EverCommerce

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

EverCommerce provides a suite of vertically-focused software solutions to service-based small and mid-sized businesses, operating primarily as a SaaS model.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

EverCommerce (EVCM) is a provider of vertically-tailored software solutions designed for service-based businesses. Their offerings are primarily delivered through a SaaS model, encompassing a diverse suite of functionalities from booking, scheduling, and managing customer interactions to marketing technology solutions. The company operates in a variety of industries, such as home, health, and wellness services, and seeks to help small businesses improve efficiency and increase profitability. They serve over 650,000 customers and their solutions are sold to companies in a wide range of sizes.

Importantly, EverCommerce’s success depends on recurring revenue, meaning the business should have good cash visibility.

Revenue Distribution

The company’s revenue is primarily driven by subscription and transaction fees.

  • Subscription and transaction fees: Represent recurring and usage-based income derived from the software solutions they provide to businesses, including booking, management, and marketing services. This type of revenue is predictable, and provides higher margins and stable cash flow.
  • Marketing technology solutions: Consist of revenues from digital marketing programs and digital presence solutions, such as advertising, search engine optimization and social media engagement. This is typically the fastest-growing area.
  • Other: Includes revenue from payments related to financing and third-party integrations.

Several trends shape the landscape EverCommerce operates within:

  • Shift to digital: Small and mid-sized businesses are increasingly adopting technology to manage their operations, interact with customers and market their offerings, which has been an accelerating trend. This shift is driving demand for specialized software solutions.
  • Increased competition: Software providers serving SMEs are proliferating, increasing the competition, forcing companies to differentiate their solutions.
  • Customer expectation for easy-to-use solutions: SMEs seek flexible and easy to use software, that integrates the entire business into a single offering.

Margins and Profitability

From 2021-2023:

  • Adjusted gross profit increased from 344 to 404 million showing good gross profits.
  • Adjusted EBITDA increased from 99.2 million to 125.8 million showing improving profits, however, there is a consistent amount of operating expenses and net loss.
  • Net income shows a loss between (39) million and (114) million over the past three years, however, the net income loss decreased in 2023. This is primarily a result of increased interest expenses and amortization.

These metrics show that the business has a long way to go in terms of proving itself to be a profitable business.

Competitive Landscape

EverCommerce operates in a fragmented market with a wide array of competitors across different verticals, such as:

  • Vertical Software Players: Many niche software providers focusing on a particular industry (e.g., healthcare).
  • Generalized SaaS Platforms: Larger, broader platforms that serve a wider customer base, although they may not offer a deep level of integration across all a service-based business’s requirements.
  • In-house software and systems: Companies may also elect to build their own business software.

The key distinguishing factors for EverCommerce in the competitive market are its specific verticals and the depth of functionality within the platform.

What Makes EverCommerce Different?

EverCommerce’s differentiator is its focus on vertically integrated platforms. The company targets very specific service-based verticals, creating tailored solutions that go well beyond one specific business operation. These include a lot of integrations into the company’s day-to-day operations, including features such as scheduling, payments, and management reporting. This is quite different from competitors such as generalized SaaS platforms.

In a nutshell, their solutions are typically more complex and expensive than solutions used by many service companies, resulting in a type of customer lock-in.

Financials In-Depth

Revenue

EverCommerce has shown consistent revenue growth. It’s 50% of revenues come from recurring software revenues and payment revenues which are growing, both due to acquisitions and organic growth. Over the last three years, revenues increased significantly:

  • 2021: 400.6 million
  • 2022: 448 million
  • 2023: 570 million

These trends demonstrate the growth of the platform and increasing adoption of its solutions.

Profitability

The company’s path to profitability is still underway. The growth in gross profit is encouraging, however, net losses are still present with the company continuing to invest in product development and acquisitions.

  • Adjusted EBITDA: Adjusted EBITDA is a good measure for earnings before all the interest and other financing cost. Adjusted EBITDA is positive and growing.
    • 2021: 99.2 million
    • 2022: 111.5 million
    • 2023: 125.8 million
  • Net Losses: The most notable negative trend is that the company still registers losses. A large percentage of losses can be attributed to interest and amortization of acquired intangibles. Although these are non-cash items, they still affect a company’s ability to generate net profits.

Balance Sheet Health

The balance sheet shows a decent financial position. With nearly $900 million in assets, and a similar number of total liabilities, this gives a debt-equity ratio of around 1, which isn’t too alarming. On the asset side, large portions comprise of intangible assets, including goodwill, and developed technology.

Notably, a large portion of liabilities is long term liabilities and deferred income.

  • Assets:
    • Cash and cash equivalents: $90 Million (fairly small).
    • Acquired intangibles: $430 million (significant percentage of assets).
    • Goodwill: 310 Million
    • Net PP&E: $115 million
  • Liabilities:
    • Deferred revenue: $430 million (significant).
    • Short-term debt: $150 million
    • Long-term debt: $485 million
    • Total Liabilities: 1059 Million

The company also has a large negative number in its retained earnings, which means the company has accumulated losses over the years. This may require future restructuring. Despite these issues, the company seems stable in its short-term debt. With a quick ratio of 1.58, it is unlikely that the company will face liquidity or solvency issues in the short-term, and it might be worth taking a bet.

Moat Analysis: Rating 2/5

Moat Rating: 2 / 5

  • Intangible assets: + The value of their software solutions. The company also owns many brands across different sectors.
  • Switching costs: + Although the software itself is not complex, the switching costs are high. A customer would have to go through much effort to change providers. This has the ability to create lock-in.
  • Network Effects: - No significant network effects.
  • Cost Advantages: - Does not appear to have sustainable cost advantages, although its solutions are meant to be affordable.
  • Size Advantages: - Many large competitors exist in the industries it operates within.

Overall, the company appears to possess weak to average moats. The company is showing potential, but there is still much room for improvement. Although the business is in growing industries, and seems to have a tailored product offering, competitors exist in all of the industries it operates.

Risks to the Moat and Business Resilience

Several risks could pose a threat to the company’s moat and business resilience:

  1. Increase in competition: The biggest threat comes from new and old competitors entering its space and providing more targeted services. This could especially threaten areas where their software isn’t as robust.
  2. Slowing growth: The company must continue to provide robust revenue growth to create value for shareholders. Failure to acquire new users or increase profits may lower the price significantly.
  3. Acquisition Integration Risks: Over the past few years, many acquisitions have occurred that have not yet seen a significant return. Poor integration with acquired businesses can lead to a drag in the long-term.
  4. High dependence on acquisition: A large portion of the revenue and growth comes from its acquisitions. This also exposes it to the risk of overpaying for acquisitions.
  5. Customer Acquisition Costs: If EverCommerce’s customer acquisition costs increase and the price of acquiring new customers becomes unsustainable, then that could become a serious problem.

Understandability: Rating 3/5

The business is moderately easy to understand, because while the overall business model is easily digestible, one has to dive deeper to understand different business models of different offerings.

  • The concept of vertically-integrated SaaS solutions for service-based companies is clear.
  • However, some of the financial metrics are complex, requiring a good understanding of accounting.
  • Some of the finer points of their customer offerings will require further research to fully understand.

Overall, the business is relatively easy to understand, but requires more research than some simpler business models.

Balance Sheet Health: Rating 4/5

  • The company seems well-capitalized. They have a good amount of assets relative to debt. This helps create a stronger financial position to grow in the future.
  • The company doesn’t have issues repaying short-term loans or debt obligations. Liquidity seems to be relatively strong.
  • Despite a healthy balance sheet, continued losses are still present and something that must be monitored. The negative book value of equity, due to consistent losses, may require some restructuring or asset sales in the future.

Overall, the company appears to have a strong financial position with certain vulnerabilities, which give it a slightly less than excellent score.