our product towards the goal of unlocking our full potential and further simplifying back-office work streams for solo practitioners and group practices. In addition to acquiring new customers, we continue to expect the average revenue per customer to increase over time as practitioners expand their practices, add licenses for additional practitioners and process more transactions through our solution. Finally, we continue to make progress on our strategy of replicating our successful playbook in mental health into other wellness verticals. We see a large opportunity in speech language pathology, occupational therapy, chiropractic and physical therapy. We are focusing on the development of vertically tailored features for these specialties in the coming years. In Enterprise, we continue to build on our highly visible and durable revenue growth. Our growth is fueled by our continued focus on product innovation and customer experience, enabling us to drive superior rates of digital adoption. We continue to invest in further simplifying onboarding and increasing marketing efforts to drive higher digital adoption for our customers. We also continue to see great momentum driven by our alliances. In Q2, our alliance with Harris Utility Group yielded strong bookings performance for InvoiceCloud as they are looking to upgrade solutions across their client base. This is a testament to our product leadership in the space and the power and lasting impact our alliances have. We are excited about our success and are looking forward to implementing our online bill presentment and payment solutions with our partners in the future. Finally, I'd like to highlight that our business is resilient. We operate in defensive verticals that are characterized by their recurring and nondiscretionary nature and should remain attractive and vibrant even in economic downturns and inflationary periods. Now moving on to margins. Our adjusted gross margin for Q2 of 2022 increased to 78.2% from 77.4% in Q2 of 2021, driven by efficiencies gained in customer support and implementation. Sales and marketing expenses were $23.1 million, up $6.1 million as we continue to invest meaningfully in new customer acquisition in both the SMB and Enterprise segments. R&D expenses came in at $10.8 million, up $3 million, primarily driven by our investment in features and functionality in our SMB segment. G&A costs were $12.6 million, up $4.6 million, mostly due to absorbing public company operating costs following our initial public offering last September. Adjusted EBITDA was $12 million for the quarter, representing 16.2% margin compared to $7.8 million or 15% margin in the second quarter of 2021. Now moving to our outlook for the third quarter and full year 2022. For Q3, we expect revenue in the range of $73.5 million to $75 million, which implies 34% growth year-over-year at the midpoint of our range. We expect adjusted EBITDA in the range of $9.7 million and $10.2 million, which represents an adjusted EBITDA margin of 13.4% at the midpoint. For the full year, we expect revenue in the range of $295 million to $297.5 million, which implies 37% growth year-over-year at the midpoint of our range. We expect adjusted EBITDA in the range of $42.5 million and $43.5 million, which represents an adjusted EBITDA margin of 14.5% at the midpoint. I'll now turn the call back over to Bob for closing comments. -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [5] -------------------------------------------------------------------------------- Cassandra, another great quarter. We founded EngageSmart because activities like paying bills, scheduling appointments, on-boarding new patients and client communications shouldn't be that hard. Our success is driven by 3 simple factors. First, our proven customer-focused playbook, driven by 8 players. The dedication of our employees and their relentless pursuit of customer satisfaction drives our success. We recruit, retain and develop great talent across the entire organization and are proud to have such a highly focused workforce ready to take on the future. Second, product leadership as measured by adoption and retention. Customers choose EngageSmart because they want to work with the best. We leverage our deep vertical expertise and customer focus to deliver the best solutions for our customers, and we continuously invest in our vertically tailored solutions to drive innovation and higher adoption. Third, our large market and runway. We adjusted $28 billion U.S. market and have captured about 1% of market share. We are excited about the huge opportunity before us and continue to invest in our solutions to unlock EngageSmart's full potential. We remain focused on delighting our customers, growing our business and creating shareholder value while we make a positive impact in the world. We appreciate you all joining us on this call, and thank you very much. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And we can take our first question from Terry Tillman with Truist Securities. -------------------------------------------------------------------------------- Terrell Frederick Tillman, Truist Securities, Inc., Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Bob and Cassandra, great quarter. I hope that sounded okay. I can keep working on it in upcoming quarters. But yes, so my first question just kind of relates to the emerging opportunities you all have in both Enterprise and SMB. If I look at the SMB side or SimplePractice, in particular, what I'm curious about is product market fit for the platform with SimplePractice in these emerging verticals. How much more do you need to do? You talked about like multidisciplinary dynamics in some of these other emerging verticals. Is there still some heavy lifting to be done in terms of some of the product market activities or not really now, just selling the heck out of that product into those emerging verticals? -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [3] -------------------------------------------------------------------------------- There's still some work in the road map, Terry. And I mean, very strong product market fit, but not wholesome for all of the wellness verticals yet. So I would say a little bit more work on the road map and a lot of work on the brand awareness, expanding the word-of-mouth throughout those communities that are not mental health to try to replicate the viral referral lead -- from referrals to top of funnel that we get in mental health. So well on our way though. -------------------------------------------------------------------------------- Terrell Frederick Tillman, Truist Securities, Inc., Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. And then on the InvoiceCloud side, maybe could you talk a little bit more about like the emerging verticals, in particular, like insurance, consumer finance? And then just a follow-up for Cassandra. -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [5] -------------------------------------------------------------------------------- Sure. I think that we're doing really well in insurance, getting lots of traction, hundreds of customers at this point, and really strong momentum there. We like our position in that growth rate. I think that you'll find consumer finance is something that we start to break into a little bit more aggressively. 2023 where we started to embark on that vertical because we really got a very strong top of funnel in our existing markets, including insurance right now, government utility. And we've got our hands full just keeping up with the demand there. But yes, we will continue to expand into consumer finance in other areas as we move forward. We do have customers there that are quite happy, so the product market fit is good. -------------------------------------------------------------------------------- Terrell Frederick Tillman, Truist Securities, Inc., Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Okay. And I promise I'll rest after this. Cassandra, in terms of the digital marketing spend, I think you said that sales and marketing overall was up $6 million year-over-year. You do have really strong kind of customer acquisition and unit economics. But how do we think about digital marketing spend, if you could call that out, how much impact that was in 2Q? And does it continue to build each quarter sequentially through the rest of the year? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [7] -------------------------------------------------------------------------------- Yes, we're continuing to invest there, to your point, Terry, and also investing in building out the broader marketing organization at SimplePractice to support that growth. We're still seeing very strong returns on an LTV to cap basis, well north of our target, 10x. I think we will continue to invest meaningfully in digital marketing in the back half of this year and always continuing to experiment with new programs that broaden our reach for the SimplePractice brand. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And we can move to our next questioner. Our next question comes from Bhavin Shah with Deutsche Bank. -------------------------------------------------------------------------------- Bhavin S. Shah, Deutsche Bank AG, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Congrats on another strong quarter. Just maybe on the macro, can you just elaborate a little bit more here. And I'm completely understanding to the sensitive nature of your business, but are you seeing any impact in terms of top of funnel or conversion on the SMB side? Or anything in terms of longing deal cycles on Enterprise? Anything changed as you kind of progressed through the quarter? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [10] -------------------------------------------------------------------------------- We haven't seen any changes certainly through the first half of this year in our business. We still have -- obviously, the business drivers are still quite strong. We're very encouraged by the trends. I think just kind of broadly speaking on the macro environment, we feel pretty well positioned to navigate potential recession, the inflationary environment that we're clearly currently in. Like I said on the call, we believe the verticals that we're targeting are very defensive, but it's a really in uncertain times. And just kind of given everything going on macro-economically and the uncertainty there, it's certainly something we're closely watching internally and being prepared for. -------------------------------------------------------------------------------- Bhavin S. Shah, Deutsche Bank AG, Research Division - Research Analyst [11] -------------------------------------------------------------------------------- That's helpful there. And just a quick follow-up. Now that I know it's a little early, but you have a full quarter under the new Good, Better, Best model. And as you think about the starter package, like how do we think about just the type of customers you're able to attract there, whether it's within your core vertical or as you expand into new verticals? And then how do we think about kind of getting those customers to move into the Better and Best models? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [12] -------------------------------------------------------------------------------- The customers we see on the starter plan, I mean, they're typically just starting out, right? They might be just opening their practice, kind of building their client base. And we're going to see them move into our higher-priced offerings when they want to leverage our more fully featured telehealth application when they want -- when they have built their book of business and need to add an additional practitioner to their practice, for example. I think that journey obviously takes time, but we're pretty encouraged by the uptake we're getting on the starter plan. And I think we'll kind of continue to see how the upgrade path does through the next couple of quarters. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- And we will move next to John Davis with Raymond James. -------------------------------------------------------------------------------- John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - MD & Analyst [14] -------------------------------------------------------------------------------- Just wanted to start on the SMB side and specifically in customer adds, it looks like you guys added about 5,000 customers, which is pretty similar to what you did in 1Q to 2Q last year. So Cassandra, you mentioned that churn ended up being better. But is it fair to say that the large majority of churn from any pricing increases is likely behind us? And on the same foot, any reason why the ARPU, which was up nicely, I think high teens on a year-over-year basis, how should we think about that on the back half of the year if churn is done? Anything else to think about and why the ARPU wouldn't be up kind of high teens in the back half in SMB? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [15] -------------------------------------------------------------------------------- I mean I think I believe on the customer churn side; we do think that's behind us now. Now that we've kind of normalized to 2021 levels. I don't think, obviously, the ARPU increase that we saw in the first half of this year is much higher than our trend. I think we'll start to revert back to our average. I don't think there's anything fundamentally different than how our business will perform, kind of broadly speaking. -------------------------------------------------------------------------------- John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - MD & Analyst [16] -------------------------------------------------------------------------------- Okay. Great. And then we've gotten a lot of questions recently just with the high inflation environment. So Bob, maybe spend just a second explaining to us in your Enterprise business, how you guys deal with inflation. Obviously, any card usage, you're going to pay a higher cost on interchange. How do you combat that? And is that something that we should think about in the back half of the year? Or just curious, any thoughts on how inflation plays to the Enterprise business? -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [17] -------------------------------------------------------------------------------- Sure. Well, enterprise, JD, as you know, is dominated by InvoiceCloud in terms of revenue generation and growth. And as an example, we have a variety of different pricing and approaches that we take with our customers, where sometimes it's a fixed fee. Frequently, it's basis -- it's a certain fixed number of basis points on top of our cost of processing. And sometimes, a combination of both. Generally speaking, if we see an increase in average transaction that base -- where we're pricing with basis points, drives higher margin. Also true, frankly, with our SMB segment, where at SimplePractice, we priced primarily around basis points. So our calculations indicate that in an inflationary environment, we are well positioned to at least maybe it'd be a little bit better or even with where we are now in terms of margins. So it will gives puts and takes, but overall, pretty I would -- we would call it inflation or recession-resistant, inflation-resistant a little bit. So I think we're in good shape there. -------------------------------------------------------------------------------- John Kimbrough Davis, Raymond James & Associates, Inc., Research Division - MD & Analyst [18] -------------------------------------------------------------------------------- Okay. And then one more quick one for Cassandra. Just the 3Q guide implies margins down a little bit. So far this year, we've seen really good flow through on any upside to the top line for the quarter and the year. But Cassandra, anything we should think about seasonally that would result in kind of margins being down sequentially? Just any color there would be helpful. -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [19] -------------------------------------------------------------------------------- No. I mean the only thing I would call out is we're continuing to invest in R&D and sales and marketing, right? So those are the core investment areas for us. I think you're exactly spot on in terms of the flow-through has been very strong. Other than that, I think it's largely business as usual for us. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- And we will take our next question from Bob Napoli with William Blair. -------------------------------------------------------------------------------- Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [21] -------------------------------------------------------------------------------- Bob and Cassandra, definitely a great quarter. So just thinking about the SMB business, maybe you're doing quite well in the mental health space, expanding out into other areas. But mental health is the monster here. In what inning are we in mental health? Is there -- I mean you've become pretty large. When does the law of large numbers catch-up to you on the growth rate? What is your outlook? I mean, you still have a relatively small market share, but clearly is the dominant player in that market. -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [22] -------------------------------------------------------------------------------- Yes. I mean I think you're exactly right, Bob. In terms of what inning we're in, I think I would call the fourth. But we're still continuing to see really strong new customer ads in behavioral health. It is our core market and something we're investing pretty meaningfully in, in terms of product development. So we think we have a long way to grow and continue to play in that space. And we're also encouraged and excited about the newer vertical opportunities as well. -------------------------------------------------------------------------------- Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [23] -------------------------------------------------------------------------------- In the newer verticals, what areas stand out? Where do you have -- and should we expect to see a ramp up? I mean you're nicely profitable. You seem to have good operating leverage. But what areas within like mental health, speech pathology, chiro, physical therapy, which of those stand out to you? And should we expect to see, say, going into '23, significant investment there? And how should we think about margin expansion tied in with the investment opportunities over the next few years? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [24] -------------------------------------------------------------------------------- I mean we're certainly investing to drive growth in those newer verticals. And I think that is a trend that will be with us in this year, and we'll continue to be investing in years to come. I think margin expansion for us will really come less so from products, to be honest, because we'll be investing meaningfully there. More so from back-office efficiencies in G&A, kind of continued expansion in the gross margin in a steady manner. But in terms of engineering, we're very committed to maintaining our product leadership, and we're going to invest behind that. -------------------------------------------------------------------------------- Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [25] -------------------------------------------------------------------------------- Last question just -- sure, Bob. -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [26] -------------------------------------------------------------------------------- Yes, Bob. No, I was just going to add a little bit that from a product markets that we love where we are with speech language pathology, occupational therapy, dietitians, nutritionists and so forth, full on product market fit there and a little -- still a little bit of work to do in some of the others. -------------------------------------------------------------------------------- Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [27] -------------------------------------------------------------------------------- And then just on your investment side, what are you most excited about as far as product innovation? What are you -- what should we expect to see over the next couple of years? And when you're very proud of your tech platform, as you should be, but how are you leveraging that to -- on the innovation -- speed of innovation front? -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [28] -------------------------------------------------------------------------------- Well, the great thing about our customer focus and our customer base is they're not shy about making suggestions on how we can improve it. So we don't have enough time on this call to go through it all, but I can tell you that we've got a -- we are constantly pushing new enhancements. It's one of the beauties of having true SaaS solutions across the board. I think we mentioned on the call, over 60 pushes in InvoiceCloud alone since 2016 of material enhancements. So when things like Apple Pay come out and we're able to play those all across our solutions and provide that as a new opportunity, it drives adoption, drives customer satisfaction, organic growth. So lots of things. Our product teams are constantly thinking out of the box and so are our customers to drive new innovations. -------------------------------------------------------------------------------- Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [29] -------------------------------------------------------------------------------- Congratulations on the quarter. -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [30] -------------------------------------------------------------------------------- Thanks, Bob. -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [31] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- And we will move next to Scott Berg with Needham. -------------------------------------------------------------------------------- Michael Ethan Rackers, Needham & Company, LLC, Research Division - Research Analyst [33] -------------------------------------------------------------------------------- This is Michael Rackers on for Scott Berg. Congrats on the quarter. It looks like there was a little bit of year-over-year deceleration in the SMB transaction revenue growth rate. Can you just give us a little color on the dynamic there and kind of how to think about that moving forward? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [34] -------------------------------------------------------------------------------- Sure. I mean, I would, again, kind of point to overall ARPU maximization for that business, right? So we made pretty meaningful changes in Q1 on the subscription pricing. And obviously, that's going to drive growth for this year. So at times, we're making trade-offs between subscription growth versus transaction growth. An example of that is like as part of the pricing and packaging changes in Q1, we baked insurance, some level of insurance claims processing into the top 2 pricing tiers. So that's going to shift dollars between transaction revenue into subscription revenue. And we're always just looking to maximize ARPU in that what we see going on. I will say we continue to see very strong growth in transactions processed on the subscription side, so it's more of just a total ARPU maximization story for us. -------------------------------------------------------------------------------- Michael Ethan Rackers, Needham & Company, LLC, Research Division - Research Analyst [35] -------------------------------------------------------------------------------- Great. And then could you go a little bit deeper on DonorDrive, with the strong quarter that you mentioned? And then maybe how to think about that growth moving forward? -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [36] -------------------------------------------------------------------------------- Sure. With DonorDrive, we -- so with the pandemic -- so DonorDrive, just to refresh, is primarily a peer-to-peer fundraising platform for large nonprofits. So when the pandemic hit in March of 2020, there was not a lot of peer-to-peer gathering events, think walks, runs and rides where you raise money through those types of efforts. DonorDrive had positioned well prior to the pandemic by pivoting into virtual fundraising-type events, so think video streaming, charity streaming and so forth. So we were fairly well positioned, but we did lose some momentum without the watch runs and rides in 2020 and very few actually happened as well in 2021, although we did see decent growth in 2021, a little bit of growth. So in 2022, we're starting to see some watch runs and rides come back. Not as fulsome as it was, let's say, in 2019 prior to the pandemic, but very strong growth in product and mobile apps development and issuance. And some automation around check-in has helped to drive further adoption really among our nonprofits. And we've had some very nice wins over the past couple of years in the nonprofit space as well. That's driving nice growth. So I mean, I don't think we guide exactly to the growth numbers, but DonorDrive is performing well. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- (Operator Instructions) We will go next to Josh Beck with KeyBanc. -------------------------------------------------------------------------------- Madison Taylor Schrage, KeyBanc Capital Markets Inc., Research Division - Associate [38] -------------------------------------------------------------------------------- This is Maddie on for Josh. Congrats on the quarter. I wanted to talk a little bit -- yes, about SMB, again. I'm wondering what are some of the changes that you guys expect to happen to ARPU as you go into these new emerging verticals? Do you expect most of those emerging verticals to also take like the Essentials plan right away, or if there is more exposure to the Plus our starter plan there? -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [39] -------------------------------------------------------------------------------- I think the mix will likely be pretty stable between behavioral health and these newer markets that we're going after. What I would point to on ARPU is we feel we have a lot of room to continue to maximize ARPU. We will continue to expand our feature set to match the price that we charge. And I think we have a lot of room in some of these newer verticals, especially physical therapy, chiropractic, for example. More to come on that as we roll out features specific to those verticals over the next several years. -------------------------------------------------------------------------------- Madison Taylor Schrage, KeyBanc Capital Markets Inc., Research Division - Associate [40] -------------------------------------------------------------------------------- Awesome. And then my follow-up question for you is how are you guys thinking about the M&A landscape with current valuation levels? -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [41] -------------------------------------------------------------------------------- Well, we think about it all the time. Where we built a company through a blend of organic and acquisitive growth, and we intend to continue to do it. I think that we're starting to see some rationalization between public market, private -- public market valuations and private market expectations. And we're optimistic that we will continue to be able to be aggressive with our balance sheet and M&A as we move forward. So we're pushing. -------------------------------------------------------------------------------- Madison Taylor Schrage, KeyBanc Capital Markets Inc., Research Division - Associate [42] -------------------------------------------------------------------------------- Awesome. Congrats on the quarter again. -------------------------------------------------------------------------------- Cassandra Hudson, EngageSmart, Inc. - CFO [43] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- There are no additional questions registered at this time. I'll pass the conference to Bob Bennett for closing remarks. -------------------------------------------------------------------------------- Robert Paul Bennett, EngageSmart, Inc. - Founder, CEO & Director [45] -------------------------------------------------------------------------------- Thank you for your questions. EngageSmart delivered excellent results in our second quarter of 2022. Momentum across the business drove another quarter of record revenue performance. Standouts are our strong customer growth, the increase in average revenue per customer and exceptional customer retention. Overall, our positioning continues to be compelling as we address our huge U.S. market opportunity with our proven flywheel. Thank you all for joining us. We are excited to speak with you again later this summer at the KeyBanc Technology Leadership Forum, Deutsche Bank's 2022 Technology Conference and the Goldman Sachs Communacopia and Technology Conference. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Thank you for your participation. This does conclude today's program. You may disconnect at any time.