EverCommerce: Overall Strong 2Q23 Results Suggests Positive Growth Outlook (NASDAQ:EVCM)

Overview

My recommendation for EverCommerce (NASDAQ:EVCM) is a buy rating. I expect EVCM to continue growing in the low teens moving forward, as I am positive about the mandate for adopting EVCM Payments and also the increased visibility into customers potentially adopting more solutions. All of these should drive mid-teens EBITDA growth as management adopts a cost-efficient growth model moving forward.

Business

EVCM offers marketing, business management, and customer experience software solutions that improve growth, streamline operations, and increase retention. EVCM focus is on domestic US customers who represents 100% of its revenue.

Recent results & updates

As a whole, EVCM’s results were positive, with revenue of $170 million meeting expectations and adjusted EBITDA of $39 million exceeding expectations by $6 million. Management maintained their FY23 revenue guidance, but due to anticipated cost savings, they increased the implied adj EBITDA margin by 100bps. But there is one small red flag, and here is what I think: It seems impossible to ignore the fact that organic growth slowed to 8.1%, 400bps lower than the 12.2% seen in 1Q23. The bear thesis here is that the macro situation is worse than it is. If the macro situation worsens, this PF growth figure could potentially decline further. This is a plausible bear case, but it gives me peace of mind to know that management is certain, thanks to the payment mandate’s implementation (more on that below), that growth will pick up speed in the second half of the year.

Aside from these, there are a lot of reasons for optimism among investors. From a high level, 2Q23 was similar to 1Q23, with management reporting no drop in demand across its three primary markets. The stabilization in the Marketing department is reflected in the projections for the year. Notably, despite the uncertainty in the macro environment and EVCM’s heavy exposure to SMB, the company’s NRR remained above 100%, a testament to its successful cross-selling efforts and the stability of the macro environment. What’s more impressive is how the attachment rate has grown over the quarters; the number of customers using multiple EVCM solutions has gone up from >73K in 1Q23 to >75K in 2Q23, an increase of 15% y/y. I anticipate this trend to continue, as management reported that 162K customers had enabled more than one solution, a 29% y/y increase. This metric is a good forward-looking indicator of multi-product adoption because it represents customers who have signed up and been onboarded but who are not yet fully utilizing an additional solution. I see this new disclosure by EVCM as a positive catalyst for the stock, as investors now have better visibility into growth.

The second encouraging fact is that EVCM’s Payments revenue has been expanding at a rapid clip (32% y/y in 2Q23). This is a slowdown from the 37% growth seen in 1Q23, but it still represents an increase in take rate, as it is greater than the 13% seen in TPV growth. The increase was attributed by management to a shift in pricing and payment strategy that increased the proportion of transactions that were processed at a higher take rate. Take-rate increases seem likely to continue as management “forces” customers to adopt payments in order to prevent price hikes.

One more thing to add to that. We have implemented payment mandates in two of our solutions, which we have been

So the mandate, I’ll let Matt on this Mandate was really driven, A, you kind of convert to our payments, we had about 35% in a specific vertical — a specific solution utilizing it. So we went out to the back book and if you take our payments, that’s great. Otherwise, we’ve got pretty significant price increase if you do not take it. From: 2Q2023 earnings call

Finally, I’d like to stress that EVCM margins have remained healthy. This is the best quarterly margin in two years, driven primarily by cost management, which resulted in an adjusted EBITDA margin of 22.8% compared to the consensus estimate of 19.2%. I think management is taking the right approach by carefully controlling costs to drive margin expansion and preparing for a more balanced approach to growth and profitability.

Valuation and risk

According to my model, EVCM is valued at $18 in FY24, representing a 71% increase. This target price is based on my growth forecast for the low teens over the next two years. The rationale for the low teens is based on FY23 guidance and my positive view on the increase in payment take rate and stabilizing segments as the macro recovers in due time. EVCM is now trading at 15x forward EBITDA. I am modeling this to stay at this level as it is back to where it trades relative to the market (S&P 500). Ignoring pre-2022, where valuations were sky-high due to low rates, post FY21, EVCM has traded at around 1.1 to 1.2x the S&P forward EBITDA multiple, and it is at 1.2x today. A positive catalyst that could drive multiples higher is when EVCM posts an acceleration in PF revenue (as guided), as it would remove any doubts that PF growth is slowing.

As for the downside (risk), a further slowdown in the economy could impact EVCM’s underlying segments and its ability to accelerate PF revenue growth. As I mentioned above, regarding the bear case, if EVCM prints another quarter of decelerating PF growth, I think the bear thesis will take hold of the narrative, which will drive the stock price down.

Summary

In conclusion, EVCM strong 2Q23 results indicate a positive growth trajectory. With a focus on adopting EVCM Payments and expanding solutions adoption among customers, low-teens growth outlook seems plausible. Despite a slight organic growth slowdown, management’s certainty in growth acceleration, driven by payment mandates, instills confidence. Notably, stable NRR and growing attachment rates underscore customer loyalty and multi-solution adoption. The robust expansion of Payments revenue and effective cost management contribute to healthy margins.