EngageSmart, Inc.

Good morning. Thank you for attending today's Engage Smart second quarter 2023 earnings call. My name is Chelsea and I will be your moderator today. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note this call is being recorded and that I will be standing by if you should need any assistance. I'll now turn the call over to Josh Schmidt of EngageSmart. Josh?

Thank you. Good morning and welcome to our second quarter 2023 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 factor section of our annual report on Form 10-K and other SEC filings for more information on the risks regarding these forward-looking statements and risk factors associated with our business. 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.

Thanks, Josh. Good morning, everyone, and thank you for joining us on our second quarter 2023 earnings call today. Building upon our proven track record of success, we achieved another remarkable quarter, delivering record revenue of $94.4 million and adjusted EBITDA of $19.4 million. This represents 28% revenue growth and 20.5% adjusted EBITDA margins. Our results demonstrate our ability to balance sustainable top line growth and strong profitability, and they underscore the durability of our business model. With our teammates' relentless execution and our attractive market position in defensive verticals, we are well positioned for continued success. Before diving deeper into the details of our second quarter performance and outlook for 2023, I'd like to address the two strategic accomplishments that we announced today. the Luminello deal, and the sale of our Health Pay 24 solution. We have entered into an agreement to acquire strategic assets of Luminello, an electronic medical record and practice management platform for mental health prescribers, predominantly psychiatrists. Like Simple Practice, Luminello was founded by practitioners to create a practical and intuitive solution that empowers private practices to run a simpler business and deliver better patient experiences. Both businesses share a commitment to removing administrative burdens for practitioners and enable them to focus on what they care most about, treating patients. We believe the Luminello deal offers four key strategic benefits. First, we believe it will expand our market share and growth potential in psychiatry. Luminello's customer base complements SimplePractice's growing community of mental health practitioners and enables us to better address the high-value prescriber market. Second, Luminello has a compelling market position and offers distinct features and functionality, including ePrescribe. With both Luminello and SimplePractice, we will be able to offer a greater range of functionality and drive higher value for all practitioners. Third, the deal would unlock greater possibilities for serving multidisciplinary group practices. To solve more complex and acute mental health diagnoses, A growing number of group practices include both prescribers and non-prescribers, and Luminello's strong background in serving prescribers adds to SimplePractice's deep expertise in mental health. Fourth, it will increase the value we bring to employee assistance programs and managed care organizations. Our growing psychiatrist community enables us to better support healthcare organizations in simplifying access to quality care, particularly for patients whose conditions require medications. We look forward to leveraging the collective experience and strength that Luminello and SimplePractice bring to practitioners. On HealthPay24, after careful consideration, we have entered into a definitive agreement and simultaneously have closed on the sale of our HealthPay24 solution to Waystar. We are proud to have developed HealthPay24 to become a premier enterprise patient payment platform that both patients and providers trust. We're confident that Waystar is the right owner to unlock HealthPay24's full potential moving forward as we focus our investments and innovations on enhancing our offerings. We believe that this strategic move creates a more streamlined business and enables us to focus on the solutions which have the highest growth potential for us. Now turning to our second quarter highlights. Driven by strong new customer ads and mental health and expansion with existing customers, our SMB segment achieved revenue growth of 30% in the second quarter. The high demand for mental health care, coupled with the shortage of professionals, continues to be a strong tailwind for our SMB segment, where we now serve nearly 110,000 customers and more than 178,000 practitioners. Notably, we have seen an acceleration of gross customer ads in that market. We are also excited about the ongoing traction beyond mental health. We continue to increase awareness for simple practice and specialties like speech language pathology and occupational therapy and are encouraged by the growth in new customers this quarter. In addition, we continue to make progress with group practices. The majority of new group acquisitions are made up of smaller businesses with up to 10 practitioners. These practices are an excellent fit for us given our track record of helping solo practitioners grow their businesses. We also continue to see expansion in our existing customer base and are excited about this momentum. As we discussed last quarter, we have several long-term initiatives underway in our SMB segment intended to drive new growth, including Simple Practice Enterprise and Revenue Cycle Management, or RCM. Our Simple Practice Enterprise offering is an extension of our efforts to improve outcomes for patients. A recent survey from America's health insurance plans found that nearly half of the insurance plans in America cover mental health services. and 83% assist their plan members in finding providers and making mental health appointments. We believe that Simple Practices Network of over 178,000 practitioners is particularly valuable to these healthcare organizations because they frequently struggle to find therapists for their customers in a timely manner. We are seeing great traction with a pilot that we initiated a couple months ago and are particularly excited about successfully expanding our programs. For example, one large national managed care organization that was initially piloting the program in one state is now in over 40 states with Simple Practice Enterprise. Notably, this particular organization has over 100,000 practitioners in its network that are not yet using our practice management solution. We believe Simple Practice Enterprise represents a strong opportunity for us to drive top of funnel, expand our in-network practitioner base, and grow our patient and practitioner community. In addition, we continue to sign and onboard new healthcare organizations and are encouraged by the positive feedback from both practitioners and patients. MCO and EAP customers are most excited about the reduction in time to appointment for their members. The national average for time to appointment is 48 days. With Simple Practice Enterprise, we have reduced that period to six days on average for our MCOs and EAPs. I think we can all appreciate the positive impact this improvement in speed to care can have on patients and their families. We also continue to invest in RCM to address the challenges practitioners face when dealing with insurance. Many health and wellness practitioners don't accept insurance today due to the difficult credentialing processes, long payment periods, and high administrative costs. And that's where simple practice can help. Our goal is to reduce the friction and administrative burden for providers, maximize their reimbursement rates, and ultimately enable them to manage insurance at scale. So early in our journey, we have gathered relevant customer feedback from the pilot and are excited about our progress. Across all customers participating in the pilot, our RCM solution automated approximately 80% of revenue from submitted insurance claims. Additionally, we recently completed a third-party analysis to size the RCM opportunity and gain further customer insights. Based on that analysis, we believe RCM has the potential to expand our behavioral health total addressable market by approximately $700 million. We have learned that most behavioral health customers prefer functionalities like RCM to be bundled with their practice management solution. They indicated that RCM was one of the top three features that they are likely to adopt as an add-on over the next three years, demonstrating the industry's shift towards improving mental health care affordability and access. We believe RCM represents a significant opportunity for us and can enable us to capture higher wallet share from current customers and better serve group practice customers that already accept insurance today. Now turning to our enterprise segment. Our dedication to creating streamlined and user-centric experiences that drive higher digital adoption continues to resonate well with our customers. Fueled by steady customer go-lives and record digital adoption, enterprise delivered revenue growth of 25% in the second quarter. We continue to see strong go-lives across verticals In utilities, for example, we went live with several new customers, including the City of Independence, Missouri. Once we go live with our customers, our solution drives superior rates of digital and paperless adoption. Mount Pleasant Water Works, a water and wastewater utility in South Carolina, for example, has reported a 72% increase in electronic payment adoption since first implementing Invoice Cloud in December of 2017. As of March 2023, the utility also reported a 46% increase in paperless enrollment. Another key differentiator is our ability to increase auto-pay adoption. Georgia Farm Bureau Mutual Insurance Company, for example, reported a 35% increase in auto-pay adoption and realized a 30% decrease in billing and payment-related calls. And this was just in the first eight months after going live on the Invoice Cloud platform. Our ability to quickly drive results and time savings for our billers is why new customers like Southern Farm Bureau Casualty in Mississippi chose to partner with InvoiceCloud. Our new customer growth continues to be driven by our strategic alliances. Forming new strategic alliances and strengthening existing relationships remains important to us as they open new markets, add to our top of funnel, and accelerate sales and implementation cycles once they're onboarded. We are excited about our continued collaboration with Oracle and recently signed another Oracle customer, Nationwide Energy Partners. Finally, we continue to focus on developing innovative functionalities that remove friction and enhance the customer experience. Most recently, we launched key enhancements to our online bank direct functionality to simplify payment reconciliation and limit money movement for billers. With the launch of our proprietary smart match intelligence technology, Billers now only receive matched payments, ultimately speeding up their payment processing. For payments that do not automatically match, billers can take advantage of Invoice Cloud's easy-to-use interface to match payments to invoices with just one click. Our machine learning technology then remembers that match for the future. In addition, billers now have the ability to receive single consolidated deposits and deposits sorted by invoice type. In summary, we've had a great second quarter, fueled by persistent customer demand in the markets we serve, adoption by our payers, and outstanding customer retention rates. Our strong results are a testament to our product suite of vertically tailored SaaS solutions and position us as leaders in customer engagement software with integrated payments. In addition, we are proud of the two strategic accomplishments we achieved. The Luminello deal, as well as the sale of HealthPay24, reinforce our commitment to enhance our offerings, and deliver exceptional value to our customers. With that, I'll hand the call over to our CFO, Cassandra Hudson. Cassandra?

Thank you, Bob. We had an excellent second quarter that underscores our ability to achieve strong revenue growth while continuously expanding our EBITDA. We delivered revenue growth of 28% in the quarter, as well as record-adjusted EBITDA of $19.4 million. which represents an adjusted EBITDA margin of 20.5%. And as Bob discussed, we announced the Luminello deal and the sale of HealthPay24 this morning. As a result, we are updating our 2023 guidance, the details of which I will discuss in a few moments. As for second quarter results, revenue growth for Q2 was fueled by growth in customer count and transactions process. As of the end of Q2 2023, our total customer count was 113,200, an increase of 22% over the prior year. Our customer growth continues to be mainly driven by new customer additions from our digital marketing program and word of mouth referrals in our SMB segment. We also delivered strong growth in transactions process. In Q2, we processed 43.8 million transactions, up from 36.1 million in the year-ago quarter, representing 22% growth. Driven by strong secular tailwinds in mental health, our SMB segment delivered revenue of $53.1 million, representing 30% growth year-over-year. Subscription revenue of $36.6 million grew 25% year-over-year, driven by high trial volume and strong conversion. As a reminder, we lapped last year's pricing and packaging changes halfway through the first quarter of 2023. The second quarter now marks the first full compare and as anticipated, subscription revenue growth moderated from previous levels. Transaction and usage-based revenue of $16.2 million grew 44% year-over-year, fueled by a higher number of transactions processed on our platform, as well as a higher transaction ARPU due to the 20 basis point price increase that we implemented in late Q1 of 2023. Our enterprise segment also performed well with reported revenue of $41.3 million representing 25% year-over-year growth marked by steady go-lives and continued digital adoption of our solutions. Notably, we continue to see high demand for our Invoice Cloud solution in our core verticals, utilities, insurance, and tax. Our adjusted growth margin for Q2 of 2023 increased to 79.2%, up from 78.2% in Q2 of 2022, primarily driven by economies of scale, the price increase of our integrated payment processing solution, and the timing of hardware revenue in the year-ago quarter. Sales and marketing expenses were $29.4 million, up $6.3 million, as we continue to invest in digital marketing channels to drive new customer acquisition in SMB and broaden our brand to create awareness for our solution. In enterprise, our investments continue to be in support of our strategic alliances as well as sales headcount to fuel pipeline and bookings growth. R&D expenses came in at $15.6 million, up $4.9 million. In our SMB segment, we're investing in new features and functionality for group practices, such as measurement-based care, our simple practice enterprise offering, as well as revenue cycle management. In enterprise, we're investing in features and functionality for our invoice cloud solution, such as the recent online bank direct enhancements. Features like these continuously improve the experience for our billers and their payers and help accelerate digital adoption in all of our verticals. G&A costs were $11.4 million down $1.3 million. We continue to realize efficiencies in G&A driven by lower insurance premiums this year and leverage across many of our back office functions. Net income was $4.3 million for the quarter compared to $6.9 million in the second quarter of 2022. The decrease is primarily due to higher income tax expense associated with the Section 174 tax code changes partially offset by operating efficiencies and interest income. Adjusted EBITDA was $19.4 million for the quarter representing 20.5% margin compared to $12 million or 16.2% margin in the second quarter of 2022. The expanded EBITDA margin was primarily driven by economies of scale, and efficiencies in G&A, partially offset by higher investments in R&D. Pre-cash flow was $13.8 million for the quarter, increasing our cash balance to $332.8 million as of June 30, 2023. As a reminder, we expect adjusted EBITDA to pre-cash flow conversion to moderate to approximately 50% in 2023 due to higher cash taxes associated with the Section 170 for tax code changes and the utilization of the majority of our remaining NOLs in 2022. Now turning to our Q3 and full year guidance. We are updating our 2023 guidance as follows. We now expect revenue in the range of $376.5 to $379 million for the full year or revenue growth of 24% at the midpoint. this updated guidance factors in our expectations for the continued strong performance across our business this is of course offset by the removal of 5 million in revenue from the back half of the year due to the divestiture of health pay 24. we estimate that excluding the impact of this divestiture our revenue growth rate for 2023 would increase by roughly two percentage points for adjusted EBITDA for the full year we are updating our guidance to 69.5 to 70.5 million, which represents an adjusted EBITDA margin of roughly 18.5% at the midpoint or a 230 basis point improvement over fiscal year 2022. Our adjusted EBITDA guidance assumes continued strong profitability, which is partially offset by the impact of the Luminello deal and the sale of Health Pay 24. For Q3 of 2023, we expect revenue in the range of 95 to 96 million. which implies 21% growth year-over-year at the midpoint of our range. Our updated revenue range factors in a decrease of $2 million from the sale of Health Pay 24. We estimate that excluding the impact of this divestiture, our revenue growth rate for Q3 2023 would increase by roughly three percentage points. We expect adjusted EBITDA in the range of $14.7 and $15.2 million, which represents an adjusted EBITDA margin of 15.7% at the midpoint. This assumes a minor reduction in adjusted EBITDA as a result of both deals, as well as the impact of one-time go-to-market investments we are planning to make in our enterprise business. As you think about the next quarter and the remainder of 2023, please keep the following in mind. Regarding SMB, we continue to see strong new customer growth in mental health. The mental health market makes up the majority of our SMB revenue today and continues to grow at a steady pace. Our solution remains in high demand with solo practitioners and small group practices, and we continue to invest in increasing awareness for our simple practice brand. Beyond new customer growth, we enable our practitioners to grow their practices with us, and as they expand, they typically purchase higher-priced packages, add more seats, and process more payments through our solution. Additionally, we continue to invest in product innovation to enhance our solution and drive higher value for our practitioners. We remain excited about RCM and the TAM expansion opportunity it presents. We received positive feedback in our pilot program and we will continue to invest in this growth area. As a reminder, we increased the pricing of our integrated payment processing solution by 20 basis points in late Q1 of 2023. This increase helps to offset the higher payment processing and infrastructure costs that we have been incurring and allows us to continue to provide and invest in the seamless experience our customers expect. Finally, we are very excited about the strategic potential of the Luminello deal. However, our guidance assumes no material contribution from this deal in 2023. Now turning to enterprise. We are seeing consistent demand for our solutions and have built a robust pipeline that we believe will continue to fuel steady customer growth. We are beginning to focus on larger deals and are excited about our top of funnel. In addition, we are encouraged by the continued traction in insurance and tax. Both verticals are characterized by large white space where we see significant room for growth. Our expansion into these verticals speaks to the versatility of our solution, as well as our ability to replicate our success in other verticals. We continue to invest in strategic alliances that create long-term tailwinds for growth, as well as in our solution to enhance features like the online bank direct functionality. In addition, we are planning the following strategic one-time enterprise investments to create future margin expansion opportunities. First, we are in the process of renegotiating certain legacy partner arrangements. Related one-time expenses will impact margins in the second half, but will enable us to further expand margins over the long term. Second, we are conducting a comprehensive pricing analysis for our Invoice Cloud solution with the goal of better understanding and optimizing our pricing structure. Our guidance factors in related consulting expenses that we expect to incur in the second half of 2023. As a reminder, our donor drive vertical is more susceptible to macroeconomic disruption, and our guidance assumes a slowdown in revenue growth from fundraising events this year. Finally, our updated guidance for the third quarter in fiscal 2023 now excludes revenue and adjusted EBITDA from our Health Pay 24 solution, whose sale we announced today. In summary, we believe we largely operate in defensive verticals that are characterized by attractive secular tailwinds. Regarding SMB, the unmet need for mental health treatment is large and widespread. In the coming quarters, we look forward to leveraging the expertise of SimplePractice and now Luminello to better serve practitioners in the mental health and wellness verticals. In our enterprise segment, the majority of bills are non-discretionary in nature and the trend towards digitization remains strong. The sale of HealthPay24 enables us to focus on the enterprise solutions and markets with the highest growth potential for us. We remain committed to investing in our solution to further enhance our ability to serve the unique needs of both our SMB and enterprise customers. We are confident in our ability to drive profitable growth and create long-term value for our stakeholders as we execute our strategy and capitalize on the opportunities that lie ahead. I'll now turn the call back over to Bob for closing comments.

Hubba Bubba, Cassandra, that was one strong, busy quarter. 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 a combination of three simple factors. First, we have a proven playbook that revolves around customers and is guided by top talent. We are focused on recruiting, retaining, and developing our teammates. Their exceptional work and dedication to customer satisfaction fuel our ongoing momentum. Second, our emphasis on product leadership is reflected in our high adoption and retention rates. Leveraging our deep expertise in vertical markets, we make customer-centric decisions and develop innovative, industry-leading solutions. Third, we operate in a vast and thriving market with immense potential for expansion. We have captured about 1% of our addressable U.S. markets. We are eager to broaden our reach across all verticals and capitalize on new opportunities as they emerge. We remain focused on delighting our customers, growing our business and creating stakeholder value while we make a positive impact in the world. We appreciate you all joining us on this call this morning. Thank you very much.

At this time, if you would like to ask a question, please press the star and one keys on your touchtone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. And our first question will come from Bhavin Shah with Deutsche Bank. Your line is open.

Thanks for taking my question, and great to see another strong quarter. Just on Luminello, Given that there appears to be plenty of product and target market overlap, how should we think about the longer-term cost synergy opportunity here? Is there an ability to, over time, consolidate or integrate onto one platform?

Thanks, Bob. And, you know, yeah, I mean, that certainly is our intent. So we envision delivering an enhanced solution, you know, that basically provides the functionality for all of our customers, including the customers of Luminello. So we're excited about that. And, you know, I think what you'll see once we get on the other side of migrating to one platform, that you'll see a high degree of flow through to the bottom line as a result.

Got it. And just following up on your fiscal year guidance, even after we adjust for the health pay sale, it appears that you haven't raised the full year guidance despite the 2Q outperformance. Anything that you're seeing in the business or kind of pipeline that has you a little bit more cautious or any kind of change to the guidance methodology we should think about?

No, I wouldn't say we're being more cautious. I mean, I think our performance has been very strong through the first half of the year. I think there certainly is noise given the health pay divestiture that's masking things a bit. We did move up the midpoint of our range a bit, excluding the impact of COVID. of health pay, and I think that factors in the continued strong performance that we saw in the first half to continue in the second half. I think this year our business is very predictable, so we're pretty comfortable with the numbers that we put out, and I think that's reflected in our guidance.

Super helpful. Thanks for taking my question.

No problem.

Thank you. Our next question will come from Bob Napoli with William Blair. Your line is open.

Thank you, and good morning, Bob and Cassandra. Solid numbers, and I like the strategic moves. Just, I guess, on the RCM effort, I mean, it sounds like a really large opportunity, maybe a little bit more color on the nuts and bolts of how First of all, are you having success on cross-sell and what percentage of your clients already accept insurance? And then how are you, what is EngageSmart doing with their customers to enable that insurance business?

Hi, Bob. It's Bob. Yeah, less than half of our customers accept insurance in simple practice, but getting closer to half, I guess. And what we do is actually take over the burden, and ultimately we see ourselves helping our clinicians with credentialing. with the claims management. And we're developing solutions and systems that automate the process of claims management so that we get a very high degree of automation that requires no human intervention for claims management. And then we take, from a revenue standpoint, we take a percentage of the claim that flows through for a solution. So as insurance continues to gain traction for mental health across the country. We continue to see strong demand from our clinicians for that. It's been in pilot, really small percentage of our clinicians using it today. But, you know, we anticipate this generating material revenue in the future.

Great. Thank you. And then just on the pricing change, and I'll turn it over. Lots of questions. A lot of it going on here. But the pricing change question. that you made. What is the response from your customers? How does your pricing compare, I think, to some of your competitors? And how important is that pricing on the payments piece to the overall customer relationship, the pricing on the payments part?

I guess, Bob, just to clarify, you're talking about the simple practice pricing change, correct?

Yeah, that's right. I'm sorry. Yes, yes.

Sure, no problem. I mean, you know, we... The pricing change went into effect in late March. I think the reaction was went very smoothly, I guess. The rollout has been very smoothly. We haven't really seen an increase in churn, which we're always watching for. So I think it was largely a non-event for us, especially as you think about comparing it to the pricing and packaging change that we did last year, which was far more disruptive. So I think very positive. For us, The real key to our payments offering is the integration into our overall platform and investing in, you know, that integration and the billing capabilities and reporting capabilities for our practitioners adds a lot of value. And so, you know, to continue to make those investments, that's why we made the price increase. You know, so we're, you know, we're certainly providing value and obviously, you know, charging for the value that we provide in return.

Great, thank you.

Thank you. Our next question will come from Ashwin Shukrikar with Citi.

Ashwin, please make sure that you're not self-muted. All right, we'll go to the next question.

Jason Kupferberg with Bank of America. Your line is open.

Good morning, Bob and Cassandra. This is Tyler DuPont on for Jason. Thanks for taking the questions. So just to start off and just to make sure that I'm on the same page here, if you could just spend a minute or two walking through the pieces of guidance, particularly with respect to the acquisition and investiture, sort of when exactly is HealthPay 24 and Luminello expected to close? Is that supposed to be simultaneous? So just any sort of clarity there would be appreciated.

Sure. Thanks, Tyler, for the question. And, yes, there is some moving pieces this quarter, so appreciate the follow-up. So both acquisitions closed as of yesterday. And so, you know, as a result, at least as it relates to health pay, we've removed revenue and adjusted EBITDA associated with that business, you know, as of today effectively, and that is factored in in our guidance report. And just to reiterate, that was about $5 million in revenue that we removed in the back half of this year and about $1 million in adjusted EBITDA. In terms of Tahoe, we are operating under a license and TSA arrangement for this year with them, and we're really focused on the migration effort associated with rolling out an enhanced solution that meets the needs of both customers. So that's our focus for the back half of this year and moving into next year. So we don't expect material contributions from that business while we're making those investments and focusing on that migration plan. And really excited more about the strategic side. value of Tahoe, you know, just given it really moved us more meaningfully into the high-value psychiatry space, gives us more features and functionality, especially e-prescribe, which, as you know, is a roadmap item for us, so certainly accelerates That for us, you know, I think makes us more attractive to multidisciplinary group practices where they often have prescribers and non-prescribers coordinating care together and increases our value on simple practice enterprise. So, you know, for EAPs and MCOs providing access to care for patients who require medication. So for us, it's a very strategic deal, looking forward to the value that it will bring to us on the other side of the migration and later in 2024.

Okay, that's helpful, Cassandra. Thanks for the color there. And then as a follow-up, it just looks like this was another impressive quarter for growth within enterprise. Growth was like I believe, what, around 25% versus customer growth of 7%. So when looking at the drivers here, are you seeing that led by increased transactions in ARPU or sort of any dynamics there that we should pay attention to? And sort of tangentially to that, if you just speak to the trends you're seeing in enterprise as a whole now, you know, sort of X health pay.

Sure. I mean, you know, I think the trend in enterprise has existed for a while where we continue to onboard larger and larger customers. So that is definitely driving the overall ARPU up and contributing to our growth. And also digital adoption, right? Our digital adoption continues to increase and exceed our expectations. And that's contributing to revenue as well. And I think, you know, even more broadly speaking on the enterprise business, you know, those are the two, you know, drivers of overall revenue growth largely. You know, getting new customers live, ramping them up on our solution, and then driving increased rates of digital adoption over time. And, you know, I think both of those continue to deliver superior results for us as it relates to enterprise.

Okay, great. I appreciate that. Thank you very much.

Thank you. Our next question will come from Kerry Tillman with Truist Securities. Your line is open.

Yeah, Bob, Cassandra, Josh. I think if I got this right, it was Hubba Bubba. That's great.

You got it right.

Yeah, awesome. Haven't heard that one before. So first question, it's a multi-parter on the acquisition and the new technology that you get from the acquisition. And then, Cassandra, I had a follow-up for you on revenue cycle management. But first, in terms of your installed base right now of 180 or so thousand clinicians, how much of your current customer base actually prescribes versus doesn't prescribe right now? And then the second part is, Cassandra, it was helpful in terms of this was a roadmap item on ePrescribed. Would this be like an add-on, you think, as you move into next year, or would it just go into one of those SKUs that you have? And then I had a follow-up for Cassandra.

So very small percentage, Terry, of our customers today prescribe. I mean, it's in the, you know, a few hundred. And they're obviously not using simple practice for e-prescribe because we haven't had that. That's been, as you said, a roadmap item. So we're very excited about expanding that, and yes, it obviously has long-term implications for us and our ability to provide e-prescribe in the future to, you know, beyond psychiatry and to other medical specialties. Did that answer your question?

It did. As it relates to, it did, but I guess a follow-up on that. I mean, should we look to 2024 in terms of maybe how this shakes out, whether it's a it's almost like a telemedicine add-on, or it would kind of flow into one of the higher-value use?

Yeah, I mean, that will be bundled in, you know, as we continue to, you know, refine our pricing and packaging over time. But, you know, anticipate that that's bundled in and available to all of the customers that have a need for that over time.

Okay, wonderful. And then, Cassandra, in terms of revenue cycle management, I know it's early days, but do you think this could start to leave a mark in 24, and would it be more of a processing revenue stream or subscription revenue stream? Thank you, and nice job on the quarter.

Sure, thanks, Terry. You know, I guess... First and foremost, it's processing revenue for us, and we are generating revenue through RCM today. I think RCM is a longer-term play, just given the dynamics in place in the market. So we know today that there is a reluctance among providers to accept insurance, just given the challenges administratively there. So we're looking to solve those problems, and we think there is a ton of demand from therapy seekers and and just people more broadly to increase coverage for mental health from the insurance network. So as that changes, I think we'll start to see more and more revenue out of RCM, but I do think it is a longer term part of our story.

Thank you.

Our next question comes from Scott Berg with Needham. Your line is open.

hey guys uh congrats on the quarter this is michael rackers on for scott today um just a couple quick ones from me uh but i guess you know looking at this acquisition do you see you know kind of other areas of consolidation like with similar acquisitions or i guess are there other you know competitors you know in different verticals of a similar size that you know you could acquire moving forward um and then you know how does that play into kind of the the vertical expansion strategy with simple practice.

Yeah, hey, Michael, it's Bob. Yeah, we do anticipate that there's more to come here on strategic acquisitions in the future and a variety of different flavors that could come there, but we definitely are excited about our momentum in the marketplace and and finding other areas for us to participate and add value to, you know, an expanding base of wellness clinicians over time.

Great. Thanks. And then on the pricing increase, could you just kind of walk us through the impact on SMB transaction ARPU growth there? I mean, was most of the growth, you know, kind of driven by that, or are there, you know, any other kind of trends in place?

Sure. So, you know, it's really both, right? So we continue to process more and more transactions on our platform. That's going to continue to drive growth for us, as well as the pricing change that we made. So it was a 20 basis point price increase that occurred in late Q1. And as a result of that change, you know, we've been expecting, just related to the price increase, about an 8% to 12% lift in ARPU on a year-over-year basis. So I think we've been seeing that play out and certainly as a contributor, but it's not the entirety of the growth that we're seeing out of transaction and usage-based revenue within SMB.

Awesome. Thanks.

Thank you. Our next question comes from John Davis with Raymond James. Your line is open.

Hey, good morning, Bob and Cassandra. Cassandra, I just wanted to touch a little bit on the one-time go-to-market expenses in 3Q. for enterprise. Is this kind of a function of reinvesting the upside from 2Q? Just trying to understand how either offensive or defensive these expenses in third quarter are.

I think it certainly is a little bit of that, JD. I mean, we've been operating ahead of plan. you know, for us and driving more profitability and, you know, just thinking about the things that we need to do in our business long-term. You know, we were kind of going after some of these opportunities here that we think will continue to set us up for success in 24 and beyond. So, you know, I think these are opportunistic investments that we're ready to make and execute on. And, you know, I think will help drive longer-term margin expansion for us as well.

Okay, great. And then on Luminello, it definitely seems like it's more of a tech capability buy, and I appreciate it's not in the guide, but any color on either what the current size or growth rate of that business looks like today?

Sure. Thanks for the question. You know, so with Tahoe, you know, Right now, obviously, we're operating under a structure where we have a license agreement in place with a TSA, and we're collectively very focused on creating that enhanced solution so that we can migrate to one single platform. That's the goal. For us, it will start to contribute to revenue and EBITDA once we get on the other side of the migration. If you think about business, obviously, just given the size of the purchase price, it's not a huge business, but we are picking up a couple thousand customers. And, you know, the ultimate goal will be to migrating to this single solution. And during that time period, you know, those customers will be onboarded to our platform. And, you know, we'll start to see ARPU from them bleed in. I think during the period of migration, you can expect ARPU to be a little bit lower. And then in the second year post that migration, probably more in line with simple practices, ARPU. And then I think where there's upside is longer term, just given the high value of the psychiatry market itself, I think we'll start to see ARPU trend higher in the out years there. You know, again, on the other side of the migration, we'll start to see higher flow through to the bottom line as well. So, you know, we're really excited about the deal. We're probably most excited just about the strategic value that we're getting of, you know, moving more meaningfully into the psychiatry market, you know, the features and functionality, the acceleration in our roadmap on e-prescribe, you know, and then the value to multidisciplinary group practices and and EAPs and MCOs is very much in line with the strategy that we've been executing on here for a while.

Okay, great. And then one quick one for you, Bob. We've talked about the e-prescribed capability for a while. It's been on the roadmap. I understand kind of going after mental health first and kind of getting this integrated is priority one, but how do you think about it opening up the ability to attack other sub-verticals within healthcare down the road?

Yes, it definitely is an asset, J.D., for us as we move forward. I mean, think more out there a little bit for us because we've really got our hands full in behavioral health and the other wellness verticals that we're already in in terms of growth for the next couple of years. But, yes, e-prescribed will be something that will obviously get woven into our value proposition for medical specialties as we move forward.

Okay, thanks guys.

Thank you. Thank you. Our next question will come from Jeff Van Reeve with Craig Hallam. Your line is open.

Great. Thanks for taking my questions. I've got a couple. First, maybe just on the enterprise side, you talked about the size of deals increasing. I'm just curious, you know, you talked about like the top of funnel and large deals. The large deals, is that a function of scalability increases in the product? Is it a change in focus on the sales side? Just talk about what's driving you up into these larger deals, maybe.

Yeah.

Hey, Jeff. It's Bob.

The larger deals, yeah, I mean, we're really – part of it is coming from partnerships, right, alliances that we've got with Guidewire, for example. We signed a large insurance southern farm deal. In Mississippi, that's another Guidewire referral that comes to us through our alliances. So in some cases, it's our move up market with alliances. So, for example, another Oracle deal as well that's signed in the quarter. Part of it is we've always had plenty of scale opportunities. The enhancements that we do make over time as we do go up market is are necessary to satisfy the needs of those customers. We are true SaaS, single instance, multi-tenanted. So as other interested, more enterprise style customers come along that are large, Now that we've added those enhancements and features that are desired by those enterprise customers, it gives us the ability to add the value and win those deals where previously we might not have been going after those. So I think that it's both product, not really scale, but product enhancements as well as alliance-driven.

Got it. That's helpful. And then in the incremental S&B wellness markets that you're pursuing currently, Anything to call out in terms of the trends of customer acquisition costs? I know you've played with a lot of digital go-to-market and ways to approach those different verticals. Just as you've been tuning the models around CAC to then maybe step on the gas, any areas where you feel like you've kind of got it dialed in and are really pouring in a bit more expenditure there or just some thoughts on that?

I mean, you know, we continue to see really strong trends on the new customer acquisition side for simple practice, both within behavioral health and in, you know, the new expansion specialties, primarily SLP and OT is where we see that growth. And I do think this year we've really been fine tuning that model. And, you know, that's playing out in the results, you know, second quarter. Both customer ads exceeded our expectations. And we saw an acceleration in ads from Q1, which we don't typically see. So I think that was very positive. You know, we're continuing to dial up the investment where it makes sense. But I think, by and large, we have the model down for these markets.

Got it. Okay, great. Thanks.

Thank you. Our next question will come from Tianxinhong with JP Morgan. Your line is open. Thank you.

Hi, good morning. Thanks for all the detail here. I just want to ask on enterprise and I heard about the backlog and the pipeline and whatnot, but are implementation timetables changing at all? Any signs of lengthening? I know in the broader IT services space, I've been asking this question quite a bit because we're seeing some cancellations and delays. So curious if that's relevant here.

I would say no, actually. Certainly through the first half of this year, we've seen really strong go-lives. We haven't seen any change in the trend as it relates to go-lives. I mean, there is always that ebb and flow that happens with deals going live earlier, deals pushing out for a variety of reasons. We manage through that very well. So I wouldn't say we've seen any change there.

Perfect. And then just quickly on the manila, just in terms of your diligence and how you know this asset in general, can you just give a little bit more of your familiarity with it to go ahead and do the deal? Thank you. Sure.

You know, a founder that had a very similar outlook to the founder of Simple Practice, you know, very customer-centric, actually a practicing psychiatrist that was frustrated with the tools available for practice management and, you know, felt that, you know, he could build something better, and he did. And, you know, remarkably similar culture and customer-centric approach to the market. You know, very nice platform. It has a few... enhancements old for psychiatry specifically that are will also and help us as we bind them into a singular so single solution the simple practice solution to enable better work with groups and with you know with well certainly he prescribed being a major one so we just think it's the best of both worlds opportunity very strong customer strong loyal customer base and So similar, I guess, momentum to simple practice, albeit a smaller subset because there aren't as many psychiatrists as there are mental health professionals, if you will, and wellness professionals. Right.

Sounds promising. Thank you.

Thank you. Our next question will come from Bob Napoli with William Blair. Your line is open.

Thank you for the follow-up. Just on the enterprise business calling out momentum in insurance and tax, can you give maybe just some color on the mix of enterprise? What is the size of insurance and tax versus other key verticals today?

I mean, I would say our core government utility market is by far the largest. You know, today insurance is, you know, it's growing very fast. So, you know, we don't break out necessarily the components there. But, you know, I think insurance is going to be a meaningful business for us over time. And, you know, we're really starting to pick up scale there. Thank you. And then we've also –

Sorry, Bob. I was going to add that tax is something that we were in early. And to Cassandra's point, it is, you know, the utilities still seem to drive it. But we've been in the tax business for a long time, and we love the product market fit there. So we see that as a growth opportunity as well.

Great. And I always get asked, I know that we've talked about this a lot, but I still get asked a lot about, you know, why, what is tax? I'm sorry, the enterprise business or invoice cloud doing that is allowing it to have higher adoption rates than its competitors?

Well, the first reason is that it is single instance multi-tenanted. And right now, we still are operating with about 45% for Invoice Cloud. It's an electronic bill presentment and payment solution. And it's primarily revenue from transactions. So we're getting about 45% of the bills that get issued to an Invoice Cloud customer get paid through Invoice Cloud, which means that more than 50% on average are not being paid through Invoice Cloud yet. while we have customers that are at 80% and higher. So we know how to get the existing base from 45% to 80%, so we have a team of customer success managers that are actually working on that very diligently. In the meantime, we continue to enhance the platform, and when we do enhance it, everybody gets those enhancements simultaneously. So that's the beauty of single instance multi-tenancy, where we don't have that with most of our competitors. So that gives us a significant advantage in terms of being able to drive adoption and retention of customers better or more quickly than our competitors. And it obviously provides a significant value proposition to a customer in the selling process and to strategic alliances as we speak with them about the opportunity to partner with us and not be stuck in time with a solution that doesn't installation because it's hosted and that installation remains the same until they do some kind of an upgrade. We're constantly pushing every month to enhance the solution and drive higher adoption through simplification and better features.

Thank you. And then just last question on free cash flow conversion, what should we expect over the medium to long term on free cash flow conversion rates?

I mean, I think it's tough to say we've got to get through the impact of the tax code changes this year. I think we'll certainly see the conversion rate improve from where it will be this year, just given this is the first year of the impact there. But while we're, one, turning profitable, and then, two, investing meaningfully in R&D, we will have more of an impact from taxes that will be impacting that rate. So, you know, I think we'll see it tick up from the 50-ish or so percent, but I don't think we'll get back to the rate, the full rate that we had before, which was kind of closer to the 75, 80% range. So somewhere in between. Great.

Thank you. Appreciate it.

No problem.

Thank you. There are no additional questions registered at this time. I will now pass the floor back over to Bob Bennett for closing remarks.

Thank you. EngageMart had a successful, vibrant second quarter. Both of our segments contributed to achieve record revenue and adjusted EBITDA results, reflecting the momentum we have built. Our achievements were driven by several key factors, including robust customer growth, an increase in average revenue per customer, and exceptional customer retention. We are well positioned to take advantage of the immense market opportunity in the U.S., and our compelling win-win value proposition continues to resonate with customers. We look forward to speaking with you again later this quarter at the KeyBank Technology Leadership Forum, surrounded by mountains in Vail, as well as the Goldman Sachs Communicopia and Technology Conference in San Francisco.

Thank you, ladies and gentlemen. This concludes today's conference call, and we appreciate your participation. You may disconnect at any time.