ESMT - EngageSmart: Be Smart Ride On This Wave Of Digitization

Summary

• Evolving consumer preference necessitates adoption of digital tools.
• EngageSmart, Inc. solutions are cloud native and vertical-focused solutions.
• EngageSmart solutions are highly scalable with extended range of integrations.

Thesis highlight

EngageSmart, Inc. ( ESMT ) is worth more than its share price today. ESMT's solutions are designed to streamline the way their clients interact with their customers. The use of digital tools is becoming increasingly common in businesses of all sizes, and ESMT is well-positioned to take advantage of this trend.

Company overview

ESMT's offerings include customer engagement software with built-in payments processing. With the goal of facilitating digital adoption and self-service, the SaaS (Software as a Service) vertical solutions they offer are designed to streamline the way their clients interact with their customers. The five main areas that ESMT concentrates on are health and wellness, government, utilities, finance, and philanthropy.

Evolving consumer preference necessitates adoption of digital tools

In my opinion, a number of major developments are speeding up the adoption of business management and customer engagement solutions, as well as payment systems.

First of all, consumers' needs are evolving quickly. When dealing with mundane administrative tasks like making an appointment or paying a bill, many consumers have grown accustomed to a certain amount of friction and hassle. Customers nowadays anticipate easy-to-use, digitally-first interactions with service providers, bill payment, and task completion across a variety of devices.

Today's business leaders must do more than just adapt to the shifting preferences of their customers; many have embraced the use of digital technologies to streamline and broaden their operations. Digital technologies are being adopted by businesses as a means to increase growth, optimize processes, reduce costs, enhance the customer experience, and free up employees for more strategic endeavors. The widespread spread of COVID-19 has also hastened the shift to digital methods in many sectors. Businesses that don't adapt to the market risk being left behind.

The ease with which a digital solution can be implemented is something that should not be overlooked. The use of digital tools is now commonplace in companies of all sizes. Unlike large corporations, which can afford the time and manpower needed to implement, integrate, and maintain a wide range of point solutions, SMEs (small and medium-sized enterprises) need straightforward, user-friendly, all-encompassing technology solutions. Larger enterprises and SMEs alike can now realize a greater return on investment and face fewer obstacles thanks to the advent of cloud native SaaS, which have made software solutions more accessible and cost-effective.

It's possible that some people will question a business' decision to invest in cutting-edge tech. To put it simply, many existing solutions are constructed on antiquated technology and not able to provide modern digital engagement solutions in response to consumers' ever-evolving preferences. Also, many SMEs lack adequate internal IT resources, so they continue to use antiquated methods of conducting business and communicating with customers. As such, the ability to continuously deliver enhancements to all customers at the same time is hindered by legacy infrastructure, which also slows innovation cycles and fails to meet adequate compliance standards. As a result, providers often face substantial technological and service burdens and complaints from their clientele.

I therefore believe that the use of cutting-edge digital solutions is on the rise, and that ESMT is positioned to reap the benefits of this trend.

Cloud native and vertical-focused solutions

The software solutions provided by ESMT are all hosted in the cloud and allow for digital adoption as well as self-service capabilities for customer engagement. Since the services are hosted in the cloud and are shared amongst multiple users, they can be used simultaneously. By utilizing a cloud-based architecture, ESMT is able to quickly iterate on new product features and release them to customers at lower operational costs than traditional service providers. This is important as it means ESMT has a cost advantage to legacy solution providers, which means two things:

1. ESMT could offer the same product offering at a lower price to capture share; or
2. ESMT could offer the same product offering at the same price as legacy providers to improve margins

Either way, it works in the favor of ESMT.

On top of that, ESMT employs business strategy to zero in on particular industries; this is a move I applaud because it allows the company to concentrate its efforts and, consequently, its reputation and product offering. ESMT focuses on gaining expertise in the industries it serves and hires experts with deep knowledge of those industries to drive innovation and product development. This focus on specialized knowledge helps ESMT provide better solutions to its customers. As a result, I believe they are in a better position to offer software solutions that are adapted to specific industries and that cater to the unique processes and needs of their clients. When comparing ESMT to the "one size fits all" solutions offered by other providers, vertical domain expertise stands out as a key differentiator.

Highly scalable with extended range of integrations

To me, scalability is a crucial factor to consider when evaluating software solutions, and ESMT has all the necessary components. Readers should keep in mind that serving thousands of customers with varying degrees of engagement and different business requirements requires careful planning and engineering as the business grows. Customizing software to better meet the needs of individual users is a time-consuming, costly approach. This is especially true if your target market consists of SMEs, the number of which is exponentially higher than that of large corporations.

According to the S-1, ESMT has spent tens of thousands of man-hours developing its SaaS solutions in accordance with the principles of exposing capabilities through configuration, so that they can be used by any customer at any time without affecting the integrity of the products themselves. Which means, all customers have the freedom to adopt new features at their own pace, and new customers can be onboarded rapidly. Furthermore, ESMT's solutions are made to steer clear of legacy dead ends brought on by bespoke changes. Customers, on the other hand, have the ability to tailor their experience by selecting the features they want, either independently or with guidance from the service provider. Since most SMEs lack the coding capabilities to run complex codes, I believe the best thing about ESMT from the perspective of a SME is that no custom coding is required to take advantage of the capabilities of our SaaS platform.

When you think of customization, integration is what you think of. The solutions offered by ESMT harness the potential of collaboration by means of integration. Many organizations rely on in-house or external systems and technology for crucial functions like customer data delivery and management or central software operations. This, I believe, has been acknowledged; consequently, ESMT have built and integrated APIs, web service endpoints, and other mechanisms for communicating with a wide range of providers and vendors of essential software systems, both from the perspective of customers and suppliers. This is a brilliant and astute move on their part, because the integrations' architecture and the design patterns they employ make it easy to rapidly extend integrations to new providers or vendors.

Effective GTM strategy

There is no universally applicable GTM (go-to-market) approach, and the same holds true for ESMT. A different approach is required when going after SMEs as opposed to large corporations (as stated above, the number of businesses out there is 1 key factor). When it comes to reaching out to potential clients, ESMT has a wide range of options and an efficient approach that is adapted to each customer segment. ESMT's SMB Solutions division is most successful at drawing new customers from organic search engine optimization, earned media, and customer referral programs. Enterprise Solutions at ESMT integrates with customers' back-end core systems and acquires customers through a partners with their own sales force, both of which speed up the process of acquiring new customers and increase their likelihood of sticking around.

Valuation

Price target

My model suggests a price target of $19.43 in FY23. This assumes that revenue will continue its high growth rate, and the forward revenue multiple will be 6x in FY23e.

I used management guidance for my FY22 estimates, and I believe that due to the large total addressable market ("TAM"), ESMT can continue to grow at historically high rates in FY23e and beyond. In terms of valuation, ESMT currently trades at 6x forward revenue, and I assumed that it would continue to trade at this level in the future. That being said, I believe that once we get past this weak macro environment, ESMT could see a positive re-rating of its average trade back to its 10x average, implying additional upside.

Risks

Competition

Considering how many different software programs already exist, it's clear that getting started in this field requires little effort. In addition, this market's massive size ensures that investors will keep pouring money into it, leading to even more rivalry. There will inevitably come a point when competing businesses offer identical products, at which point (assuming there are many competitors) the market will compete more on price – which is not a healthy game to play.

Recession

Obviously, this would be bad for ESMT, as the majority of their business is with SMEs. In a downturn, SMEs are more likely to fail due to a weaker financial position, which means that ESMT would be directly impacted on two fronts: increased churn and weak customer growth.

Conclusion

EngageSmart, Inc. is cheap today, in my opinion. ESMT offers customer engagement software with built-in payment processing. Their goal is to facilitate digital adoption and self-service, and their SaaS solutions are designed to streamline the way their clients interact with customers. The use of digital tools is becoming more common in companies of all sizes, and EngageSmart, Inc.'s cloud-based architecture allows them to innovate quickly and release new features to customers at lower operational costs than legacy providers. This cost advantage positions EngageSmart, Inc. to capture market share or increase revenue while maintaining the same pricing as legacy providers.

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