ESMT - EngageSmart Inc. (ESMT) Q1 2023 Earnings Call Transcript
2023-05-06 18:03:02 ET
EngageSmart, Inc. (ESMT)
Q1 2023 Results Conference Call
May 04, 2023 08:30 AM ET
Company Participants
Josh Schmidt - IR
Bob Bennett - Chief Executive Officer
Cassandra Hudson - Chief Financial Officer
Conference Call Participants
Tyler DuPont - Bank of America
Tien-Tsin Huang - JPMorgan
Terry Tillman - Truist Securities
John Davis - Raymond James
Scott Berg - Needham
Presentation
Operator
Good morning. Thank you for attending today's EngageSmart First Quarter 2023 Earnings Call. My name is Todd, and I will be your moderator today [Operator Instructions]. Please note, this call will be recorded, and I will be standing by if you should need any assistance.
I'll now turn the call over to Josh Schmidt of EngageSmart. Josh?
Josh Schmidt
Thank you. Good morning, and welcome to our first 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 8-K can be found at investor.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 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 investor.engagesmart.com.
I would now like to turn the call over to our CEO, Bob Bennett.
Bob Bennett
Thanks, Josh. Good morning, everyone, and thank you for joining us on our first quarter 2023 earnings call today. We are thrilled to kick off the new year with an excellent first quarter that showcases the strength and resilience of our business model. EngageSmart delivered our seventh consecutive quarter of record revenue, which is $88.4 million, representing 31% year-over-year growth, all organic, and record adjusted EBITDA of $17.3 million, which is an adjusted EBITDA margin of 19.6%. Our teammates' hard work and unwavering dedication to excellence have been instrumental in driving our success and enabling us to deliver exceptional value for our customers. Throughout the first quarter, we continued to see sustained demand and favorable secular trends across both segments of our business. We also continued to make progress in driving product innovation, further solidifying our market position. As we move forward in 2023, our focus on simplifying customer and client engagement is paying off, and we continue to expand our reach across all verticals. Before Cassandra dives deeper into the details of our financial performance and our outlook for 2023, I'd like to share some first quarter highlights. The high demand for mental health care and the shortage of professionals presents a unique opportunity for our SMB segment to make a meaningful and positive impact, Driven by new customer adds and favorable transaction revenue, SMB achieved revenue growth of 36% in the first quarter.
Our Enterprise segment is well positioned to capitalize on the long-term trend of organizations digitizing their operations, providing a steady tailwind for growth. Enterprise delivered revenue growth of 25%, fueled by strength in digital payments and paperless adoption and continued customer go-lives this quarter. Our growth strategy in SMB has two main elements and is showing great traction. The first element of our strategy centers on our core mental health vertical, where we see a growing need for care due to the prevalence of mental health disorders. According to the American Psychological Association, 45% of psychologists agreed or strongly agreed that they felt burnt out in 2022, highlighting the strain on the industry. SimplePractice presents a unique opportunity to address this challenge. By streamlining administrative functions, SimplePractice gives practitioners time to focus on what they care most about, treating their patients. The second element of our strategy targets group practices, which we see as a significant growth opportunity. We continued to see traction with this area in Q1, particularly among small group practices. These are an excellent fit for us given our track record of helping solo practitioners expand their businesses with our comprehensive solution. We continue to invest in developing new features and functionality to cater to the needs of both small and large group practices and are encouraged by our progress with both.
Additionally, we continue to see strong market expansion growth, particularly with speech language pathologists and occupational therapists. One of the keys to SimplePractice's success is its ability to build and foster a community around its platform. Our customers don't just need a software solution, but also a supportive community that can help them succeed in their practices. We've taken this approach to heart and are investing to create resources that bring our customers together. In a recent survey of over 900 practitioners, we found that 75% say that mentorship is a critical aspect to their career success, but only 25% currently have a mentor. With our vast network of over 169,000 mental health and wellness practitioners, we are uniquely positioned to address this gap and connect practitioners with peer support. In March, we launched a pilot 50-member mentorship program, and the interest we saw was enormous. In fact, we received over 10x the number of applicants than we had room for. We are excited about initiatives like this as they help us expand our community, bring new practitioners into SimplePractice, and enable us to grow our brand. We are committed to making mental health care more accessible. Our newest offering, SimplePractice Enterprise is an extension of that mission. We believe our practitioner network has the potential to be particularly valuable for employee assistance programs or EAPs and managed care organizations, or MCOs, which often struggle to find therapists for their network. By providing easy scheduling with our existing practitioners, SimplePractice Enterprise can address systemic issues regarding therapist supply while also improving efficiency. SimplePractice Enterprise also strengthens our flywheel by expanding our in-network practitioner base and growing our patient and practitioner community. We are now in the process of bringing live additional EAPs and MCOs that we previously signed and look forward to updating you on our progress.
Beyond SimplePractice Enterprise, we continue to invest in revenue cycle management or RCM to address the challenges practitioners face when dealing with insurance. Accepting insurance can be complicated and time-consuming, particularly for solo practitioners and small group practices that lack the necessary resources or expertise. As a result, they often rely on third parties to understand the various policies, submit accurate claims, and deal with denied claims or payment delays. Or they choose not to accept insurance at all. We believe SimplePractice has the potential to improve access to mental healthcare by transforming how solo practitioners and small group practices manage insurance. We are developing an innovative ecosystem that is designed to help practitioners accept insurance at scale and maximize reimbursement rates, so they can focus on what they love most, treating patients. With a pilot program underway, we are making great progress in gathering valuable insurance insights, understanding customer expectations, and determining the most effective ways to add value to our SimplePractice solution. We are excited about the initial feedback, and we'll keep you updated on our progress as we advance our solution with the goal of achieving strong product market fit.
Now turning to our Enterprise segment, Enterprise continued to perform well, driven by steady wins throughout the quarter and ongoing digital and paperless adoption of our solutions. The industries we cater to, utilities, financial services, government, healthcare and giving, rely heavily on outdated software that lacks modern features and capabilities. However, whether it's shopping online or paying bills, consumers in today's digital age demand a convenient, user-friendly and seamless experience. In these legacy industries, businesses often fall short in providing even basic functionalities such as mobile access, online payments or automated reminders and notifications. At InvoiceCloud, we have addressed this challenge by creating tight integrations and adding new features on top of existing systems. Our approach enables our customers to deliver a modern experience without the need for expensive overhauls. Once implemented, we partner with our billers to drive digital adoption with them, and that's why we win. We continued to see robust customer go-lives in the first quarter of 2023. In insurance, for example, we went live with our largest customer to date. In utilities, we went live with several customers, including Chugach Electric in Alaska, Charter Township of Canton, Michigan, and Vigo County, Indiana. In addition, we achieved new records of digital and paperless adoption. Notably, we are seeing an acceleration of adoption with recent cohorts, a testament to evolving customer preferences and our ability to drive superior rates of digital adoption for our billers.
Our first quarter was also a strong bookings quarter for InvoiceCloud, fueled by consistency in the mid-market. In utilities, we recently signed the town of East Hampton, Connecticut and the City of Quincy, Illinois. And in insurance, we won Luba Workers' Comp. In tax, we signed several new customers in North Carolina where we benefit from tailwinds rooted in recent customer wins and strategic alliances. Forming new strategic alliances and strengthening existing relationships remain important growth drivers as they open new markets, add to our top of funnel, and accelerate sales and implementation cycles once they're onboarded. Additionally, our network often enables us to move upmarket more quickly. One of our key initiatives is to expand our network and further accelerate our strategic move upmarket through industry conferences. For example, in the first quarter, we participated in the invitation-only Oracle Energy and Water Customer Edge Conference in San Diego. InvoiceCloud was one of 6 companies that presented in the event's innovation showcase, a forum that enables forward-thinking technology companies to share solutions that shape the future of energy and water. In the past, we have also worked with Oracle Energy and Water customer service and billing technologies to provide real-time integrations, new digital engagement efficiencies, and increased customer satisfaction to utility customers like the City of Escondido, California. We are excited about potential opportunities to collaborate with Oracle in the future. In addition, InvoiceCloud has joined the Oracle Industry Lab as a technology collaborator.
Another key success driver is innovation. We are always striving to be at the forefront of product development and thought leadership to meet and exceed our customers' expectations. Most recently, we joined the Utility 2030 Collaborative. The collaborative focus is on helping customer-facing and operations-focused departments improved their impact on customers and employees. We look forward to sharing critical insights on customer preferences and how our solution helps utilities keep revenue streams consistent while assisting payment challenged customers. In summary, we've had a strong start to fiscal 2023, delivering yet another quarter of record revenue with expanded EBITDA margins. We continue to drive market adoption of solutions that help save costs, improve operational efficiencies, and elevate customer satisfaction. Our suite of vertically tailored SaaS solutions delivered outstanding outcomes fueled by persistent customer demand, platform adoption by payers, and excellent customer retention rates. This demonstrates the strength of our business model and our position as leaders in customer engagement software with integrated payments.
With that, I'll hand the call over to our CFO, Cassandra Hudson. Cassandra?
Cassandra Hudson
Thank you, Bob. Our first quarter results again exceeded our expectations, showcasing the continued strength of our defensive verticals and our ability to deliver growth while expanding profitability. We've reported robust growth in revenue and delivered record-breaking adjusted EBITDA and adjusted EBITDA margin in the first quarter. As a result, we are making the following changes to our fiscal year 2023 guidance. For the full year, we continue to expect revenue to be in the range of $380 million and $384 million or revenue growth of approximately 26%. We are raising our guidance for adjusted EBITDA for the full year, and we now expect to be in the range of $69 million and $71 million, which represents an adjusted EBITDA margin of roughly 18.3% or a 210-basis point improvement over fiscal year 2022. For Q2 of 2023, we expect revenue in the range of $92.5 million to $93.5 million, which implies 26% growth year-over-year at the midpoint of our range. We expect adjusted EBITDA in the range of $15 million and $15.5 million, which represents an adjusted EBITDA margin of 16.4% at the midpoint. We anticipate a sequential decrease in the adjusted EBITDA margin from Q1 to Q2 due to the timing and concentration of investments in Q2 of 2023. As you think about the next quarter and the remainder of 2023, please keep the following in mind. Regarding SMB, our SimplePractice solution remains in high demand within our core mental health vertical, driven by an increase in awareness and a growing demand for care. This trend has created opportunities for small practitioners to expand their practices and meet the needs of a growing patient population. As our customers grow, they typically purchase higher-priced packages, add SimplePractice seats, and process more payments through our solution. We believe group practices represent a significant opportunity for us, and we are seeing continued traction.
We remain focused on enhancing our platform to further strengthen our value proposition and accelerate our move upmarket. In late Q1 of 2023, we increased the pricing of our integrated payment processing solution by 20 basis points. This increase helps to offset higher payment processing and infrastructure costs and allows us to continue to provide and invest in the seamless experience our customers expect. As it relates to Enterprise, we are seeing consistent demand for our solution and have built a robust pipeline that we believe will continue to fuel steady growth. We also remain highly focused on our sales and implementation execution, enabling us to move upmarket. We are excited about our top of funnel as this market segment is becoming a critical aspect of our growth strategy. In addition, we are seeing strong traction in our insurance and tax verticals. As Bob mentioned, we just went live with our largest insurance customer to date and are encouraged by our progress with several new tax customers in North Carolina, where we benefit from tailwinds rooted in recent customer wins and strategic alliances. Insurance and tax billers have traditionally relied heavily on slow, inefficient, and error-prone billing systems and represent a large opportunity for us. As you know, our pricing is customized based on individual customer needs. In some cases, we charge a fixed fee per transaction and absorb costs. In other cases, we charge a percent of volume, which increases revenue as the average ticket increases. And in some cases, we charge a mix of both. We regularly assess and adjust our pricing structure for our customers to optimize revenue per transaction while absorbing higher costs. Finally, as I mentioned last quarter, we believe that our DonorDrive solution is more susceptible to macroeconomic disruption and our guidance assumes a slowdown in revenue growth from fundraising events in the second half of this year.
Now turning to our first quarter results. Total revenue for Q1 was $88.4 million, representing 31% year-over-year growth, fueled by an increase in customer count and transactions processed. As of the end of Q1 2023, our total customer count was 108,200, representing an increase of 23% over the prior year. Our customer growth continues to be primarily driven by new customer adds from our digital marketing programs and word-of-mouth referrals in our SMB segment. We also delivered strong growth in transactions processed. In Q1, we processed 42.6 million transactions, up from 34.3 million in the year ago quarter, representing 24% growth. Driven by strong secular tailwinds that have propelled demand for our SimplePractice solution in mental health, our SMB segment delivered revenue of $49.8 million, representing 36% growth year-over-year. Subscription revenue of $34.9 million grew 39% year-over-year, fueled by new customer adds and a partial uplift related to the pricing and packaging changes that we made in the first quarter of last year. Transaction and usage-based revenue of $14.6 million grew 32% year-over-year, driven 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 of our integrated payment processing solution. Our Enterprise segment continued to perform well with reported revenue of $38.6 million, representing 25% year-over-year growth, marked by consistent wins throughout the quarter and continued digital adoption of our solutions. As expected, we saw a small stepdown in revenue on a sequential basis due to the timing of transactions in Q4 2022 associated with tax billing in InvoiceCloud and the concentration of large fundraising events for DonorDrive.
Our adjusted gross margin for Q1 of 2023 increased slightly to 78.7% from 78.6% in Q1 of 2022. Sales and marketing expenses were $28.2 million, up $5.9 million as we continue to invest in digital marketing channels to create awareness for our SimplePractice solution and drive new customer acquisitions. In Enterprise, our investments continue to be primarily focused on our strategic alliances as well as sales headcount to fuel pipeline and bookings growth. R&D expenses came in at $13.9 million, up $4 million. In our SMB segment, we're investing in additional features for group practices as well as the long-term opportunities we see with SimplePractice Enterprise and Revenue Cycle Management. In our Enterprise segment, we're investing in functionality to continuously enhance the experience for our billers and their payers and to accelerate digital adoption in all of our verticals. G&A costs were $11.3 million, up $200,000. We've seen significant efficiencies in G&A, driven by lower insurance premiums and leverage across many of our back-office functions. Net income was $4.1 million for the quarter compared to $2.1 million in the first quarter of 2022. Sequentially, net income decreased by $800,000, primarily due to an increase in income tax expense associated with the Section 174 tax code changes. Adjusted EBITDA was $17.3 million for the quarter, representing 19.6% margin compared to $10.6 million, a 390-basis point improvement from the first quarter of 2022. The expanded EBITDA margin was primarily driven by efficiencies in G&A, and to a lesser extent, sales and marketing as well as the timing of investments planned in fiscal year 2023. Free cash flow was $6.4 million, increasing our cash balance to $318.3 million as of March 31, 2023. We typically see lower adjusted EBITDA to free cash flow conversion in the first quarter as a result of our annual bonus payments.
As a reminder, we expect adjusted EBITDA to free cash flow conversion to moderate to approximately 50% in 2023 due to higher cash taxes associated with the Section 174 tax code changes and the utilization of our remaining NOLs in 2022. In summary, we believe we operate in defensive verticals that should remain attractive and vibrant even in times of economic uncertainty. In SMB, there is significant and widespread unmet need for mental health treatment that continues to fuel growth. In our Enterprise segment, the majority of bills are nondiscretionary in nature, and the trend towards digitization remains strong. Looking ahead, we continue to invest in our solutions 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.
Bob Bennett
Thank you, Cassandra. Wicked cool growth and profit expansion. 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 3 simple factors. First, we have a proven playbook that is centered on our customers and led by top-tier talent. We prioritize recruiting, retaining, and developing our teammates, whose exceptional work and unwavering focus on customer satisfaction keep our momentum going. Second, we have a strong focus on product leadership, as evidenced by our high adoption and retention rates. Our deep expertise in vertical markets allows us to make decisions that prioritize our customers, resulting in innovative industry-leading solutions. Third, we operate in a large and growing market with significant potential for expansion. We have captured approximately 1% of market share of a $28 billion addressable U.S. market. We look forward to expanding our presence across all verticals and seizing new opportunities as they arise. 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, and thank you very much.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Bhavin Shah with Deutsche Bank.
Unidentified Analyst
It's Nick on for Bhavin this morning, and thanks for taking my questions. Digging in further on customer growth within SMB, can you give us some color on how mix has developed across the different pricing tiers within SimplePractice? How has the progression looked from clinicians graduating up from Starter to Essential and even on to Pro tiers?
Cassandra Hudson
We've seen a very I would say stable mix really since we rolled out the new pricing and packaging in Q1 of 2022. The majority of our customers are on the top 2 tiers today, so a small percentage overall on the starter plan. But we do see a ton of upgrade activity happening, right? Once they get into the product, use it, and then start to have a need for more features, we are seeing them graduate up to the next tier. That activity is happening and I would say in line with our expectations of what we were driving for with the pricing impacting rollout.
Unidentified Analyst
And then just as a follow-up, thinking about the updated guidance for the year, can you just give us any color on how expenses and investments are expected to trend in the second half? And just anything else we should be aware of on linearity?
Cassandra Hudson
I think last quarter we certainly touched on just the progression that we see on revenue, so that will certainly influence things in terms of profitability. We do expect revenue to decelerate marginally throughout the year. And I would say in terms of timing of investments, I think Q2 is really the big one. We have a number of consulting projects that are happening right now and that will impact our EBITDA margin in the quarter. I think the rest of the year should be a little bit smoother. But again, it really depends on the progress that we make on some of these projects. Some of the upside that we saw in Q1 in particular was just a shift of investment spending from Q1 to Q2. It is possible that that happens a little bit again in Q3. But right now, we're really seeing that concentration happening in the second quarter here.
Operator
Our next question comes from Jason Kupferberg with Bank of America.
Tyler DuPont
This is Tyler DuPont on for Jason. Nice job during the quarter. I just want to briefly touch on adjusted EBITDA margin. During the quarter, it seemed to beat almost everyone's expectations. Can you maybe just discuss a little bit more on where the majority of that surprise came from? I know you mentioned efficiencies in G&A, but any additional clarity there would be helpful.
Cassandra Hudson
Yes, I mean it's certainly really strong profitability in the quarter. We are seeing a lot of efficiency in our G&A function broadly speaking. Lower insurance cost was a factor. And really, we went public in 2021, and we had made a lot of investments over '21 and '22 to really invest behind our back-office function to support being a public company and also just a growing business, especially one that's growing as quickly as ours. And I think those are starting to really drive some efficiency for us across the business. And then a little bit just timing related between Q1 and Q2. Also, some efficiencies in sales and marketing in the quarter as we continued to get more efficient there I'd say a little bit more on the Enterprise side in this quarter than -- which was I would say a pleasant surprise.
Tyler DuPont
And then also, just if you can provide an update on the additional health verticals within SMB in addition to mental health. I know you mentioned speech language pathology and OT seems to be gaining traction at a faster rate compared to potentially others. Just any clarity there. And then when we think about the SMB segment, can you just remind us the breakout between mental health and the other healthcare verticals?
Bob Bennett
The mental health continues to be 90% roughly of the overall SMB segment. And speech language pathology and occupational therapy continue to be very strong growth opportunities for us in our market expansion plans. The emphasis has shifted a bit towards supporting the really strong growth we're seeing in group practices, but we continue to see natural growth coming from new specialties as well.
Operator
Our next question comes from Tien-Tsin Huang with JPMorgan.
Tien-Tsin Huang
I want to ask on the consumer bill pay side, just an observation this earnings season, it seems like performance across the board has been pretty strong. What do you see on the ground in terms of consumer health? And on the enterprise side, how's demand shaping up versus 90 days ago? It sounds like it's steady, but just curious if there's any interesting observations there as the quarter played out as well as into April.
Cassandra Hudson
Just to clarify your question, you're on the enterprise side asking about just overall trends that we're seeing? Yes. It's been very strong. Yes, very strong. We continue to have a really robust pipeline, very strong bookings performance and implementations in Q1 were strong as well. I think kind of looking green across the board, especially as it relates to Q1 performance. Bob, any additional color you've got?
Bob Bennett
No, I think that some of the adjustments we made in go-to-market a year ago plus with aligning our partnerships with selling teams and so forth is having a very strong yield in terms of building top of funnel. And as we continue to scale, that just seems to be providing a very strong inventory if you will of new deals and our sales engine is executing quite well and driving steady bookings.
Tien-Tsin Huang
I guess my second question or last question, just on we're getting a lot of questions around generative AI, so Bob, curious to hear your thoughts on generative AI and ChatGPT what the impact might be on both businesses. I'm thinking especially SMB, what do you think in terms of product roadmap and how it might fit there. Productivity demand or any comments would be great.
Bob Bennett
And of course, I think that we're going to see AI bounce across everybody right now, and it already has. We've actually done a really efficient job of building self-service into our SMB segment so that the vast majority of tickets, if you will, or support questions that come in from our customer base, are handled already through AI techniques, not through people having to deal with it. Because they are generally the same questions over and over again. I think that there's lots more that can be done there as we even shift some of that towards Enterprise. But yes, I think we're going to see a whole new age of driving self-service, which we think really fits well with our natural direction of simplifying customer and client engagement.
Operator
Thank you. Our next question comes from Terry Tillman with Truist Securities.
Terry Tillman
Hey, Bob, Cassandra and Josh. It seemed like a wicked good cool quarter, Bob. First question, Bob, just relates to group practice. And it sounds like small group practice versus very large group practice. But what I'm curious about is, when you brought on SimplePractice, that was like a $4 million business I believe, thereabouts, and now it's exploded and it's very large and a lot of scale. How does small group practice compared to the early kind of roots of the mental health oriented SimplePractice business from just a revenue standpoint? What is typically like a number of clinicians for these small group practices? And is there anything you have to do differently on like go-to-market or like how you skew up products for that? Unfortunately, that was a 3-part question, and I can repeat every part of it if you want.
Bob Bennett
The group practices, as they get larger and we continue to see them get larger within our base, somewhat organically as they collect new deals, they fill up their schedules, they add another clinician that they used to work with at a big clinic or something. Definitely have more items and more needs, if you will, for reporting and hierarchical permissions-based rooms that they've got to figure out who's going to what room and all that. There's definitely more complexity to it. We've seen a natural migration towards groups from the customer base, and we continue to expect to continue to see that as we move forward. I think that it is -- it was originally built more for a solo practitioner. And over time, we've adjusted the solution to accommodate more and more of the needs. And it's -- I think we've worked very closely with clients to see that migration and support their needs as they continue to expand. They don't want to leave SimplePractice. We don't want them to leave SimplePractice. We've been very successful in just gearing the product to accommodate the growing needs of group practices. And we've seen a steady increase of number of clinicians per group over time.
Cassandra Hudson
And I would just add, Terry, certainly for group practices in the 2 to 10 range, that's where we see a lot of strong traction today. But we do have a lot of group practices above 20 and 50 and even a couple above 100. I think that's a testament to the demand that we see for group practices and is a big reason behind why we're investing in more features specifically for groups. A couple of those features include things like waitlist management, payroll simplification, things like roles and permissions, and then some UI to allow group practices to manage productivity across their clinician base.
Terry Tillman
I appreciate both you all's responses on that. And Cassandra, one thing is -- I mean one way to look at this guidance is you maintained it, but I think you did say DonorDrive, maybe second half, maybe some macro-driven challenges. Looking at it another way, it feels like maybe the InvoiceCloud and the SimplePractice business are actually ahead of expectations if you're maintaining. Could you flush out a little bit more how you feel about kind of the full year on kind of the Enterprise and SMB businesses kind of adjusting for DonorDrive? Thank you.
Cassandra Hudson
I think broadly speaking, we are very encouraged by the performance and the outperformance really that we saw in Q1 relative to our expectations. I think it speaks to the continued strength that we see in demand for all of our solutions, primarily SimplePractice and InvoiceCloud of course, just given the concentration that they make up of our business. I don't think our view has changed really on DonorDrive, just given the macro susceptibility there of that solution in particular. We just wanted to highlight the fact that there is a concentration of revenue from fundraising events in the back half of the year, and that would be where we would see the impact. That's certainly factored in. We continue to feel really confident about our ability to achieve our full year revenue guidance. It's still early in the year, and just kind of given all of those factors, we're sticking with the range for now. But again, still feel really good and very confident in our ability to get there.
Operator
Our next question comes from John Davis with Raymond James.
John Davis
Cassandra, the SMB customer count came in I think about 100 basis points or 1,000 better than we expected, given especially in light of the price increases. Any comments there? Have you seen any attrition? Do you think any attrition that you were going to see you've seen from the SMB price increases that went in March?
Cassandra Hudson
I guess to agree with you, JD, we certainly did have a good quarter in terms of customer adds at SimplePractice. On the growth customer add side, we were very pleased with how that turned out for the quarter. I think on the churn side, it was largely as expected. The pricing and packaging change I think is small. As we alluded to last quarter, we expect the disruption to be, at least on the churn side, more minimal, and that aligns with what we've been seeing so far. I think there's still potential for that, just given we changed the pricing pretty late in the quarter and it's still new. There's still some potential for that to impact Q2, but largely a smaller event for us, broadly speaking.
John Davis
And then I think SMB ARPU was up about 10% year-over-year. Maybe help us think about the puts and takes on that for the rest of the year. Obviously, you're lapping the pricing and packaging, but you have the SMB price increase. I assume it's going to moderate a little bit because I think the price increase was smaller this year versus last year, but any comments there would be helpful.
Cassandra Hudson
Yes. I think certainly, I think a lot of the increase that we saw in ARPU, obviously, is related to the pricing change on the payments side. We still see steady increase on the subscription ARPU side, and I would expect that trend to continue. I think one thing to just keep in mind is there's a little bit of seasonality in terms of appointments that happen in our business, and Q1 is typically the strongest, and we start to see that stepdown throughout the rest of the year. That will impact the ARPU as well. I think we'll see certainly more moderate ARPU as we get -- work through the balance of this year as a result of those factors.
John Davis
And one more quick one for Bob. You're stacking cash here. Any comments on M&A environment? Have valuations started to rationalize at all? Pipeline? Any color there would be helpful.
Bob Bennett
Yes. We continue to be active, Terry, I mean JD, and we definitely -- I think we're more active than we were. And no, valuations haven't rationalized completely yet at all, but we continue to see opportunities.
Operator
Our next question comes from Scott Berg with Needham.
Scott Berg
I guess I have two. First of all, Bob, you talked fairly extensively about some of the pushes you're making into some of these events and conferences and partner ecosystems for InvoiceCloud. InvoiceCloud has always had a fairly partner-driven go-to-market motion anyways. I guess what does this incremental push maybe do for the business outside of obviously just having more outlets to sell the product?
Bob Bennett
Yes, it also provides us an opportunity to become tighter with the customer information system. And therefore, create a fundamentally stronger integration. To use a simple example, let's say it's a real-time integration versus a batch integration. If you're a utility and somebody is delinquent, you might be sending a truck out to shut the water off. And if a payment comes in that morning, you don't want to send a truck. But if you're in batch, you might not see that. If you're in batch-mode, you just uploaded the payment files overnight, you might not -- you might send a truck to somebody that just paid that morning. Real-time integrations are stronger. That's sort of a simple example of it. There are lots of ways that we can create tighter integrations and better support systems and ecosystems around the customer to support their needs better by having strong alliances. It isn't just top of funnel. It's actually an improved value proposition versus our competitors.
Scott Berg
And then from a follow-up perspective, Cassandra, you talked about the pricing increase on the processing, the payment processing. I know it's very modest, very nominal. But did that have any impact in churn on the quarter? I didn't know if customers might see that negatively versus the reality on how small it is.
Cassandra Hudson
Again, we're expecting it to be a very small event in terms of churn impact. We really didn't see too much disruption there in Q1. As I mentioned earlier, we did roll that out later in the quarter, so we may still get -- see some impact here, just given how new it is. But again, I think it will be pretty nominal of an impact for us.
Operator
Our next question comes from Josh Beck with KeyBanc.
Unidentified Analyst
This is Maddie on for Josh. Congrats on the quarter. I love seeing EBITDA way above expectations. My first question for you guys is, how are you thinking about the digital payments penetration within the Enterprise segment today? Where do you see that number going? And how do you think that affects the average take rate going forward?
Bob Bennett
Our average customer, Maddie, is probably about 45% of the bills that get issued, get paid through us for our average customer. We have customers that are over 80%. On a natural basis, in other words, they're not -- it's not a penalty to pay with a paper check, but they still, because of our simplicity and adoption-driving motion, we tend to drive very high adoption of both paperless and online payments. We've got several customers over 80%. We're at an average of 45%. There's plenty of opportunity for us to see this go to 80% for we think virtually all of our customers. That's just within the base. And I think that that's a trend. 10 years from now, it will be certainly higher than that. But today, we see that 80% is really the sort of near-term goal to try to drive adoption for our existing customer base.
Unidentified Analyst
And then just wanted to touch base on the progress of Monarch. How many EAPs would you say that you guys are in talks with today? And what's the approximate size of business that you guys are targeting there?
Bob Bennett
We have several that we are in talks with. We've contracted with a couple. We've actually gone live this week with our largest MCO, managed care organization, not naming names at this point, but that's to come. And we're extremely excited about the progress we're making there for the access to care for mental health professionals by providing this really simple methodology and marketplace if you will, through meetmonarch.com or our EAPs and MCOs to be able to provide mental health assistance and direct appointments through our calendaring functions for those patients that are in need for the employee bases that they support. Several and growing very fast.
Unidentified Analyst
And just one quick follow-up on that. Do the clinicians need to opt into Monarch or all of the clinicians just automatically a part of Monarch?
Bob Bennett
What we see is that they need to build their -- they need to create their full bio for us out of our -- within our system, which we provide simple tools for. We've got thousands of our existing customers that have already done that. We have lots of access to a lot of clinicians available for these MCOs and EAPs today. But yes, they do have to enroll in it. Doesn't cost anything to enroll in it, but they have to just update their bio website and make sure that the calendar is online for our MCOs and the care coordinators to be able to create the appointments online.
Operator
Our next question comes from Bob Napoli with William Blair.
Unidentified Analyst
This is Spencer James on for Bob. I want to go back real quick to the sequential increase in expenses and the outlook for adjusted EBITDA. Could you maybe just summarize the amount of incremental expenses going towards near-term go-to-market opportunities versus longer-term product enhancements for the SimplePractice business? Or maybe put differently, just between Enterprise and the SMB segment?
Cassandra Hudson
I would say, at least as it relates to Q2, more of the investment is a little bit more weighted to the SMB side go-to-market investments and a little bit also in the engineering side. And also, just in terms of hiring, right? There's lots of investments that we're making in our business. And I think Q1, we weren't able to get all of those investments executed on in the same timeframe that we had originally planned. That's certainly influencing the Q2 adjusted EBITDA results a bit. There's a little bit obviously in G&A just in terms of general consulting projects as well.
Bob Napoli
And then I wanted to ask about the digital ad market and how that might be impacting new ads in the SMB segment. How should we think about trends in the digital ad market and what that might mean for the outlook in new ads for the rest of the year?
Cassandra Hudson
Certainly, obviously, prices and the cost of digital advertising has been increasing over time. I would say despite that, we've seen continued strength in top of funnel and very, very stable gross customer adds for gosh, 8, 9, approaching 10 quarters now. We're really pleased with those results. For us, I think it speaks really to the broader demand environment. And as you can see, still very, very efficient from an LTV to cash perspective as well. Today, for now, that's the trend that we see in our business and expect them to continue.
Operator
Thank you. There are no additional questions registered at this time. I will now pass the floor back over to Bob Bennett for any additional or closing remarks.
Bob Bennett
Thank you. EngageSmart had a successful first quarter with strong execution. Both of our segments contributed to achieving record revenue and adjusted EBITDA results, reflecting the momentum and durability of our business. Our achievements were driven by several key factors, including robust customer growth, an increase in average revenue per customer, effective pricing and packaging changes, and exceptional customer retention. We remain bullish and well positioned to take advantage of the immense market opportunity in the U.S. and our compelling value proposition continues to resonate with customers. We look forward to speaking with you again later this quarter at J.P. Morgan's 51st Annual Global Technology, Media and Communications Conference in Boston and William Blair's 43rd Annual Stock Growth Conference in Chicago. Thank you very much.
Operator
Thank you. This concludes today's EngageSmart First Quarter 2023 Earnings Call. You may disconnect at this time, and have a wonderful day.
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EngageSmart, Inc. (ESMT) Q1 2023 Earnings Call Transcript