EngageSmart Announces Fourth Quarter and Full Year 2022 Results

EngageSmart, Inc. (NYSE: ESMT), a leading provider of vertically tailored customer engagement software and integrated payments solutions, today reported financial results for the fourth quarter and full year ended December 31, 2022.

"Our fourth quarter results again exceeded our revenue and Adjusted EBITDA guidance, closing out a phenomenal year of outperformance," said Bob Bennett, EngageSmart CEO. "Robust customer demand and strong execution across our business segments drove record annual revenue of $303.9 million, representing 41% year-over-year growth, all organic, and record net income of $20.6 million and record annual Adjusted EBITDA of $49.3 million. Our dedication to simplifying customer and client engagement is resonating with customers, our products are gaining market share, and we are expanding our footprint across all verticals."

"We delivered outstanding profitable growth, as we leveraged our proven customer-focused product leadership strategy, our deep vertical expertise, our strategic alliances, and our highly motivated teammates to drive product innovation and extend our market leadership," stated Cassandra Hudson, EngageSmart CFO. "Our SMB segment is uniquely positioned to address the shortage of mental health professionals and the high demand for care. Driven by new customer adds, a favorable subscription mix, and the successful pricing and packaging changes, SMB achieved annual revenue growth of 52% in 2022. Our Enterprise segment continues to benefit from secular tailwinds, stemming from the need for organizations to digitize their operations. Fueled by customer go-lives and high digital adoption with existing customers, Enterprise exceeded our expectations and delivered annual revenue growth of 29%. Heading into 2023, we look forward to capitalizing on the underlying momentum in both segments of our business, supported by our strong balance sheet, highly profitable business model, and resilience to macro pressures."

Fourth Quarter 2022 Financial and Business Performance

• Total Revenue increased 36% to $83.9 million compared to $61.6 million in the fourth quarter of 2021.
• SMB Revenue increased 45% to $45.2 million compared to $31.1 million in the fourth quarter of 2021.
• Enterprise Revenue increased 27% to $38.7 million compared to $30.6 million in the fourth quarter of 2021.
• Gross Profit was $64.7 million, representing 77.2% gross margin, compared to $46.2 million, or 75.0% gross margin, for the fourth quarter of 2021. Adjusted Gross Profit was $66.7 million, representing 79.5% Adjusted Gross Margin, compared to $48.0 million, or 77.8% Adjusted Gross Margin, for the fourth quarter of 2021.¹
• Net Income was $4.9 million, representing 5.8% net income margin, in the fourth quarter of 2022, compared to net loss of $0.9 million, or 1.5% net loss margin, in the fourth quarter of 2021.
• Adjusted EBITDA was $13.6 million, representing 16.2% Adjusted EBITDA Margin, compared to $6.3 million, or 10.2% Adjusted EBITDA Margin, for the fourth quarter of 2021.¹
• Total Transactions Processed increased 25% to 38.9 million compared to 31.2 million in the fourth quarter of 2021.

Full Year 2022 Financial and Business Performance

• Total Revenue increased 41% to $303.9 million compared to $216.3 million in the prior year.
• SMB Revenue increased 52% to $165.5 million compared to $108.7 million in the prior year.
• Enterprise Revenue increased 29% to $138.5 million compared to $107.5 million in the prior year.
• Gross Profit was $232.1 million, representing 76.4% gross margin, compared to $161.2 million, or 74.5% gross margin, in the prior year. Adjusted Gross Profit was $239.3 million, representing 78.8% Adjusted Gross Margin, compared to $167.9 million, or 77.6% Adjusted Gross Margin, in the prior year.¹
• Net Income was $20.6 million, representing 6.8% net income margin, compared to a net loss of $9.0 million, or 4.1% net loss margin, in the prior year.
• Adjusted EBITDA was $49.3 million, representing 16.2% Adjusted EBITDA Margin, compared to $30.6 million, or 14.2% Adjusted EBITDA Margin, in the prior year.¹
• Total Transactions Processed increased 32% to 146.8 million compared to 111.4 million in the prior year.
• Total Number of Customers increased 24% to 102,700 as of December 31, 2022, compared to 83,000 as of December 31, 2021.
• Cash and Cash Equivalents were $311.8 million as of December 31, 2022, compared to $254.3 million as of December 31, 2021.

2022 Business Highlights

EngageSmart and its vertically tailored solutions achieved industry recognition:

• EngageSmart named one of the fastest-growing companies in North America on the 2022 Deloitte Technology Fast 500tm.
• EngageSmart named a winner of the Top Workplaces USA 2022 Award.
• EngageSmart named a winner of the Top Workplaces for Compensation & Benefits, Employee Well-Being, Innovation, Leadership, Purpose & Values, and Work-Life Flexibility in 2022.
• SimplePractice honored as Gold Stevie® Award Winner in the 2022 Stevie Awards for Great Employers and named to Built-In's 2022 Best Places to Work Awards.
• DonorDrive named Salesforce's 2022 Nonprofit Product Partner of the Year.

Vertical expertise and product innovation drive strong market leadership across verticals:

• SimplePractice launched SimplePractice Enterprise, an API integration for Employee Assistance Programs and Managed Care Organizations that connects to practitioners' SimplePractice accounts and creates a streamlined referral process for providers.
• InvoiceCloud launched functionalities that remove friction and enhance the customer experience, including data management tools that enable data-driven decision making.
• DonorDrive added new features to its mobile charity fundraising app to further simplify fundraising and boost supporter engagement.

EngageSmart added Scott Semel, Senior Vice President, General Counsel, to the Leadership Team and added Ian Knox, Chief Product Officer at SimplePractice.

Financial Outlook

With the information available as of February 9, 2023, we are providing the above guidance for the first quarter and full year of 2023, based on current market conditions and expectations. This guidance is subject to various important cautionary factors referenced in the "Forward-Looking Statements" section below.

We do not provide a reconciliation of Adjusted EBITDA guidance to net income (loss) on a forward-looking basis due to difficulty in predicting certain items excluded from this non-GAAP financial measure; specifically, stock-based compensation, provision for (benefit from) income taxes, transaction-related expenses, and restructuring charges. We expect the variability of these excluded items may have a significant, and potentially unpredictable impact on our future GAAP financial results.

Webcast and Conference Call Information

EngageSmart, Inc. (NYSE: ESMT), a leading provider of vertically tailored customer engagement software and integrated payments solutions, will report fourth quarter and full year 2022 financial results before the market opens on Thursday, February 9, 2023. Management will host a conference call to discuss the results at 8:30 a.m. ET.

The conference call will be webcast live on EngageSmart's investor relations website at https://investors.engagesmart.com/events-and-presentations/events/. A replay will be available on the investor relations website following the call.

For investors and analysts wishing to participate in the call, the dial-in numbers are (800) 225-9448 for domestic callers and (203) 518-9708 for international callers. The conference ID is ENGAGESMART, and the program title is EngageSmart Q4 2022 Earnings Call.

About EngageSmart

EngageSmart is a leading provider of vertically tailored customer engagement software and integrated payments solutions. At EngageSmart, our mission is to simplify customer and client engagement to allow our customers to focus resources on initiatives that improve their businesses and better serve their communities. EngageSmart offers single instance, multi-tenant, true Software-as-a-Service ("SaaS") vertical solutions, including SimplePractice, InvoiceCloud, HealthPay24 and DonorDrive, that are designed to simplify our customers' engagement with their clients by driving digital adoption and self-service. As of December 31, 2022, EngageSmart serves 99,300 customers in the SMB Solutions segment and 3,300 customers in the Enterprise Solutions segment across several core verticals: Health & Wellness, Government, Utilities, Financial Services, Healthcare and Giving. For more information, visit www.engagesmart.com and follow us on LinkedIn.

Forward-Looking Statements

Certain statements in this release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on current expectations and assumptions that are subject to risks and uncertainties. All statements contained in this news release that do not relate to matters of historical fact should be considered forward-looking statements, and are generally identified by words such as "expect," "intend," "anticipate," "estimate," "believe," "future," "could," "should," "plan," "aim," and other similar expressions. These forward-looking statements include, but are not limited to, statements regarding anticipated financial performance and financial position, including our financial outlook for the first quarter and full year 2023 and thereafter, and other statements that are not historical facts. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those contained in the forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including, but not limited to, the following: our inability to sustain our rapid growth; failure to manage our infrastructure to support our future growth; our risk management efforts not being effective to prevent fraudulent activities; inability to attract new customers or convert trial customers into paying customers; inability to introduce new features or services successfully or to enhance our solutions; declines in customer renewals or failure to convince customers to broaden their use of solutions; inability to achieve or sustain profitability; failure to adapt and respond effectively to rapidly changing technology, evolving industry standards and regulations and changing business needs, requirements or preferences; real or perceived errors, failures or bugs in our solutions; intense competition; lack of success in establishing, growing or maintaining strategic partnerships; fluctuations in quarterly operating results; future acquisitions and investments diverting management's attention and difficulties associated with integrating such acquired businesses; general economic conditions (including inflation and rising interest rates), both domestically and internationally, as well as economic conditions affecting industries in which our customers operate; the war in Ukraine; concentration of revenue in our InvoiceCloud and SimplePractice solutions; COVID-19 pandemic and its impact on our employees, customers, partners, clients and other key stakeholders; legal and regulatory risks; and technology and intellectual property-related risks, among others.

Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect the Company's operating results and financial condition are discussed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, and our subsequent Quarterly Reports on Form 10-Q, as updated by our future filings with the Securities and Exchange Commission ("SEC"). Such statements are based on the Company's beliefs and assumptions and on information currently available to the Company. The Company disclaims any obligation to publicly update or revise any such forward-looking statements as a result of developments occurring after the date of this document except as required by law.

Non-GAAP Financial Measures

This press release includes certain performance metrics and financial measures not based on GAAP, including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, Adjusted Gross Margin, Non-GAAP Operating Expenses, and Free Cash Flow, as well as key business metrics, including total Number of Customers and total Transactions Processed.

Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, Adjusted Gross Margin, Non-GAAP Operating Expenses, and Free Cash Flow are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP and should not be considered as an alternative to net income (loss), gross profit, operating expenses, net cash provided by operating activities or any other performance measure derived in accordance with GAAP.

We define Adjusted EBITDA as net income (loss) excluding interest (income) expense, net; provision for (benefit from) income taxes; depreciation; and amortization of intangible assets, as further adjusted for transaction-related expenses, the fair value adjustment of acquired deferred revenue, stock/equity-based compensation, and restructuring charges. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by revenue plus the fair value adjustment of acquired deferred revenue.

We define Adjusted Gross Profit as gross profit as adjusted for the fair value adjustment of acquired deferred revenue, amortization of intangible assets, stock/equity-based compensation, and transaction-related expenses. We define Adjusted Gross Margin as Adjusted Gross Profit divided by revenue plus the fair value adjustment of acquired deferred revenue.

We define Non-GAAP Operating Expenses as GAAP operating expenses excluding stock/equity-based compensation and transaction-related expenses. We define Non-GAAP Operating Expenses as a percentage of revenue as Non-GAAP Operating Expenses divided by revenue plus the fair value adjustment of acquired deferred revenue.

We define Free Cash Flow as net cash provided by operating activities less purchases of property and equipment, including costs capitalized for development of internal-use software.

We define Number of Customers as individuals or entities with whom we directly contract to use our solutions.

We define Transactions Processed as the number of accepted payment transactions, such as credit card and debit card transactions, automated clearing house ("ACH") payments, emerging electronic payments, other communication, text messaging and interactive voice response transactions, and other payment transaction types, which are facilitated through our platform during a given period. We believe Transactions Processed is a key business metric for investors because it directly correlates with transaction and usage-based revenue. We use Transactions Processed to evaluate changes in transaction and usage-based revenue over time.

We calculate our dollar-based net retention rate at the end of a given period by using (a) the revenue from all customers during the twelve months ending one year prior to such period as the denominator and (b) the revenue from all remaining customers during the twelve months ending as of the end of such period minus the revenue from all customers who are new customers during those twelve months as the numerator. We define new customers as customers with whom we have generated less than twelve months of revenue. Acquired businesses are reflected in our dollar-based net retention rate beginning one year following the date of acquisition.

We caution investors that amounts presented in accordance with our definitions of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Gross Profit, Adjusted Gross Margin, Non-GAAP Operating Expenses, and Free Cash Flow may not be comparable to similar measures disclosed by our competitors because not all companies and analysts calculate these non-GAAP financial measures in the same manner. We present these non-GAAP financial measures because we consider these metrics to be important supplemental measures of our performance and believe they are frequently used by securities analysts, investors, and other interested parties in the evaluation of companies in our industry. Management believes that investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations.

Non-GAAP financial measures assist management in assessing operating performance by removing the impact of items not directly resulting from our core operations, to present operating results on a consistent basis. Management uses these non-GAAP financial measures for planning purposes, including the preparation of our internal annual operating budget and financial projections; to evaluate the performance and effectiveness of our operational strategies; and to evaluate our capacity to expand our business. These non-GAAP financial measures have limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or a substitute for net income, gross profit, operating expenses, net cash provided by operating activities, or other financial statement data presented in accordance with GAAP in our consolidated financial statements.

Disclosure

We disclose information to the public concerning EngageSmart, EngageSmart's products and services, and other items through a variety of disclosure channels in order to achieve broad, non-exclusionary distribution of information to the public. Some of the information distributed through these disclosure channels may be considered material information. Investors and others are encouraged to review the information we make public in the locations below.* This list may be updated from time to time.

*For information concerning EngageSmart and its products and services, please visit: www.engagesmart.com

*For information provided to the investment community, including news releases, events and presentations, and SEC filings, please visit: investors.engagesmart.com/overview/default.aspx

*For information provided to the media, including news releases, please visit: investors.engagesmart.com/news/default.aspx

*For additional information, please follow EngageSmart's social media accounts: www.twitter.com/engagesmartinc, www.facebook.com/EngageSmartInc, and www.linkedin.com/company/engagesmart