EngageSmart, Inc.

Good morning. Thank you for attending today's EngageSmart third quarter 2022 earnings call. My name is Shelby, and I'll be your moderator today. I'll now turn the call over to Josh Smith of EngageSmart. Josh?

Thank you. Good morning, and welcome to our Q3 2022 quarterly earnings call. With me on the call today are Bob Bennett, Chief Executive Officer, and Cassandra Hudson, Chief Financial Officer. Our earnings press release, supplemental presentation, and 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. Please refer to the Risk Factors section of our annual report on Form 10K and other SEC filings for more information on the risks regarding these forward-looking statements and risk factors associated with our business. All metrics discussed during this call are non-GAAP unless otherwise noted. 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.

Thank you for that introduction, Josh. Good morning, everyone, and thanks for joining us on our call to discuss our quarterly results today. Q3 marked our one-year anniversary of being a public company, and it has certainly been an eventful year. We have repeatedly beaten our revenue and adjusted EBITDA guidance every quarter since our IPO. This is a testament to the strength of our business model and the huge need for our offerings in the ongoing quest to digitize business and consumer engagement in legacy industries. To date, the market dynamic has remained relatively strong despite the macroeconomic flux. This is due to the continued demand for mental health and wellness services and the durability and predictability of services to help consumers ease the payment process for their bills and charitable donations. And our results speak for themselves. EngageSmart delivered record revenue of $78.8 million, representing 42% year-over-year growth, all organic, and adjusted EBITDA of $13.2 million, which is 16.8% of revenue for the quarter. We saw strong demand for our vertically tailored true SaaS solutions fueled by growing customer affinity for digital experiences, rapid adoption of modern technologies and legacy industries, and a continuing shift to electronic payments. Our results demonstrate our customer success using our solutions, our market leading software, and our attractive competitive position. I'd like to thank our teammates for their dedicated efforts. Our momentum and success are driven by their tremendous work and relentless pursuit of customer satisfaction. Before Cassandra dives deeper into the details of our financial performance, I'd like to share some highlights. SMB delivered outstanding growth of 52% year over year. driven by high demand for our simple practice solution and mental health and continued traction in new verticals, such as speech-language pathology and occupational therapy. We now serve over 94,000 customers and more than 154,000 practitioners across our wellness verticals. Turning to our enterprise segment, enterprise achieved 31% year-over-year revenue growth, driven by strong momentum in our verticals. InvoiceCloud, our largest enterprise solution, posted another robust quarter fueled by high digital adoption across all cohorts. We also implemented our solution with several new billers in utilities, insurance, and tax this quarter. To provide more color on our excellent results in the SMB segment, we see high demand for our simple practice solution in our core mental health market, a market that, unfortunately, continues to be characterized by a shortage of professionals coupled with strong demand for care. According to the National Alliance on Mental Illness, three-quarters of Americans say that they are not content with the state of mental health treatment in the United States. Many therapy seekers struggle to find the best provider for them, get in contact with that provider, and successfully book an appointment. SimplePractice, with a network of over 154,000 mental health and wellness practitioners and online scheduling features, is uniquely well positioned to help address these problems and connect care seekers to providers. We are excited about driving change in this industry and the huge opportunity before us. In September, we launched our Simple Practice Enterprise offering. A study from the Hartford shows that from 2020 to 2021, 70% of employers saw an increase in usage of employee assistance programs, called EAPs, due to increased stress and burnouts. Finding mental health practitioners is becoming increasingly difficult and expensive. This not only affects the individual care seeker, but also employers, EAPs, and managed care organizations, abbreviated as MCOs. And we believe a lasting solution must include all parties. We believe we can address inefficiencies around the supply of therapists and quality of care with Simple Practice Enterprise. Through a simple API integration that connects to providers' simple practice accounts, schedulers, either members or care coordinators, can instantly view their availability and request an appointment. This in turn creates an easier, more streamlined referral process for providers and is designed to increase both provider and patient satisfaction. By enabling easy scheduling with simple practice, our goal is to reduce the administrative burden for providers within EAPs or MCOs while also simplifying the patient journey with quicker access to mental health care when they need it most. It is still early days and we don't expect material contributions to revenue in the near future, but we're excited by our progress and the continued interest from employers and health plans. Our simple practice enterprise clients include small, medium, and large EAPs whose combined enrolled members total more than 130 million individuals. We are seeing great traction with early partners as evidenced by an increasing number of bookings and successful appointments. Feedback to date has also been very encouraging. As an example, Kristen Matthews, Chief Clinical Officer for KGA Associates, a New England-based EAP that we signed, agreed that it's critical to make the behavioral health provider referral process as efficient as possible. With Simple Practice Enterprise, they are able to easily access the calendars of their provider panel, who are also Simple Practice customers, and request appointments immediately. We are looking forward to further exploring this opportunity and are excited about the potential contribution to our Simple Practice flywheel as we capture EAP and MCO in-network providers who previously did not use Simple Practice. Now turning to other specialties. These are still a smaller part of our business, but we are encouraged by the strong growth we are seeing, particularly in speech, language pathology, and occupational therapy. We believe we have a compelling product market fit in these specialties because practitioners have similar documentation, compliance, insurance, and billing needs to our mental health customers. Most importantly, our all-in-one approach makes simple practice easy to use for them while quickly and significantly reducing their administrative burden. We continue to invest in our simple practice solution to further simplify administrative tasks and tailor our solution to our specialty. We work closely with our customers to add features and functionality that drive higher value for them. Most recently, we introduced a practice dashboard which gives practitioners an at-a-glance view of the financial health of their practice. This is especially valuable for group practice owners because it improves their ability to track important financial and operational metrics with easy-to-digest visualizations. We are also excited to announce that we have recently hired Ian Knox as Chief Product Officer. Ian brings over 20 years of product leadership experience to SimplePractice. He has worked across Fortune 500 companies and other high-growth businesses and has deep experience with SaaS products, API platforms, and marketplaces. With his leadership, we will continue innovating to better serve our practitioners and their clients. In addition to product innovation, we continue to invest in marketing to drive account growth. Word of mouth referrals are our most efficient marketing channel, particularly as we are rapidly growing our referral base each quarter. At the same time, we are seeing great traction with our investments in digital marketing, including paid SEO. These enable us to broaden our brand awareness beyond existing customers and their network and allow us to reach a larger audience that was previously not aware of simple practice. Now turning to our enterprise segment. Our strong results were driven by customer go-lives fueled by our partner-assisted selling motion and high digital adoption with existing customers. In Q3, we were particularly excited about our momentum and utilities where we saw record digital adoption. Notable customer launches include the city of Springfield, Ohio, and the city of Bowling Green, Ohio, utilities. In a world of rising costs, the ability to increase cost-saving behaviors, like paperless billing and auto-pay enrollments, is critical to customer satisfaction. And that is why billers keep choosing Invoice Cloud. What's so remarkable about our solution is how quickly we achieve results. As an example, the city of Wiley, Texas, saw a 13% decrease in service shutoffs and an 18% decrease in mailed-in checks within the first six months of implementing InvoiceCloud. And our solution drives a higher number of online payments over time. Bonavista Water in Utah, for example, received 75% of bill payments electronically since implementing InvoiceCloud in April 2021. And Truckee Meadows, Nevada, over 12 months, saw a 4x increase in paperless enrollment a 22% increase in auto pay adoption, and a 20% decrease in mail payments. We are also seeing great results in financial services. We signed an alliance with insurance software supplier Intelligence, a fat brain AI company, to provide insurance carriers and their policyholders with a premier billing and payments experience. Additionally, we onboarded nine insurance customers, including the Norfolk and Dedham Group. Across these customers, we developed integrations for four customer information systems. Our rapid growth in the insurance industry demonstrates the importance of a simple and intuitive policyholder and claimant experience that drives customer satisfaction and higher levels of digital adoption. And that's because we partner with our customers to drive results. Ellington Mutual, for example, doubled payment options to allow customers more flexibility when paying bills via digital wallet, text, phone, or PayPal. They achieved a 7X increase in autopay adoption, a 63% increase in paperless enrollment, and a significant decrease in print and mail costs per statement, ultimately improving their bottom line and customer satisfaction. However, the real win for our insurance customers is automatic renewal for policyholders. We are also excited about our success in tax, In Q3, we signed five new county tax clients in four different states. We recently signed an alliance with DevNet, a leading provider of property tax software tailored to meet the needs of local governments across 11 states. We look forward to further broadening our market share in tax as we implement our solution in the coming quarters. In summary, we've had a great third quarter. We continue to drive further traction in the market for products that help save labor costs, increase operational efficiency, and drive customer satisfaction. We delivered strong results across our vertically tailored SaaS solutions, driven by continued customer demand, payer adoption on our platform, and great customer retention. We believe that this is a testament to the strength of our business model and our market leadership position in customer engagement software with integrated payment. With that, I'll hand the call over to our CFO, Cassandra Hudson. Cassandra? Cassandra?

Thank you, Bob. We again experienced another strong quarter of financial performance, which exceeded our revenue and adjusted EBITDA guidance. We remain focused on delivering strong revenue growth with balanced profitability and are pleased with the continued momentum we experienced in both segments of our business. As a result, we are again raising our 2022 guidance on both the top and bottom lines. We now expect revenue to be in the range of $300.5 million to $302 million and adjusted EBITDA to be in the range of $46.5 million and $47.5 million, which represents an adjusted EBITDA margin of 15.6% at the midpoint. Our revenue guidance implies 39% growth year-over-year at the midpoint and assumes that our growth in Q4 moderates from Q3 levels as expected due to the pattern of new customer and practitioner license ads that we have experienced this year. Total revenue for Q3 was $78.8 million, representing an increase of 42% year over year, fueled by growth in customer count and transactions processed. As of the end of Q3 2022, our total customer count was 97,800, an increase of 26% over the prior year. Our customer growth continues to be 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 Q3, we processed 37.5 million transactions, up from 28.6 million in the year-ago quarter, representing 31% growth. Our SMB segment continues to perform well. with third quarter revenue coming in at 42.9 million, representing 52% growth year-over-year. Subscription revenue of 31.2 million grew 62% year-over-year and was marked by strong new customer ads and a 26% increase in average subscription revenue per customer versus prior year. The subscription ARPU increase continues to be driven in part by the pricing and packaging changes we made earlier this year, as well as expansion with existing customers. As a reminder, with the stronger than anticipated impact on ARPU from our pricing and packaging changes, we are seeing a pull-forward impact that is driving higher revenue growth this year. This sets us up for tougher quarterly growth rate comparisons next year. Overall, the pricing and packaging changes continue to be well-received by our customers as we are seeing healthy adoption from new accounts and strong referrals that are scaling with our customer growth. Transaction and usage-based revenue of $11.3 million grew 32% year-over-year as more transactions on our platform were processed. Our enterprise segment also delivered strong results with reported revenue of $35.9 million, representing 31% year-over-year growth, driven by new customer ads, stronger digital payment adoption, and revenue per payment growth from our older utility cohorts. Other revenue, which includes hardware and professional services and is generally one time in nature, increased $600,000 year-over-year in Q3 2022. Transaction and usage-based fees came in at $32.6 million, representing 31% growth year-over-year. As a reminder, we have a mix of fixed fee and percent of volume pricing models within our enterprise segment. We believe rising inflation will lead to offsetting trends for our enterprise business, and we therefore do not currently 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 expect to see strong demand for our simple practice solution in our core market fueled by a shortage of mental health professionals coupled with an increasing need for care. This demand environment is currently driving consistent top of funnel trends and customer ads in SMB. In addition to acquiring new customers, we scale with our customers and increase our average revenue per customer. As our practitioners grow their practices and add more simple practice seats, they use additional features, purchase higher-priced packages, and process more payments through our solution. We're encouraged by the practitioner growth per practice this quarter and excited about the opportunity we see with group practices. We are making progress on our strategy of replicating our successful playbook in mental health across other wellness verticals. We continue to see traction in speech language pathology and occupational therapy, where we already have a strong product market fit. In addition, we are investing in our solution to further develop vertically tailored features intended to increase our market share. We are excited about our large market opportunity and runway as we invest for growth and unlock our full potential in mental health and other specialties. In enterprise, we are building on our momentum. Our steady growth is driven by our focus on product innovation and customer experience, which enables us to drive superior rates of digital adoption. We invest in further simplifying the customer experience by adding functionality that removes friction to drive higher value for our customers. We remain highly focused on continued sales and implementation execution to fuel new customer growth. This quarter, we achieved a number of new CIS systems integrations that we believe will build the foundation for successful goal lives in the future. We are excited about our success in traction in insurance and tax. Notably, we signed alliances and clients in new states this quarter that we believe create long-term tailwinds for additional targets. As an example, we recently signed Surry County, North Carolina, which quickly led to the signing of an additional North Carolina county. We are also pleased with quarterly go-lives with our tax billers, including the launch of Allen County, Indiana's new payment system. Lastly, we continue to invest in our strategic alliances to drive new customer growth. In Q3, we signed six new alliances across utilities, insurance, and tax, and are looking forward to kicking off joint implementations in the coming quarters. Now moving on to margins. Our adjusted gross margin for Q3 of 2022 increased to 78.5% from 77.5% in Q3 of 2021, primarily driven by the results of our SMB pricing and packaging changes that occurred in Q1 2022. Sales and marketing expenses were $25 million, up $7.1 million. In enterprise, we continue to invest in our partner relationships and sales headcount to drive top-line revenue growth. In SMB, we invested meaningfully in digital marketing to drive new customer acquisition, as well as brand marketing to drive awareness for our solutions in the verticals we serve today. R&D expenses came in at $12.3 million, up $3.4 million, driven by our long-term focus on maintaining product leadership in both of our segments. G&A costs were $12.2 million, up $3.8 million, primarily driven by public company operating costs. Adjusted EBITDA was $13.2 million for the quarter, representing 16.8% margin, compared to $8.7 million or 15.6% margin in the third quarter of 2021. As a final thought, we operate in defense of verticals that we believe to be characterized by their recurring and non-discretionary nature. We continue to believe that these markets should remain attractive and vibrant, even in economic downturns and inflationary periods, and we remain confident in our ability to continue to deliver profitable growth in the future. I'll now turn the call back over to Bob for closing comments.

Thank you, Cassandra. Wowza! We founded EngageSmart because activities like paying bills, scheduling appointments, onboarding new patients, and client communications shouldn't be that hard. Our success is driven by three simple factors. First, our proven customer-focused playbook driven by A players. Companies are just collections of people. Our people help us continue winning, and their tremendous work and relentless pursuit of customer satisfaction drive our momentum and success. That's why we are committed to recruiting, retaining, and developing top talent. Second, product leadership, as measured by adoption and retention. Customers want to work with the best, as in the best people. And that's EngageSmart. We leverage our deep vertical expertise and put our customers at the center of our decision-making to deliver innovative market leading solutions. Third, our large market and runway. We address a $28 billion US market and have captured about 1% of market share. We are excited about the massive 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.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and one to ask a question. We'll pause for a moment to allow questions to queue. We'll take our first question from Bob Napoli with William Blair.

Thank you. Good morning. Wow, nice results there, Bob and Cassandra. Just on the Outlook, as we move into 2023, lots of questions around the macro and your business being recession resistant. Have you seen in your pipelines, your new business pipelines, any effects from the macro? And maybe if you could give any cover on how that pipeline looks for new business to be added over the next year.

Hey, Bob. Nice to hear your voice. Hope everything is good in Chicagoland for you. We haven't really seen a negative impact at this point from the macro. We're cautiously optimistic. So, you know, as you can see, the numbers kind of speak for themselves. But, yeah, steady as it goes so far.

And then just I would say the enterprise move for, you know, larger in your – I guess, simple practice business, if you would. What are your thoughts around the TAM, and what are your – I know it's going to take some time to build, but what kind of feedback are you getting, and what do you think about that can do to your business over the next few years?

Yeah, simple practice enterprise is really connecting patients to caregivers that are on the simple practice platform today. And we're actually quite excited about the traction that we're getting, steady growth in appointments from EAPs and MCOs. The reaction and response we're getting from them is very strong, also from our customer base. We think it's a big play for us. We think that, you know, patients are – still struggling to get appointments, make appointments, and get the care that they are needing because there's so many clinicians, and we actually have quite a few of them, as you know, over 150,000 clinicians and practitioners in wellness that we can provide a nice online directory for scheduling appointments. So we're very excited about it. We think that it's going to ultimately drive demand for us for new accounts. as well as other opportunities for us to dip our toe in other areas. So, all good.

Thank you. Appreciate it.

We'll take our next question from Terry Tillman with Drist.

Yeah, good morning, Bob and Cassandra. I echo the LALSA. So, I guess maybe... The first question is on the product and packaging benefits. Cassandra, you spoke about that. You've talked about it actually throughout the year in terms of the benefit and how it is helping drive outsized growth in ARPU. Could you help us maybe going forward? What are some of the key offsets or to a tough comp that we're going to have to grapple with on ARPU? And, you know, how do we think about maybe a normalized ARPU growth going forward? And then I'd follow up.

Sure. Terry, great to hear from you. On the pricing and packaging side of things, as I mentioned on the call, we've seen a stronger result on revenue this year, which has been tremendous. And I think in terms of your question around where are the offsets, continued growth in new customer ads, You know, certainly is an offset there to the tough compare on the pricing and packaging. You know, also, you know, one of the things that we've seen this year is with the rollout of our new starter plan, you know, practitioners that are earlier on in their journey coming onto our platform and helping them grow their practice, being more patient, you you know, expanding their focus business obviously leads to more payments for us. So I think payments is certainly a strong lever for growth. And then, you know, there's a lot of new things that we're doing with Simple Practice Enterprise, EAPs, Monarch, et cetera. You know, so I think we're continuing to focus on our strategy of, driving new customer growth and focusing on ARPU maximization. I think those will be the core offsets to next year. I think just the highlight was that pricing and packaging was a little bit better this year.

Yep. Okay. Thank you. And I like to spread it around with the different business segments, but I can't help myself. I want to ask a follow-up on Simple Practice. The Practice Dashboard, it's great to see the ongoing innovation there. and more features and functions. But I'm curious, is there any kind of pricing kind of mechanism around the practice dashboard? And maybe where are we on group practice traction in general? Thank you.

Yeah, so we continue to invest in group practices, Terry. And lots of, in fact, the dashboard is particularly applicable to group practices so they can see that. sort of get a broad view of how their various clinicians and practitioners are doing individually as well as in groups. So, yeah, we continue to invest there. There's no pricing. This is just part of our bundled strategy. There's no price change there. It's not an additional fee or anything for that dashboard. It just comes with it.

And, Terry, to the point on group practices, we continue to see the number of practitioners per practice tick up, you know, very steady growth this year. And, you know, group practices remain a very exciting opportunity for us.

Okay, thank you all. Thank you.

We'll take our next question from Baamin Shah with Deutsche Bank.

Great. Thanks for taking my question. I guess the first one is following up on that topic. I mean, you have had very strong clinician per customer growth this quarter. One of the drivers of this meaningful increase, I would have thought it would maybe turn it the other way given the starter package, but how much of this is customer succeeding on your platform and then growing the size of their business versus maybe adding group practices from the beginning?

I would say we continue to see a very healthy mix of practitioners joining group practices. I think the packages that we have in place, the starter plan in particular, is It's new for us, and it's helping to get practitioners that are much earlier in their journey on board with simple practice and up and running their practice. So that is kind of a new dynamic, if you will, but we're still seeing practitioners join group practices, very steady rate of growth in the practitioners per customer rate over time, and it remains a big area of focus for us.

That's helpful there. And then just to follow up on EBITDA margins, I mean, it's really nice to see the continued upside. And then your FYI for this year implies nearly 150 bits of margin expansion versus last year. Any thoughts on how we should think about the pay-per-margin expansion going forward, realizing this year had some off-setting factors from headwinds from greater public company costs versus maybe tailwinds from pricing and packaging changes in civil practice?

I mean, as you know, Bob, and we're very focused on driving strong revenue growth with balanced profitability. On the EBITDA margin side of the equation, we continue to invest more in marketing. We're kind of testing and learning our way through that and incrementally increasing the amount of spend on the marketing side of the equation as we start to see programs that are bearing fruit. So that is kind of a big area that we're investing and focusing on. And it takes investment to drive the growth rates that we've been seeing this year and for us to support the long-term growth that we have and opportunity that we see in the marketplace. So we're going to continue to be focused on that. I think you can see from this year to the extent that we have upside growth, on the revenue that does tend to flow to the bottom line. So, you know, I think that helps to keep us in that more balanced profitability lane, if you will.

Thank you. We'll take our next question from John Davis with Raymond James.

Hey, good morning, Bob and Cassandra. First, I wanted to touch on the new customers added in the S&B. Business this quarter accelerated nicely to 5,000 roughly versus 4,000 last quarter. How much of that do you think is just kind of getting through whatever attrition you were going to have with the pricing changes versus kind of adding new customers from the starter package, maybe kind of a new market that you didn't have before? And is 5,000 kind of the right way to think about kind of a quarterly ad going forward?

I mean, we're very pleased with the continued strength in new customer ads that we saw in Q3. I think following pricing and packaging, obviously, there was higher than expected churn in the first half of this year. So that was muting the net ads, if you will. And things have continued to stabilize and normalize in Q3, which continues to lead to a strong result in new customer ads. We continue to see growth there. You know, it's certainly something that we're very focused on, you know, to drive growth over the long term. But, you know, very positive quarter for us, I would say, on the new customer ad side.

Okay. And then just a little default on Terry's question around ARPU headwind next year. I think, Cassandra, you had said initially that you expected kind of 500 to 1,000 basis points of uplift in S&B ARPU from pricing this year. Then you said it was tracking a little bit better than that. Is that the right way to think about the headwind as we head into next year? Obviously, you called out the offsets that will help still grow ARPU, but as we kind of look at the growth this year versus what we should expect for S&B ARPU next year, is that kind of the right way to think about the headwind from pricing this year?

I mean, that is kind of what we indicated in the beginning of this year for pricing and packaging, and we did end up slightly better than the 5% to 10% that we expected on the ARPU side. You know, we're not guiding to 2023 today, so we'll certainly update you guys on our next call. But, you know, in terms of the impact that pricing and packaging had this year, you know, you are thinking about it correctly.

Okay, and squeeze one in on enterprise. Bob, just talk a little bit about inflation. You know, is it a headwind? Is it a tailwind? Is it neutral? We get lots of questions there, obviously, with, you know, inflation where it is today and probably not going anywhere anytime soon. So just any quick comments there would be helpful.

Yeah, I mean, hey, J.D., yeah, the – Inflation for us, Invoice Cloud being the primary driver for enterprise, we have a lot of pricing that's based on a variable rate. I mean, in other words, it could be 2.95% for tax payments. It could be a flat fee for certain utilities. What happens is we offset inflation. one with another so we think that in an inflationary environment in other words if there's a tax bill that goes up you know if if if you have property assessments that drive higher prices on homes you know our 2.95 actually becomes a little bit more profitable right over over for those higher inflationary situations so the net net for us by our evaluation is we might be slightly positive within an inflationary environment but we're basically neutral for us

Okay, appreciate all the color.

Thanks.

And we'll take our next question from Scott Berg with Needham.

Hi, everyone. This is Michael Rackers. Hi, everyone. This is Michael Rackers for Scott today. Hi, Michael.

How are you?

I'm doing well. How are you guys?

Doing great. Great.

I was just wondering on the simple practice vertical expansion, I believe you've previously said about 85% in terms of product fit versus the core vertical there. Could you maybe elaborate here on some of the challenges you're seeing in terms of changing the product or maybe some positives coming out of that?

Yeah, I wouldn't say that we're seeing, we're actually very pleased with our traction in speech-language pathology and in occupational therapy in addition to our mental health and behavioral health market. So, yeah, we're We are actually going deeper and driving harder at those two specialties right now to make sure that we create an appropriate template for success and sort of a recipe that we can drive into the other specialties as we move along. So we really are – I think we're doing it the right way, getting to a full product market fit in each specialty and then driving – deeper into them one at a time. It takes marketing, expand community, a lot of things that have to be done. But I don't think from a product standpoint, we're challenged in development for any of our 10 wellness specialties.

Right. And then maybe just staying on that topic, in terms of the competitive side of vertical expansion, is that typically the same you know, with kind of the earlier verticals versus longer term moving into more? Are you seeing any differences in the competitive landscape there?

I mean, I think for some of the wellness verticals, there's, you know, It's not as competitive. I mean, you know, we compete with quality, you know, solutions everywhere. Our top competitor is actually pen and paper. That's where most of our new clinicians come from. So they can choose to just do it themselves with, you know, an Excel spreadsheet and so forth. But we're, you know, certainly finding that the value proposition is highly compelling and, you know, saves so much administrative time that it's hard to see somebody ultimately, once they start using the solution in a free trial, not move forward with it. So, no, I think that in the other, you know, there are certain, you know, some of the smaller TAM, you know, wellness professions are, you know, have fewer competitors for sure. But, you know, the solution, you know, is still a great fit for all of them.

Great. Thank you.

We'll take our next question from Josh Beck with QBank.

Thanks so much for taking the question. I wanted to ask, it sounds like you're getting a really good product market fit in speech and occupational. So I'm curious, as you look out, is that something where there could be a meaningful portion of the gross ad Next year, you know, is it more of a multi-year journey? And then a little bit of a related question. Once you start to layer on, you know, some of these other verticals, speech, occupational, PT, chiropractic, you know, how much bigger is that than your core mental health vertical? Just kind of help us, you know, frame up the opportunity there.

Sure, Josh. Thanks for the question. So, I guess first and foremost on speech-language pathology and occupational therapy, you know, a couple dynamics to consider. You know, first, those markets are smaller than the market we have in behavioral health. So, you know, that is a factor. And then, you know, second is we just, we're still continuing to see really strong growth in mental health in our core market. There is a lot of demand for mental health treatment. You know, obviously there's supply constraints there with, you know, needing more practitioners to treat patients. And I don't think we see that dynamic changing any time soon. So kind of given those two things. It's hard to see SLPs and OTs, you know, overtaking mental health anytime soon as a result. You know, behavioral health is more than 90% of our business today. And, you know, I don't think we expect the mix to shift meaningfully towards the newer wellness verticals anytime soon. On the TAM side of the equation, I mean, there is a large opportunity in these other wellness verticals. you know, of our $10 billion TAM that applies to the SMB segment, $5 billion is the wellness vertical. You know, we estimate about $1.2 billion of that is on the mental health side. And then the other nine wellness verticals make up the difference there. So certainly a lot of opportunity to go after.

Okay. Very helpful. And then, you know, I also just wanted to ask a follow-up on Monarch. It certainly seems at least externally, to have really made some nice strides from a product point of view. So, you know, how would you characterize, you know, really where that stands? You know, if you could speak to maybe a little bit the monetization strategy over time, you know, it would be great to get your thoughts there as well.

Hey, Josh. Yeah, so, yeah, you can go to meetmonarch.com and check it out. It's really a high-quality patient-seeking tool to help find a simple practice clinician. And it's getting great traction. I mean, we're obviously getting a lot of interest in, you know, not just interest, but use from EAPs and MCOs. We're not... I'm gonna discuss the monetization strategy, but obviously one of them, Josh, ultimately is helping to push clinicians who aren't with Simple Practice on towards Simple Practice so that they can get the online calendar and make it easy for the EAPs and MCOs to be able to sign them up, right? So I think that, you know, to be able to, you know, schedule appointments immediately and provide the opportunity for our clinicians, our customers to accept those appointments. So I think it's going really well. And, you know, we, you know, continue to work on driving ease of use to the EAPs and MCOs and the API that connects and so forth, but going really well.

Great. Thank you, Bob. Thanks, Cassandra. Thank you. You bet.

Once again, if you would like to ask a question, please press star and one on your touchtone phone. We'll take our next question from Raquel Batesh with JP Morgan.

Good morning, guys, and thanks for taking my question. I was curious. I know on transaction ARPU per SMB customer, you guys spoke about that decrease there being a tradeoff of the subscription repackaging and repricing. But is any part of that, are you able to disaggregate a return to in-person appointments and payments not being processed by EngageSmart? You could speak to kind of any trends you're seeing there.

Sure. Thanks, Raquel. Nice hearing from you. You're exactly right. There are trade-offs that happen, and that did happen with the pricing and packaging on the SMB side between subscription and transaction this year. So that is certainly a driver in the transaction revenue performance in the quarter. We continue to see really strong performance between in-person and telehealth visits. So, you know, I don't think we see any changes in the dynamic there. You know, the one thing I would highlight is last year we were certainly deeper into the pandemic, and I think, you know, people were not taking vacation and weren't able to take vacation as people as easily as they were this year. So we're kind of returning to a more normal seasonal pattern as expected. But, you know, by and large, the tradeoffs between pricing and packaging this year is a big driver there. Thanks for the color.

No problem. We'll take our next question from Jason Kupferfer with Bank of America.

Good morning, Bob and Cassandra. This is Tyler DuPont on for Jason. Thanks for taking the question. I had to hop on late, so I apologize if this has been answered. But it looks like that despite some specific revenue per transaction, I don't want to say issues, but despite what's going on within the SMB space, it looks like total revenue per transaction has remained quite strong and resilient. Is there anything specific to call out there kind of maintaining that high number And maybe if you can just describe how you're looking at revenue per transaction, kind of looking forward into next quarter and potentially even into 2023. Thank you.

Yeah, I mean, I think it's a testament to our business model, really. I mean, we have a lot of transactional models in play between fixed fee and percent of volume. So that certainly helps. It is kind of our core competency as well. And I think That speaks to the testament of our business model and how we've been performing this year. As it relates to revenue per payment on the enterprise side, we certainly saw stronger results in Q3 than even we were anticipating, in particular within older utility cohorts. So that was very significant. encouraging to see. I think it just speaks to the secular trend of people moving more and more towards digital payments, and we're benefiting that, and also the strength of our solution driving them to adopt.

Great. Thank you. I appreciate that, Cassandra. You're welcome.

Thank you. There are no additional questions registered at this time. I'll pass the conference to Bob Bennett for closing remarks.

Thank you for your questions. GageSmart delivered great results in our third quarter of 2022. Momentum across our 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. Our positioning continues to be compelling as we address our huge U.S. market opportunity and strong top of funnel pipeline. Thank you all for joining us and we are excited to speak with you again later this month at Citi's 2022 FinTech Conference.

That concludes today's teleconference. Thank you for your participation. You may