EverCommerce Proves Resilient As It Raises Prices In 2023

A Quick Take On EverCommerce

EverCommerce Inc. (NASDAQ:EVCM) reported its Q1 2023 financial results on May 9, 2023, beating revenue but missing EPS consensus estimates.

The firm provides business management SaaS software to service-based businesses in a variety of industry verticals.

Given the firm's resilience despite a challenging macroeconomic environment and rapid cost of capital increase, my outlook for EverCommerce Inc. stock is a Buy, as the firm's price increases and new product offerings may help to offset potential headwinds, especially in the second half of 2023.

EverCommerce Overview

Denver, Colorado-based EverCommerce Inc. was founded to develop a platform providing vertically integrated software to small and mid-sized firms in the healthcare, wellness, and other home service sectors.

Management is headed by founder and CEO Eric Remer, who was previously co-founder and CEO of PaySimple, now part of EverCommerce.

The company's primary offerings include:

• Marketing technology solutions

• Customer engagement applications

• Billing & payment solutions

• Business management

The firm's primary verticals include:

• Home services

• Health services

• Fitness & Wellness

• Other

The firm pursues a "land and expand" marketing strategy for its prospective customers and places a strong emphasis on cross-selling its offerings to gain the maximum share of wallet and customer buy-in.

EverCommerce's Market & Competition

According to a 2023 market research report, the global market for SMB (small and medium-sized business) IT spending was an estimated $693 billion in 2022 and is expected to reach $988 billion by 2030.

This represents a forecast CAGR of 4.5% from 2022 to 2030.

Also, China is expected to continue as the fastest-growing region in percentage terms during the period.

Major competitive or other industry participants include:

• Salesforce (CRM)

• Intuit (INTU)

• Block (SQ)

• HubSpot (HUBS)

• Manual processes

• Vertically-focused competitors

EverCommerce's Recent Financial Trends

• Total revenue by quarter has plateaued in recent quarters:

• Gross profit margin by quarter has been trending slightly lower more recently:

• Selling, G&A expenses as a percentage of total revenue by quarter have fluctuated within a range, as shown below:

• Operating income by quarter has remained negative in recent quarters:

• Operating leverage by quarter has improved in the two most recent quarters:

• Earnings per share (Diluted) have been trending further into negative territory:

(All data in the above charts is GAAP.)

In the past 12 months, EverCommerce Inc.'s stock price has risen 19.81% vs. that of the iShares Expanded Tech-Software Sector ETF (IGV) rise of 14.53%, as the chart indicates below:

For the balance sheet, the firm ended the quarter with $69.8 million in cash and equivalents and $535.4 million in total debt, of which $5.5 million was categorized as the current portion due within 12 months. Management said the firm has no material loan maturities until 2028.

Over the trailing twelve months, free cash generated was $62.4 million, of which capital expenditures accounted for only $2.2 million. The company paid $28.2 million in stock-based compensation ("SBC") in the last four quarters, the highest in the past ten-quarter period.

Valuation And Other Metrics For EverCommerce

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.

EVCM's most recent Rule of 40 calculation was 33.5% as of Q1 2023's results, so the firm has performed moderately in this regard, per the table below:

(Source - Seeking Alpha)

Commentary On EverCommerce

In its last earnings call (source - Seeking Alpha), covering Q1 2023's results, management highlighted its pursuit of balanced growth as it focuses on its embedded payments system which grew its revenue by 37% year-over-year.

The number of customers using the firm's services increased 22% year-over-year, and 10% of its customers use more than one of its services.

EverCommerce Inc. management expects that growth and strong margins will be driven by "price increases and new product introductions" in 2023.

The company's net revenue retention rate was stable at 100%, indicating moderate product/market fit and sales & marketing efficiency.

Total revenue for Q1 2023 rose 12.2% year-over-year and gross profit margin increased 0.7 percentage points.

Selling, G&A expenses as a percentage of revenue fell 1.9 percentage points year-over-year while operating losses improved year-over-year.

Earnings per share worsened sequentially and year-over-year.

Full-year 2023 revenue is expected to be $690 million, or 11.2% year-over-year growth.

Adjusted EBITDA is expected to be $140 million, a rise from previous guidance. Adjusted EBITDA typically excludes stock-based compensation expenses.

EverCommerce Inc.'s financial position is relatively strong, with ample liquidity, reasonable long-term debt, and solid free cash flow generation.

Regarding valuation, the market is valuing EVCM at an EV/Sales multiple of around 4.2x.

The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:

So, by comparison, EVCM is currently valued by the market at a discount to the broader Meritech Capital SaaS Index, at least as of April 27, 2023.

The primary risk to the company's outlook is a macroeconomic slowdown that appears to be already underway, tightening credit conditions which may affect customer spending plans, and lengthening sales cycles which may reduce its forward revenue growth trajectory.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:

I'm most interested in the frequency of potentially negative terms, so "Macro" appeared three times.

The "Macro" term was mentioned in the call in the context of questions about the impact of the potentially slowing macroeconomic environment on the firm's operations.

In the past twelve months, the firm's EV/Sales valuation multiple has dropped by only 9%, a notable achievement during a period of sharply rising cost of capital, as the chart from Seeking Alpha shows below:

A potential upside catalyst to the stock could include a material improvement in macroeconomic conditions or dropping cost of capital assumptions, leading to improved valuation multiples for the stock.

Given EverCommerce Inc.'s resilience despite a challenging macroeconomic environment and rapid cost of capital increase, my outlook for the stock is a Buy, as the firm's price increases and new product offerings may help to offset potential headwinds, especially in the second half of 2023.

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