EngageSmart, Inc.

Hello everyone and welcome to the Engage Smart Q3 2021 earnings call. My name is Daisy and I'll be the operator for today's call. You will have the opportunity to register a question at the end of the presentation. If you would like to register a question, please press star followed by one on your telephone keypad. I will now hand over to your host, Josh Schmidt from Engage Smart to begin. So Josh, please go ahead.

Thank you and good afternoon. With me on today's call are Bob Bennett, Chief Executive Officer, and Cassandra Hudson, Chief Financial Officer. Our third quarter 2021 earnings press release and supplemental presentation in associated form 8K 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. We also will be discussing certain non-GAAP financial measures. please refer to the risk factors section of our quarterly report on Form 10Q and other SEC filings for more information on the risks regarding these forward-looking statements and risk factors associated with our business. A reconciliation of non-GAAP metrics to the nearest GAAP metric 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 Bob Bennett. Welcome everyone and thank you for joining us. In this, our first quarter as a public company, I feel compelled to point out the source of the success we have achieved today. Delivering on our mission of simplifying customer and client engagement can be directly attributed to the success of our customers, partners, and our employees. And I am truly humbled by their contributions. Before we jump into our third quarter results, I thought I'd provide a little background on EngageSmart's position in our markets. We founded EngageSmart because activities like paying bills, going paperless, and scheduling appointments shouldn't be that hard. So we set out to create easy to use digital self-service software that simplifies customer and client interactions. Our growth in customer count and revenue is an indication of the strong market reception for our vision. Customers are increasingly adopting our vertically tailored customer engagement software and integrated payments capabilities to simplify engagement with their clients by driving digital adoption and self-service. EngageSmart addresses a target market size at $28 billion, encompassing small, medium, and enterprise-sized businesses. We serve these organizations and their customers with modern customer engagement and electronic payment software tailored to the verticals of wellness, government, utilities, financial services, healthcare, and giving. These markets are huge and underpenetrated with strong non-cyclical growth dynamics. They are mired with legacy systems and manual process. they represent an exciting and large white space of prospects with growing demand and need for our modern software and payment solutions we group our solutions into two segments with similar annualized revenue of more than 100 million in each those segments are small and mid-sized businesses which we refer to as smb and larger organizations which we refer to as enterprise The SMB segment is represented by our simple practice solution and some adjacencies. The enterprise segment is anchored by our invoice cloud solution and also comprises the vertical solutions of Health Pay 24 for enterprise healthcare and donor drive for giving. Most of our SMB segment revenue is subscription-based, while our enterprise segment is primarily transaction-based revenue. In the SMB segment, our go-to-market strategy is powered by performance marketing programs and end-user influencers communicating that our software helps efficiently manage customer-facing and back-office workstreams such as scheduling, billing, notes, compliance, and collections. Importantly, our go-to-market is also powered by prospects themselves as they visit our website via trusted word-of-mouth recommendations from peers. We have approximately 120,000 clinicians now using the simple practice solution. In the enterprise business, where we have more than 3,000 customers simplifying consumer engagement through us, direct sales, partnerships, and systems integrations are important components of our selling motion. They accelerate new customer acquisition and increase long-term customer retention. With that as an overview of our business, I'd like to turn now to the third quarter. EngageSmart delivered record revenue coming in at $55.5 million. We had rock-solid performance in both segments of our business, highlighted by more than 60% revenue growth in our SMB segment and more than 25% revenue growth in our enterprise segment. Beginning with the SMB segment, Simple Practice continued to deliver high transaction volume, fast growth in subscription revenue, and high net client additions from conversions of free trials for its practice management solution, offered at www.simplepractice.com. Simple Practice, which has its roots in behavioral health, now serves speech-language pathologists, occupational therapists, nutritionists, chiropractors, and physical therapists, among others. These new markets are high growth engines for our SMB segment. As a true SaaS solution, SimplePractice continually advances the solution. In Q3, those advances including enhanced telehealth functions, embedded signatures for clients, and enhanced easy to view income tracking. As of this quarter, SimplePractice is in 10 wellness specialties and has a solid product roadmap to fuel growth. We are setting the standard for simplified digital engagement for clinicians across the wellness spectrum and their patients. In enterprise, Invoice Cloud showed continued strength in selling and product leadership in the quarter. We signed two strategic enterprise-level alliances. One was with an SAP integrator, and one was with an Oracle Systems integrator. These alliances helped to drive growth by referring their existing clients and accelerating the implementations of all our enterprise solutions. We also strengthened our longstanding partnership with Harris Utility Group and are now their preferred electronic bill presentment and payment partner. Additionally, we had a notable new customer launch at National Fuel, integrating with its SAP environment to help their customers use preferred methods for bill pay, such as pay-by-text, pay by phone, pay online, and the ability to use digital banking services such as PayPal. Such new launches further drive our monthly recurring revenue with transaction revenue generation beginning day one. continuing with the enterprise segment donor drive is playing an increasingly impromptu role the giving marketplace has seen a dramatic shift from in-person peer-to-peer fundraising events to virtual events and our highly effective virtual event and charity streaming software has enabled our non-profit and corporate giving customers to exceed expectations in this difficult environment Nonprofits such as National Multiple Sclerosis Society and the Make-A-Wish Foundation receive immediate value from our donor drive mobile-friendly solution. Looking forward, the market for our customer engagement and online bill pay software remains vast. According to the 2020 State of Online Payment Survey conducted by InvoiceCloud, more than 80% of bill payers prefer to pay their bills online, on mobile, on text, or via phone if given the option. And organizations are increasingly becoming aware that providing customers with multiple ways to pay has proven to reduce late or lost payments and to increase customer satisfaction overall. We see our success as rooted in five key strategic growth drivers which form our flywheel. Superior talent that we acquire through recruitment, develop, and retain, and that talent brings vertical expertise to provide deep industry-specific domain knowledge and drive a strong customer focus to help direct our roadmaps and maintain product leadership in each of our verticals with highly efficient go-to-market strategies to drive strong organic growth. And these strategic drivers are deployed across all of our solutions. Talent is where it all begins, and driving growth is in our DNA. With that, I'd like to turn the call over to our CFO, Cassandra Hudson. Cassandra?

Thank you, Bob, and thank you all for joining us today for our first earnings call with investors and the analyst community. Before reviewing our financial highlights for the quarter, I would like to quickly recap our financial model for everyone new to the Engage Smart story. Our revenues are highly visible and recurring in nature, marked by 40% subscription revenue and 60% transaction and usage-based revenue. We price our solutions in a manner that is aligned to the success of our customers, and we typically see an expansion in revenue over time as customers elect to purchase additional add-on offerings and leverage our solutions to drive increased digital payment adoption. For SMB, the typical customer converts from a free trial and buys a subscription to our practice management solution, and then adds products such as licenses for additional clinicians in their practice, telehealth capabilities, and payment processing services. That being the case, the majority of our SMB revenue is driven by monthly subscription fees, and we expect this trend to continue as we expand our leadership position in the wellness vertical. For enterprise, the majority of our revenue is derived from transaction and usage-based fees from the facilitation of payment processing. Our enterprise customers typically invoice and process recurring payment transactions themselves, which results in a highly visible and durable revenue stream for us. Our pricing is customized based on individual customer needs. In some cases, we charge a fee per transaction, some as a percentage of volume, or even a mix of both. Today, our revenue split between the SMB and enterprise segment is roughly 50-50, with strong net revenue retention north of 100%. Our revenue retention is a result of our ability to drive consumers to continue to adopt digital payments. SMB retention also benefits from the continued adoption of add-on products, including insurance claims processing, telehealth, and additional licenses for clinicians. Our business is further characterized by best-in-class LTVs to CAC returns across both segments that are fueled by our efficient and vertically tailored go-to-market strategy. With that background, on to the quarter. We delivered strong third quarter results that continued to be fueled by rapid growth within our solution. Consolidated Q3 revenue was 55.5 million, representing an increase of 42% year-over-year and elevating our annualized revenue from 207 million in Q2 to 222 million in Q3. Our growing customer base is a core driver of this growth. On a year-over-year basis, our total customer count has increased by approximately 22,000 to 77,000 total customers. We expect this trend to carry on, fueled by our continued success in our core markets, expansion of our product offerings, as well as a new vertical expansion. Given that nearly 60% of our revenue is transaction and usage-based, continued growth in the number of transactions processed by our solutions is another key driver of total revenue growth. We saw a 40% year-over-year growth rate in the number of transactions processed by our solutions, with 28.6 million transactions in Q3 2021 compared to 20.5 million in Q3 2020. Turning to the business segments, our SMB segment continued to deliver outsized top-line growth with revenue coming in at 28.2 million, reflecting year-over-year growth of 64%. This was primarily driven by continued strength in one, new customer ads, two, improved customer churn rates, and three, continued expansion within our existing customers as our add-on services, including payment processing, telehealth, and licenses for additional clinicians are utilized. Our enterprise segment also reported strong results and contributed $27.3 million to our consolidated Q3 revenue. This reflects year-over-year growth of 25%, driven primarily by new customers that went live on our solutions in 2021, and also by continued growth from existing customers. Our adjusted growth margins for Q3 2021 continued to be stable at 77.5% across the entire business, compared to 79.8% last year. The primary contributor to the margin change was from our Q1 2021 migration to a new telehealth backend provider. While this change resulted in an increase to our cost of revenue, it materially improved the quality of our telehealth offering and has resulted in continued additional telehealth subscription growth as well as strong customer retention. We expect that overall telehealth costs will normalize as clinicians continue to utilize a hybrid telehealth and in-person model, enabling us to improve margins over the long term. Our cost of revenue includes costs for software, hosting, direct product costs, customer support for all of our solutions, and implementation for bringing new customers live within the enterprise segments. Our sales and marketing expenses increased $6.1 million year-over-year to $18 million as we continue to invest aggressively in new customer acquisition across both segments. Most of our sales and marketing expenses are focused on driving new customer acquisition with a small amount of costs associated with driving upsell, cross-sell, and retention activities, including driving customer adoption programs. We expect our sales and marketing expenses to increase in terms of absolute dollars and as a percentage of revenue in the near term as we continue investing for growth. Our R&D expenses increased 3.6 million year-over-year to 8.9 million, primarily as a result of incremental engineering headcount. R&D costs primarily consist of headcount-related expenses associated with new product development, as well as maintaining and enhancing the ease of use of our existing solutions. Costs associated with new products or significant improvements to product functionality are capitalized and amortized into the P&L and not included in these expenses. Total net capitalized software on the balance sheet at the end of Q3 was $2.9 million. We expect to continue increasing our investment in R&D to maintain product leadership for all of our solutions, especially in SMB, where we are consistently rolling out new products and rapidly innovating on our solutions. Our G&A costs increased $2.9 million from Q3 2020 to $8.3 million. This increase is primarily due to an increase in headcount to support our transition to a public company. We expect G&A costs to decrease as a percentage of revenue after fully absorbing public company operating costs. Our net loss increased to 8.3 million compared to a net loss of 0.5 million for the third quarter of 2020, reflecting investments in product development, sales and marketing spend, and costs associated with the transition to a public company. Our adjusted EBITDA was 8.7 million for the quarter, representing 15.6% margin compared to 8.9 million or 22.8% margin in the third quarter of 2020. During 2020, we experienced a meaningful improvement in profitability driven by our strong SMB revenue growth, as well as a temporary slowdown in spending due to COVID. We have since ramped up our investment spend given the opportunities we see in the marketplace and are investing heavily in product development and sales and marketing to drive revenue growth. We are on pace to hire approximately 250 employees across the company in 2021, and these investments are expected to drive a carryover impact into 2022 that will normalize into 2023. Moving to the balance sheet, with respect to capitalization, as of Q3 2021, we had $253.8 million in cash and cash equivalents, up from $29.4 million at the end of December 2020, reflecting the capital raised from our initial public offering. On September 27, 2021, we completed our IPO in which we issued and sold 13.6 million shares of common stock at a public offering price of $26 per share. This included 600,000 shares of common stock issued pursuant to the exercise in full of the over-allotment option by our underwriters. We received $326.3 million in net proceeds after deducting underwriting discounts, commissions, and offering costs. We also utilized $114.2 million to fully repay our debt. As of September 30th, 2021, we had 161.6 million shares issued and outstanding. Based on our results to date in current financial and macroeconomic trends, we are providing the following guidance regarding our financial performance for 2021. We are raising our revenue guidance for the full year 2021 to be in the range of $211.5 million and $213.5 million, or 44% to 46% growth year over year. As a reminder, we did benefit from COVID during the second half of 2020 with high demand for wellness practitioners and digital transactions. Our key growth drivers will continue to be new customer acquisition and continued adoption growth within our expanding customer base across all solutions. Our adjusted EBITDA for the full year 2021 is expected to be in the range of $28.5 million to $30 million, which represents an adjusted EBITDA margin of 13.5% to 14.1%. As previously mentioned, our adjusted EBITDA includes costs associated with transitioning to a public company. Looking ahead, we are excited about our incredible revenue durability. We have customer and vertical diversity with non-cyclical growth dynamics on the back of better than 100% net revenue retention and a clear opportunity to drive revenue growth in the future. I'll now turn the call back over to Bob for closing comments.

Thank you, Cassandra. EngageSmart's success will continue to be driven by three simple factors. First, our proven customer-focused playbook driven by A players. We set our priorities for the customer first. Companies are simply groups of people, and EngageSmart has highly aligned A players who create repeatable best practices for all of our solutions. We are committed to retaining, developing, and growing leadership at every level of the organization. This commitment is in service of our customers. Second, product leadership as measured by adoption. Our commitment to developing and enhancing our best-in-class true SaaS solutions accelerates our go-to-market model. This commitment enables long-term partnerships with customers, powers our high customer satisfaction levels, and drives strong organic growth. Customers don't want to regularly make system changes. They want to work with someone who sets the bar and keeps them in front as measured by high adoption. That's EngageSmart. Third, our large market and runway. The total addressable domestic market for our digital self-service, customer engagement, and integrated payments is $28 billion. We are in very early innings here and have captured less than 1% of market share. And we have the best SaaS solutions in all of our verticals. in summary we are very excited about the future we are focused on delighting our customers growing our business and creating shareholder value while making a positive impact in the world we appreciate you joining us on this call to learn more thank you very much bob we will now take the questions if anyone would like to register a question please press star followed by one on your telephone keypad

If you would like to withdraw your question, please press star followed by two. And when preparing to ask your question, please ensure you are unmuted locally. Our first question comes from Will Nance from Goldman Sachs. Will, your line is open. Please go ahead. Hello, Will. Your line is open. Please go ahead. We will move on to our second question. Our second question comes from Sterling Alty from JP Morgan. Sterling, your line is open. Please go ahead.

Hi, it's Maya on for Sterling. So just, you know, the SMB revenue grew to over 50% of total revenue, really strong growth there. Can you just talk a little bit more about the drivers on the SMB side and then how this next shift is affecting the split between subscription and transaction revenue?

Sure. You know, I think, I guess, taking the latter part of your question first, the split between subscription revenue and transaction revenue is pretty stable, you know, with 40% being subscription-based and 60% transaction-based. You know, it will shift over time, I think, a little bit more towards subscription, but we're talking a couple points, not the wholesale shift. In terms of the SMB growth drivers, you know, we continue to see really strong net customer ads and great expansion in ARPU across the business. And, you know, as you mentioned, SMB hitting 50% of the overall total of our revenue, you know, that shift is a trend that we expect to continue. So we continue to expect SMB to take up more of our total revenue over the next several years based on the growth profile of the business.

Okay, great. And then just as a follow-up, so what's the transaction volume growth? in the quarter, was that mostly driven from new customer acquisitions or increase in transaction volume from existing customers?

Just given our large install base, you know, it's really going to be driven by existing customers. And then I would say, you know, conversely on the new customer ads, you know, that's really fueling the subscription growth.

Okay, perfect. Makes sense. Thank you.

Thank you. Thank you very much. Our next question comes from Terry Tillman from Truist Securities. Terry, your line is open. Please go ahead.

Yeah, thanks for taking my questions. Hi, Bob and Cassandra. First, congratulations on the IPO. And secondly, congratulations on the results. Cassandra, just following up on the last question, I mean, should we actually – will you – the actual processing revenue and then the subscription? And or should we just plug in literally like 40% and 60% to get to the numbers for the 3Q? And then I have a couple of questions.

Sure. Thanks, Terry. And thanks for joining and the congratulations. You know, for now, those trends are stable on the 60-40. So I think that should get you kind of to where you need to be on subscription and transaction in terms of the breakout.

Okay. And talking about simple priorities, substantial, impressive growth, and a lot of that just really on the back of mental health or behavioral health. I know that that's been a strategy, and you did call out, I think maybe Bob earlier, these adjacencies, kind of near-term, near-actionable adjacencies, so like oncology, speech, pathology. What are you seeing in those kind of near to the core part of the business adjacencies, and how do they feel versus where you were with mental health when you first brought that on? I'm just trying to understand maybe kind of parallels or any observations there, and I had a follow-up.

Hey, Terry, it's Bob. Thanks for being on. Good to hear your voice. It's simple practice in March of 2017 when that became part of Engage Smart. It was literally almost entirely mental health clinicians that were using the solution. Today we have as many non-mental health customers as we did back in March of 2017 with essentially the same growth rate that we had back then. So with our ten new – well, there's nine – other markets, including speech-language pathologists, occupational therapists, chiropractors, physical therapists, nutritionists, dieticians, and so forth, that are driving very high growth, outsized growth that looks very similar to what we had back in 2017 that translated into another $100 million of or went from $4 million in ARR to over $100 million of ARR in about four years. So we're very excited about the new markets that we're in, and we have the playbook. Hopefully we can run the playbook better the second time than we ran it the first time. So I think we're confident in our growth trajectory for those new markets. I'm not sure if that answers your question, but that's my try.

It definitely does. Yeah, it definitely does. Yeah, so I felt like my first statement was more of just a clarification, so I feel like I'm going to ask one more question, and then I promise I'll stop, or you can just hang up on me. But the next question just relates to it's nice to hear about more partners on that enterprise side, particularly around Invoice Cloud. Any way to frame the opportunity and how quickly it could become actionable with the new system integrator that's Oracle-based as well as SAP? Thank you.

Sure. They're actually already actionable because we've actually implemented those. We've implemented new clients on those solutions. And once we've integrated with a certain version of Oracle or SAP, it's a rinse and repeat opportunity for us as we go out and find other larger enterprise style clients. So this is a move up market for for InvoiceCloud primarily in enterprise to drive higher revenue per client through attaining larger deals. So, yeah, those are done, and we continue to be aggressive about finding new partnerships, and we'll continue to march forward with both hunting and farming on our partner base.

Is that it, Terry?

Thank you, Terry. We now have Will Nance from Goldman Sachs back on the line. So I'll open his line again, and he can ask his question. Will, please go ahead.

Hey, can you hear me? Hey, Will, yes. How are you?

Great. Sorry about that. I wasn't on mute. I don't know what happened. But I appreciate you letting me back on. Good afternoon. Nice results. Can you guys maybe talk about the customer acquisition environment on the simple practice side? I think during the pandemic, I think telehealth drove a lot of the tailwinds in that business. As we kind of get on the other side, You know, does it feel like we can kind of sustain these really elevated bubbles of growth? And, you know, I know that you talked a little bit during the IPO about kind of broadening out the customer acquisition funnel, you know, kind of a broader audience for the free trials. Any comment on how that's playing out, any early signs of success there?

Sure. Sure. To your point, Will, you know, in the very early part of the pandemic, we did see a surge in demand in terms of trials that ultimately converted to customers. You know, later in 2020, we saw those trends stabilize, and they've been, you know, remarkably in line, I would say, you know, since then. We have not seen – we've not seen trials decrease. We've been investing behind them. And to your point, we've been going after these new wellness verticals as well, where we're seeing really strong growth. So, you know, I think we're very encouraged by the performance and the trials and the ultimate conversion that we've been able to generate now, you know, call it 18 months post pandemic.

Got it. That sounds great. And then maybe switching gears over to the enterprise side of the business. You know, I know that That's a business with a pretty good line of sight and revenue visibility. Can you maybe speak to just what pipelines look like in that business for kind of new client ads? And, you know, given the revenue visibility, how are you kind of feeling about the growth trajectory exiting the year?

Yes, Will. It's Bob. The pipeline, the top of funnel is actually quite robust for us in enterprise business. where we brought on a lot of new alliances over the past 18 months as we built up that alliance team. We continue to invest in people first, bringing on more and great strength in the talent side to continue to find, sign, and leverage partnerships to drive the top of funnel because Most of our business is driven by, you know, alliances where we integrate directly with a customer information system. So I think that we've got strong inventory at the top of the funnel and, you know, proven processes to continue to push the inventory through the factory.

Got it. Sounds great. Looking forward to hearing more about it in future quarters. Congrats on the first quarter out the gate.

Thanks so much, Will. Good to hear you.

Thank you, Will. Our next question comes from Scott Berg from Needham & Co. Scott, your line is open. Please go ahead.

Hi, Bob and Cassandra. Congrats on the strong first quarter here. Thanks for taking my questions. I guess two here. We'll start with the growth investments that Cassandra discussed in her prescripted remarks. How should we think about kind of how those are split up between the two different segments, SMB and the enterprises? Just to know if you're trying to lean in on one segment maybe a little bit more than the other. Thank you.

Sure. Scott, thanks for the question and thanks for joining us today. You know, we're definitely investing very heavily on the SMB side with respect to the product. And we are, you know, deploying more marketing spend this year certainly than in prior years. So I would say we are probably rotating a little bit more towards the SMB side of the business. As it relates to enterprise, the investments there are primarily in our go-to-market area with, you know, enterprise sales headcount and also investing in the partnerships that Bob mentioned earlier.

Great. Helpful. And then from a follow-up perspective, in the enterprise segment, I know transaction processing, especially for your government customers, on the invoice cloud side has been a little bit depressed, at least historically I've seen it in coverage of my other companies that have exposure to those types of payments or payment infrastructures. You know, kind of where are we in normalizing from maybe what was, you know, a really solid environment in the first quarter of 2020 before the pandemic, you know, obviously getting to the lows in the second quarter. How much have we kind of recovered any sort of transaction fall off, do you think? Thank you.

Thanks. I mean, I think we certainly benefited from the focus on digital payments and contactless payments in 2020 that happened during COVID. So I don't think we saw as much of a depression there, if you will. We've definitely seen really good strength in our business. I think things are normalizing now, especially in the Gov segment of our enterprise business. And we're seeing a lot of revenue growth coming from new customers coming online.

So I have. Thanks for taking my questions.

Thank you.

Thanks, Scott.

Thank you very much, Scott. Our next question is from Bob Napoli with William Blair. Bob, your line is open. Please go ahead.

Thank you, and good evening, and let me add my congratulations, Bob and Cassandra, and nice start as a public company. Good to see you. Appreciate it. Thanks, Bob. So I guess good to talk to you. Your LPV to CAC ratios have been particularly impressive, and I think especially in SMB, but As you're ramping up growth of the business, are those ratios too high? I mean, i.e., is there opportunity to accelerate growth even further by bringing that ratio down slightly, or is that not – Not a thought, if you would.

Yes, that is certainly a thought, and you are right. We are in, I guess, an enviable position with LTV-CAC ratios that are quite high. So we are investing aggressively beyond where we were in 2020 in the first half of this year, and you start to see those investments in Q3 in particular with respect to SMBs. And you will see that trend continue in Q4 as well, where we're going to be investing more in new customer acquisition and, you know, we'll take down the rate slightly as a result in terms of LTV to CAC.

Thank you. And then, I mean, obviously SMB, but within enterprise, where do you see or even in new verticals, if you would, where do you see the best opportunities to invest, to increase investment? I mean, the cover on the transit invoice cloud, health pay, standard drive would be helpful as well. Sure.

In enterprise – Yeah, in enterprise, it's really on the enterprise sales side. I think, you know, we're really just dipping our toe in the water on consumer finance and insurance. So those are good opportunities for us to invest to drive growth in the future. You know, Bob, any color you'd add there?

Yeah, I mean, one of the benefits, of course, of having, you know, four vertically oriented true SaaS solutions in the marketplace is that we have the the diversity to, you know, when one might be a little down, another one is up. Of course, we want them all to be driving, you know, outsized growth, and ultimately that's where we intend to get them all. We have had a bit of a, in 2020, we had a bit of a headwind, as you know, with our donor drive solution because it was focused on peer-to-peer. That has rebounded nicely because they had pivoted to charity events, you know, HealthPay24, the enterprise healthcare is still a little bit hard to find, you know, get a lot of attention from many of those enterprise healthcare facilities because they're still dealing with the COVID pandemic. And we... We need to obviously be patient with the customers while they're bringing back themselves to post-pandemic times, which we hope is going to be over fairly shortly. The investments in invoice cloud have been made largely already in product. But I would agree with Cassandra that we're going to drive more investment in the go-to-market, you know, feed in the street. We have a really strong inventory of prospects that we need to get after, and we're excited to bring more soldiers to the fore to get after it.

Thank you. And then just my last question, with your strong balance sheet, and you've done some M&A in the past – Your S&B acquisition was pretty good. But how important is M&A from here? Are you actively looking? And if so, what would be the strategy around your M&A?

Yes, Bob. So M&A, I think, is very important to us. It will continue to be important to us. So we are investing there. have nothing to announce in the near term for sure, but we intend to be acquisitive and blend our organic growth with inorganic growth as we move forward. So we're constantly looking. We're active and, you know, optimistic. We're bringing some talent together here.

And I guess I would just add, you know, right now kind of currently we're very focused on executing on our organic growth story and strategy.

Great. Thank you. Appreciate it.

Thank you, Bob. Our next question comes from John Davis from Raymond James. John, your line is open. Please go ahead.

Thanks. Good evening, Bob and Cassandra. Cassandra, I think in your prepared remarks, you called out improved churn rates. And I was just curious, is that specific to either SMB or enterprise or both? And then in regards to F&B, maybe some comments or color on net rev retention, how that's trending now that we're laughing, kind of the peak COVID bump that you got last year. Just curious how that net revenue retention is trending as we go to the back half of this year.

Sure. John, thanks for the question. So my comments regarding customer return were certainly with respect to SMB, where we've seen really strong customer retention. And that's really driven by the breadth of our solutions and having embedded telehealth in our product. And, you know, we've really seen customers, you know, react very well and have been incredibly impressed with the retention rates as a result. As it relates to net revenue retention, to your point, we saw a surge in net revenue retention last year. Things are normalizing on the SMB side, you know, into the 120% range as we expected them to.

Okay, great. And then just a little bit on the EBITDA margin. Obviously, this quarter, you had a nice float through of the upside to EBITDA. Obviously, I think the guide implies 4Q kind of goes back to maybe a high single-digit margin perspective or margin. But if we think about next year, I'm not looking for a guide at any time, but just how do we think about the potential upside? Is that something, Bob, that you think will reinvest?

in the business or is that something we can expect to kind of fall through to the to the bottom line just curious on how you guys think about balancing kind of growth and profitability as we go up to 22 and beyond thanks for the question john our priority for sure is you know organic growth and driving that through investment in it so uh i would i would again not providing any guidance on it but i would expect us to make every attempt to plow that EBITDA into drive growth, both segments.

Okay, that's it for me. Thanks, guys.

Thank you. Thank you very much, John. Our next question comes from Bhavin Shah from Deutsche Bank. Bhavin, your line is open. Please go ahead.

Great. Thanks for taking my question and hats off to the team for a great start to being a public company. Just first on simple practice, just looking at those adjacent markets, it's nice to see the growth there. From a product capabilities perspective, I mean, do you guys believe you guys have the right product in place to really accelerate growth there? And then just from a go-to-market, like any sense of free-to-pay conversion for these adjacent markets compares to the core behavioral health markets?

Thanks, Bob, and good to hear your voice again. So the simple practice solution, you know, in the past four and a half years, it has gained an enormous amount of functionality and a lot of add-ons that we've invested in over time, including telehealth, simple practice learning, and lots of other things. But one of the things that we did know from the very beginning is that most of the solution is applicable to other wellness markets. I mean, there's still effort there. There are always nuances. If you consider that a mental health professional has a different way of making notes and handling insurance claims and so forth than a physical therapist who might need a significantly different method of documentation and notes, Those are sort of the nuances that we bring to the table for each of the verticals as we, each of the wellness markets as we move forward. That said, we can move through them fairly quickly, and we are, as I mentioned earlier, we're from behavioral health, we've already advanced into nine others where we're quite active. We may not have perfect fit yet in a few of them, but we have, you know, plenty to gain a lot of traction while we continue to work the roadmap to bring it to a perfect fit, if there is ever such a thing as perfect.

Got it. That's helpful. And then maybe just flip into the enterprise side. I mean, you guys have historically had very strong market presence, both in government and utilities. But just from a pipeline perspective, how is it shaping up for financial services, insurance, et cetera? And how is the partnership pipeline progressing here?

That's an excellent question. We actually have been very successful adding strong partnerships. We actually signed and announced, I'm not sure if it was this quarter or the previous quarter, a partnership with Guidewire, which is, I believe, the largest core services provider in the insurance business in the country. So extremely stoked about that alliance and are already quite active on the other side of it with prospects and signings. So very optimistic on the financial services side. Still early innings there, but high growth, well beyond the lunatic fringe here. We've got hundreds of customers there.

Great to hear. If I could just sneak in one for Cassandra. Just as we head into 4Q and just progress going forward, any seasonality that we should think about just for the S&D and enterprise segments?

You know, on the whole, I would say no, there's nothing huge. As it relates to enterprise, you know, there is a little bit of seasonality with respect to the fourth quarter where a lot of our tax billers tend to invoice and bill their customers. So we do see a heavier revenue quarter on a sequential basis there. But otherwise, revenue is pretty stable between the quarters.

Thank you and congrats again.

Thanks. Thank you very much, Bhavin. Our next question is from Ashwin Srivaka from Citi. Ashwin, your line is open. Please go ahead.

Thank you. Hi, Cassandra. Congratulations on the quarter. Thanks. My first question is with Regards to just the 2022 setup, I know you're not necessarily providing an outlook or anything like that right now, but investors always start thinking about the setup heading into December and such. So any pointers with regards to you know, particularly on the enterprise side, large client ramps we should watch out for, you know, in case with regards to the pricing initiative, if there's any prep that needs to be done on schedule with Monarch, anything that we need to be watching out for as we lay out to indicators.

No, I mean, to your point, we'll give more formal and detailed guidance in February on 22. I wouldn't say there's any one particular thing that we're worried about or that we should focus on in either segment. You know, we're expecting our strong growth to continue. You know, our growth drivers are really new customer acquisition and continuing to drive digital payment adoption across our entire customer base, and we expect both those trends to continue.

Understood. And as I was looking at your segment information, you know, EBITDA for enterprise, obviously is down year over year, EBITDA margin is down year over year. That's because last year you had lower costs. But is this current EBITDA margin level a more normalized one that we should carry forward? Or is there some kind of catch-up built in there? Any help on that?

Yes. Yeah, no, you're picking up on exactly the right thing. So from a comparison standpoint, we had a temporary pause in spending in 2020. So, you know, that is not – that level of EBITDA is not something that we should expect to continue, and we've been investing – very aggressively this year across both segments in terms of hiring. I think our headcount is up over 40% on a year-over-year basis. So, you know, the EBITDA margins that you see in enterprise today are more of a normalized level that you should anticipate to continue.

Great. That's all I have. Thank you.

Thanks, Ashwin.

Thanks, Ashwin.

Thank you very much, Ashwin. Our next question is from Josh Beck from KeyBank Capital. Josh, your line is open. Please go ahead.

Hey, guys. This is Maddie on for Josh. Once again, congrats on the quarter. I wanted to ask a bit. I saw that you called out PayPal and Venmo. in your remarks. And I was wondering if you've seen these types of wallets drive greater digital payments penetration and if these digital wallets are available across all of your verticals. Thanks.

Right. Thanks for the question. Yeah, we are offering these. We see, I would say, a small uptick. We've added PayPal to hundreds of customers at this point, but only a couple of hundred. And we've seen a marginal increase, not material increase, in adoption due to that. But, you know, every little bit helps, right, when you're talking about payment transactions.

Super helpful. And then for my follow-up, I was just wondering if you could characterize the sales pipeline that you're seeing for your invoice cloud business.

Right, and Invoice Cloud is largely driven through partnerships, and we've been very active in the partnership side. So we have, I think, exceptional top-of-funnel inventory to drive growth, and we continue to hire aggressively to, I mean, as Cassandra mentioned, our hiring for EngageMart this year is north of 40%. which is pretty substantial, but we feel like we're winning that war on talent here and we're expecting to add about 250 employees in 2021. We started with around 550 in the beginning of the year, so close to 45% growth in headcount, and that's what we're doing. We're investing for long-term growth. We believe that We have the processes in place. We have the sales engine well-defined, and we're just looking to put more feet on the street to continue to drive it to the inventory that we've already got.

Awesome. Thanks again.

You bet.

Thank you. Thank you very much. This is all we have time for today on the Q&A session, so I'll hand back over to Bob for any closing comments.

Thank you. And thank you for listening to our first earnings call as a public company. A special thanks to our customers, partners, and our amazing almost 800 teammates in EngageSmart, for those that may have listened in. You folks continue to crush it, and it's greatly appreciated. Just a last comment. We are incredibly excited about the future, our growth, our $28 billion TAM, and the opportunities in front of us. Thank you very much.

Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.