EngageSmart - Q1 2022
May 5, 2022
Transcript
Operator (participant)
Good morning. Thank you for attending today's EngageSmart first quarter 2022 earnings call. My name is Emma, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I'll now turn the call over to Josh Schmidt with EngageSmart. Josh?
Josh Schmidt (SVP of Finance and Investor Relations)
Thank you, and good morning. With me on today's call 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 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 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. On this call, we will discuss certain non-GAAP metrics, including adjusted EBITDA.
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.
Bob Bennett (CEO)
Thank you, Josh. Good morning, everyone, and welcome to our first quarter earnings call for 2022. We are pleased to announce another quarter of excellent results and progress. Q1 reflects the strength of EngageSmart's mission of simplifying customer and client engagement. With top line organic growth north of 40% due to continued robust demand in both segments of our business. SMB's strong growth of 56% year-over-year, combined with Enterprise's highly visible durable growth of 28% year-over-year, can be directly attributed to our customers and partners and the dedication of our employees, who are relentless in their pursuit of customer satisfaction. EngageSmart delivered another quarter of record revenue, finishing at $67.4 million, representing organic growth of 42% year-over-year.
Before Cassandra dives into the details of our financial performance, I'd like to share with you some of the highlights that we are really excited about this quarter. We've continued to see outstanding customer count growth of 33% in our SMB segment, where we now serve nearly 85,000 customers and 130,000 professionals in 10 wellness verticals. Our strong organic customer growth in SMB is primarily driven by word of mouth and the strength of our end-to-end product suite. As a result, we have continued to experience great traction with practitioners, led by our first vertical of mental health professionals. At the same time, we continue to gain ground in new verticals. We are excited about our progress, in particular with speech-language pathologists, occupational therapists, and dieticians.
We believe we have a strong inherent product market fit in these specialties because these practitioners have similar documentation requirements, billing needs, career trajectories, and pain points as our customers in mental health. For example, one of our speech-language pathologists started her own practice using paper notes, paper records, and paper billing, resulting in huge headaches. She evaluated 15 EHR solutions and chose SimplePractice because of its superior functionality and features, allowing her to transition from 4 point systems to our comprehensive single SimplePractice solution. To unlock our full potential in all 10 of our SimplePractice verticals, we are continuously working on new features that further enhance our solution. As an example, we recently launched built-in whiteboarding for telehealth, a feature that allows practitioners to draw, type, or add images to improve client participation. This is particularly valuable to practitioners working with young patients in speech-language pathology.
In the first quarter, we've also seen a meaningful increase in average revenue per SimplePractice customer, driven by a combination of reasons. In Q1, we rolled out new pricing and packaging to better align price with the value we bring to our customers. We're very encouraged by the positive results to date. The customer migration mix by package is trending better than anticipated due to more customers selecting the Plus package than we originally anticipated. Lost revenue from churn is within our expectations. We continue to see strong top of funnel growth. Additionally, we've experienced an uptick in customer referrals in Q4 and Q1 related to our increased marketing efforts. We believe these results reflect the strength of our SimplePractice solution and the fact our customers continue to appreciate that superior value. At the same time, our existing customers continue to grow their businesses with us.
As they add new practitioners, they can switch to higher priced packages and process more transactions through us, thus fueling our revenue growth and ARPU increase. We believe our outstanding growth in SMB revenue and customer satisfaction is directly related to our product leadership. We are committed to innovation and addressing pain points for practitioners, including multidisciplinary group practices. As a result, we remain incredibly focused on our roadmap and on prioritizing key workflow feature releases to enhance telehealth collections and advanced security functionality. For example, practitioners frequently struggle to verify their patients' benefits and insurance to be able to accept in-network insurance payments. We have released a feature that simplifies this verification process, and our early adopters are already seeing a meaningful improvement in collections.
By simplifying processes such as this, we are able to drive practitioner participation to in-network healthcare services, thus boosting provider numbers and making healthcare accessible to patients at the discounted rate offered by in-network insurers. With SimplePractice, we are uniquely positioned to connect patients to a population of practitioners that might otherwise be difficult to reach. Our Monarch network is an extension of our efforts to drive access to care. With Monarch, we continue to augment a solution designed to go beyond direct patient and practitioner context. Monarch creates a network that drives access to healthcare and fuels our flywheel by growing our practitioner base and each customer's patient base. We recently signed a large employee assistance program to a pilot program, which is a testament to the power of Monarch, and we are very excited about our progress with this initiative.
Now turning to enterprise, we saw excellent momentum in the first quarter and now serve 3,200 customers across our three vertically tailored solutions. We believe our success is based on our strength in customer go lives, new customer wins driven by our partner-assisted selling motion, and the continued adoption of our digital solution. For InvoiceCloud, the largest revenue contributor in the enterprise segment, we recorded another strong go live quarter, driven by a number of notable new customer launches. These include the City of Syracuse in New York, the City of Denton, Texas, and Nashville, Tennessee Metro Water Services. We are also excited about our outstanding sales performance in Q1. We won new opportunities, including Mobile Area Water and Sewer System in Alabama and Central States Water Resources in Missouri.
Driven by our alliances with Guidewire, a cloud-based property and casualty insurance software provider that enables businesses to streamline processes, and Sapiens International, a global provider of software solutions for the insurance industry, we are beginning to gain more traction in our insurance vertical. We recently signed Kentucky Farm Bureau Insurance and are looking forward to launching the InvoiceCloud online billing and payment system with them in the coming months. These customer wins result from the outstanding customer experience we offer for billers and payers. InvoiceCloud's unique focus on customer engagement reduces payment complexity, creates peace of mind for the customer, and speeds up collection. Our key differentiation is that we help our customers drive superior digital adoption. With true SaaS, all customers receive continuous product enhancements versus stuck in time, hosted, and on-premise solutions.
Our success in driving digital adoption is also directly related to our continued focus on product leadership across our enterprise solutions. InvoiceCloud offers customers a payment experience that is uniquely suited to their individual needs by regularly accepting new payment forms. As an example, we began accepting crypto as a form of payment through our partnership with PayPal in the first quarter of 2022. DonorDrive, our best-in-class fundraising solution for nonprofits and corporations, recently released an enhanced version of its mobile fundraising app that includes features for contactless event check-ins and new integrations with apps for activity tracking. In summary, we've had an exciting first quarter and are off to a strong start to 2022. We continue to see excellent traction in our vertically tailored SaaS solutions, driven by strong customer growth and great net revenue retention.
This is a testament to the strength of our business model and our market leadership position in customer engagement software with integrated payment capabilities. With that, I'll hand the call over to our CFO, Cassandra Hudson. Cassandra?
Cassandra Hudson (CFO)
Thank you, Bob. I appreciate everyone joining us today for our Q1 2022 earnings call. We delivered excellent Q1 results that well exceeded our revenue and adjusted EBITDA guidance. We saw broad-based strength across both segments of our business and were particularly pleased with the performance we saw within SMB. As a result, we are increasing our outlook on revenue for the rest of 2022 to $290 million-$294 million or 35% growth at the midpoint of our range, up from our prior guidance of $280 million-$285 million or 31% growth at the midpoint. Our total Q1 revenue of $67.4 million grew 42% year-over-year and was fueled by strong growth in customer count and transactions processed.
As of the end of Q1 2022, our total customer count increased 32% versus the prior year to 88,000 and was mainly driven by new customer additions from our digital marketing programs and word of mouth referrals in our SMB segment. Similarly, we saw 38% growth in transactions processed by our solutions year-over-year, with 34.3 million transactions in Q1 2022, up from 24.9 million in the year ago period. Our SMB segment continued to perform exceptionally well, with first quarter revenue coming in at $36.5 million, representing 56% year-over-year growth.
Subscription revenue of $25.1 million grew 56% and was highlighted by strong new customer adds and continued expansion with existing customers from add-on subscriptions. As Bob mentioned, the early results of our new pricing and packaging rollout were strong, with a higher mix of existing customers selecting the plus package than we had originally anticipated. We attribute this to the superior value created for our customers who are utilizing our fully featured solution. For new customers in Q1, the mix of customers selecting the starter package, which provides greater flexibility for new to private practice practitioners, was in line with our expectations. Transaction and usage-based revenue of $11 million grew 54% as our customers continue to process more transactions on our platform. We also saw an increase in adoption with a higher percentage of our customers' payments flowing through our platform.
Our enterprise segment also delivered strong results with reported revenue of $30.9 million, representing 28% year-over-year growth. The vast majority of the revenue in our enterprise segment is derived from transaction and usage-based fees, which came in at $28.3 million, representing 31% growth year-over-year. At InvoiceCloud, we saw a stronger growth than anticipated from our older cohorts as more payers adopted our solution. To provide further color on the top line, I'd like to walk you through the primary growth drivers for SMB and enterprise. For SMB, we continue to see strong top of funnel trends in our mental health vertical. Additionally, our increase in marketing spend is broadening our SimplePractice brand, allowing us to reach audiences that were not previously aware of our solution.
In addition to acquiring new customers, we continue to expect the average revenue per customer to increase over time as practitioners add licenses and process more transactions through our solution. Many practitioners that choose SimplePractice are only at the beginning of their careers. They are solo practitioners that just opened their own practice. By helping them manage their time more efficiently, we enable them to focus on their business and grow their practice, ultimately driving our revenue growth. As these practices grow over time, we are excited about the opportunity we see to expand our business with features attractive to group practices. Additionally, we continue to make progress on our strategy of replicating our successful playbook in mental health with our other wellness verticals.
We are focused on engaging with practitioners in these wellness verticals to build a sense of community around our solution that helps our customers more efficiently manage their businesses. As Bob mentioned, we're seeing traction currently with speech language pathologists, occupational therapists, and dietitians. In enterprise, we continue to build on our highly visible and durable revenue growth. We had excellent sales performance in Q1 and won a number of customers in both our core and emerging verticals. Our growth is fueled by our strong product leadership and our established alliance partners, including Harris Utilities and Guidewire. They are driving growth by referring existing clients and accelerating the implementations of our enterprise solutions. We are excited about our success and our customer pipeline and are looking forward to implementing our solutions with our partners in the future.
Secondly, we continue to see high digital adoption rates with existing customers such as National Fuel Gas. We drive superior rates of digital adoption because we offer a payment experience that is uniquely suited to our billers and their payers' needs. We are driving digital adoption through combined marketing and onboarding efforts, ultimately growing revenue as billers process more payments through our solution. Now moving on to margins. Our adjusted gross margin for Q1 of 2022 increased 78.6% from 77.6% in Q1 of 2021, mostly driven by the growth in revenue, including the impact from the new pricing and packaging that we rolled out in SMB. Sales and marketing expenses were $22.3 million, up $7.2 million, in line with our plan to invest in new customer acquisition.
In Q1, we launched new middle and top of funnel marketing programs that target new channels and broaden our brand to reach customers within our 10 wellness markets in SMB. R&D expenses came in at $9.9 million, up $2.9 million, driven by our investment in engineering headcount focused on new product development within our SMB segment, as well as enhancing our existing solutions with the goal of maintaining product leadership. G&A costs were $11 million, up $3.7 million, mostly due to absorbing public company operating costs following our initial public offering last September. Adjusted EBITDA was $10.6 million for the quarter, representing 15.7% margin compared to $7.9 million or 16.7% margin in the first quarter of 2021.
Given the exciting opportunities we see in the marketplace, we continue to increase investments in product development and sales and marketing to drive long-term revenue growth while absorbing public company costs and still remaining highly profitable. Now moving to our outlook for the second quarter and full year 2022. For Q2, we expect revenue in the range of $69 million-$70.5 million, which implies 35% growth year-over-year at the midpoint of our range. We expect adjusted EBITDA in the range of $8.9 million-$9.6 million, which represents an adjusted EBITDA margin of 13.3% at the midpoint. For the full year, we now expect revenue to be in the range of $290 million-$294 million, or revenue growth of approximately 35% at the midpoint of the range.
For adjusted EBITDA for the full year, we expect to be in the range of $38 million-$40 million, which represents an adjusted EBITDA margin of roughly 13.4% at the midpoint. Given the opportunity we have in our current markets and our track record of success, we continue to target top line growth rates at or above 30% for years to come. I'll now turn the call back over to Bob for closing comments.
Bob Bennett (CEO)
Thank you, Cassandra. Whew. Great numbers. We are off to a great start in 2022. 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 three simple factors. First, our proven customer-focused playbook driven by A players. Our exceptional team drives our success. To support our rapid growth, we continuously add people to our organization and have seen great hiring momentum in the first quarter. We are proud to have such a highly focused, dedicated workforce ready to take on the future. Second, product leadership as measured by adoption and retention. Customers choose EngageSmart because they want to work with the best. We are committed to developing and enhancing our vertically tailored solutions to drive continued product leadership. Our success shows as reflected by great customer adoption and net revenue retention.
Third, our large market and runway. We address a $28 billion U.S. market and have captured about 1% of market share. We are excited about this promising domestic runway, and given our strong track record of growth through product leadership, we are extremely well positioned to execute on that opportunity. We remain focused on delighting our customers, growing our business, and creating shareholder value while we make a positive impact in the world. We appreciate you all joining us on this call and want to thank you very much.
Operator (participant)
At this time, if you'd like to ask a question, please press star one on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star and one to ask a question, and we will take our first question from Will Nance with Goldman Sachs.
Will Nance (VP)
Hey, guys. Good morning. Bob, I'll echo Will. Great numbers. I'm wondering if you could spend some time on some of the trends in SMB and help unpack the performance versus your initial expectations. Obviously, a very strong quarter there, and it sounds like the pricing and segmentation strategy is working out well. Wondering if you could talk about how much the pricing and segmentation contributed to this quarter's numbers. Then, you know, going forward, could you just kind of talk about, you know, how we should expect the mix of kind of pricing and customer acquisition to drive numbers in the SMB segment for the remainder of the year?
Cassandra Hudson (CFO)
Great. Thanks, Will. You know, I guess just starting on the pricing side or maybe just taking a step back on Q1 broadly, I mean, strength across all vectors, right? Strong new customer acquisition quarter for us, really strong payment processing quarter for SMB, and then, you know, positive results on the pricing new rollout of the pricing and packaging. You know, really strong results across the board.
As you know, our overarching strategy with the new pricing and packaging was really to give us more flexibility, and to help us scale our pricing model as we grow in the future and, you know, roll out new features and functionality and move into new verticals, and to, you know, make sure that we're aligning our price to the value that we offer to our customers. You know, we think we did that with this rollout. You know, results of that rollout, inclusive of churn, have so far exceeded our expectations. Obviously, you know, it's been one quarter. Originally, we were expecting about a 5%-10% ARPU uplift from existing customers.
You know, we think, you know, based on what we are seeing so far, that we'll come in a few points better than we had anticipated, because of the higher adoption that Bob mentioned on the plus package, largely. Overall, you know, we remain highly encouraged by the continued strength that we're seeing in new trials and conversions. You know, ultimately, we think we got the new pricing and packaging bundle right. You know, in terms of trends, you know, I think you'll still continue to see, you know, a strong mix of revenue growth coming from all three of those vectors. I mean, that is core to our strategy of how we're going to drive growth in SMB, and we expect that trend certainly to continue.
Will Nance (VP)
Got it. Sounds great. I guess it's just really nice to see the flow through of the outperformance to the bottom line, especially in the current environment. I'm wondering if you could talk through how you're thinking about the trajectory of margins for the remainder of the year. Obviously, a much stronger start than we'd anticipated, and it sounds like there are some opportunities that you're making in customer acquisition. Just, you know, wondering how you're kind of balancing, you know, letting some of the outperformance flow to the bottom line versus kind of reinvesting in customer acquisition to maintain the strong growth rates.
Cassandra Hudson (CFO)
Yeah, I mean, I think you have it exactly right? We continue and it's factored into our guidance to be investing more in the new customer acquisition engine on the SMB side. You know, I think having the revenue beat flow through to the bottom line is truly not our intent. You know, it's a matter of execution. You know, I think the team is executing incredibly well. There's a lot going on, but you know, it takes a while to deploy against these investments between the investments we're making in the product, bringing on engineering resources and then really ratcheting up our customer acquisition spend. It just takes time, but that is our intent to continue to deploy more against that.
Will Nance (VP)
Got it. Appreciate you taking my questions. Nice results.
Cassandra Hudson (CFO)
Thanks, Will.
Operator (participant)
Our next question comes from Bhavin Shah with Deutsche Bank. Your line's open.
Speaker 11
Yeah. Hey, guys. This is Rod on the line for Bhavin. Just to kind of follow up on Will's question a little bit. You know, on the pricing change, you talked about how revenue churn was in line, referrals remained strong, and that's great. To unpack that just a bit more.
Obviously spending ahead of the price change to drive brand awareness is now, it's helping you guys maintain the top of funnel activity. Medium-term, you know, do you envision any change in the cadence of the marketing with regards to SMB specifically? I guess I'm trying to think through, you know, how are you guys envisioning the size of future cohorts versus historical, like maybe there's some impact at the margins from the higher pricing for Plus, but maybe that's offset by, you know, by starter traction. Yeah, how you're thinking about that and the extent to which you would use marketing as a lever, you know, either in that or maybe in response to like competitors trying to capitalize on a pricing umbrella or on maybe like, you know, dissatisfaction among the client base.
You know, in checks, we saw that there was a little bit of friction, but a lot of, you know, obviously anecdotally people saying, "Well, we came back because it's the best value proposition." But in general, kind of how you're viewing that as a competitive lever to just kind of help manage and offset all those impacts.
Cassandra Hudson (CFO)
Yeah, I mean, I guess, you know, certainly we you know, like I said, earlier on our original intent, right? We wanted to roll out pricing and packaging that gave us a lot more flexibility. We moved to this three-tiered model. You know, these packages, we believe, better align the needs of our customer and the journey that they're on. Gives us greater flexibility on how we kind of price and package going forward. To your point on marketing spend, you know, attracts a broader set of new customers by offering a migration path that we didn't really have before for younger practitioners that are earlier on, you know, in their careers at a lower price point. You know, I think about them, I guess, somewhat separately, right?
We migrated our entire customer base to the new pricing and packaging. The overwhelmingly vast majority of our existing customers moved over to the new pricing, all within Q1. You know, we aren't necessarily dialing up marketing spend or trying to drive increased demand to offset that, if you will. They're just two separate things. Our strategy remains the same on new customer acquisition, right? We're trying to grow as fast as we can and reach as many new customers across all of our wellness verticals today. We have, you know, as you know, foothold in mental health, and we're seeing traction in a lot of new verticals. You know, really those levers are being deployed separately, if that kinda gets to the heart of your question.
Speaker 11
Yeah. No, it does. Then I guess as a follow-up, just, you know, on transaction, I think, you know, you called out how, you know, transaction growth is driven by, I think, transactions per client. But just wanna make sure I got that right. But is it basically on the SMB side specifically, is it more driven by incremental seats, you know, practices expanding as, you know, the solo practitioners grow? Or is it just, you know, new customers coming in across new verticals, across mental health?
Cassandra Hudson (CFO)
It's, I mean, it is across the board for SMB in terms of the strength that we see in payments, right? We're seeing continued increase in the average ticket, you know, increase in the number of transactions that are happening per account. To your point, as each one of our accounts adds more clinicians to their practice, those clinicians process payments, and we get the natural growth from that. It really is all three. Just overall adoption. The more, you know, that our customers process their payments through our platform, obviously we benefit from that, and we're seeing a lot of strength in the growth and transactions there.
Speaker 11
Perfect. Awesome. Thanks, Cassandra. Thanks, Bob, and congrats again.
Cassandra Hudson (CFO)
Thank you.
Bob Bennett (CEO)
Thank you.
Operator (participant)
Our next question comes from Terry Tillman, Truist Securities.
Terry Tillman (Managing Director)
Yeah. Hey, Bob, Cassandra, and Josh. Hopefully you can hear me okay. I guess I'd be remiss if I didn't say, ooh, great numbers as well. Can you all hear me okay, by the way? It's eerily quiet.
Operator (participant)
You sound great.
Terry Tillman (Managing Director)
Okay.
Bob Bennett (CEO)
That woo could have been a little more enthusiastic, but yeah.
Terry Tillman (Managing Director)
Yeah. No, I need it. Yeah. Yeah. Well, maybe next quarter. How about that? So the first question I had is just related to, you know, you all basically cut your teeth initially in mental health. I mean, if I'm not mistaken, that's basically a nine-figure, $100 million-plus business. I'm curious on the learnings from just scaling that business and now as you've got a broader set of capabilities to actually add when you sign up new SMB customers. You know, I don't wanna put words in your mouth, but the speech language pathologists, occupational therapists, and dietitians, you know, is there the idea of learnings from a mental health could help even ramp or accelerate these emerging businesses faster than you saw with mental health? And the second part of that is around group practice traction.
Anything you could share there, and then I had one follow-up. Thank you.
Bob Bennett (CEO)
Okay, Terry. Yeah, mental health, of course, was SimplePractice's first vertical that they entered, and certainly, there's been a lot of learning there. The first thing about mental health is we're seeing tremendous demand still in that marketplace. We think we have a lot of room to continue to grow there aggressively, and part of that does relate to the other part of your question, which was, you know, sort of multi-clinician groups, you know, larger, you know, group practices as well as, multidisciplinary group practices. We frequently see mental health professionals working with speech language pathologists and nutritionists and so forth, all in a single, you know, in a single group practice. Doesn't need to be hundreds of clinicians for it to be a successful group practice.
Of course, SimplePractice, one of its basic tenets is that we eliminate so much of the administrative burden that those clinicians can focus on their customers in their communities and grow their businesses without the administrative hassles that others might have. They're able to add clinicians, and of course, that drives ARPU up with more seats, more payments, and so forth. Lots of learning from the new specialties as well as mental health. They really run in parallel. The clinician base across all 10 of our wellness verticals essentially run the same business, you know, they just have different specialties. What we learn in one, even in terms of driving top of funnel free trials, typically applies to others.
It's getting the word out and making the adjustments to the solution to accommodate the nuances of each of the verticals, and that's kind of what we're about. Does that answer your question, Terry?
Terry Tillman (Managing Director)
It definitely does. Yeah, thanks for that. I guess, I don't know if this is for you or Cassandra, but, you know, the theme on higher adoption rate, digital adoption rates, I'm curious if there's any more you could kind of quantify on like same-store sales or potential impact in that revenue retention. Maybe that's the wrong way to look at it, but just any more you could kind of double click on digital adoption rates. To me, it seems like in an inflationary environment and trying to move more of these transactions to a digital fashion, there's a real incentive for your customers. Do you see them even kind of trying to proactively push more digital adoption? Just any more you could share on that and the potential impact to either same-store sales or net revenue. Thank you.
Cassandra Hudson (CFO)
I mean, ultimately, you know, what we see is the customers that use our payment processing service, especially on the SMB side, you know, obviously they're driving the highest level of digital adoption for us, and they see the value, so it's very clear. They're also very sticky, right? Because they're, you know, really using all the capabilities that we offer in our business management solution. You know, we expect that rate of digital adoption to, you know, continue to tick up over time. I think in Q1, it certainly exceeded our expectations. You know, we think that's kind of a broader macro trend that, you know, should be core to our revenue growth over the long term.
Bob Bennett (CEO)
Yeah, Terry, the other thing about that, you know, when you mentioned inflation and, you know, the inflationary environment, if the way we price is not a negative. You know, as average, you know, clinician hour rates go up and payments go up, that creates more volume for us that actually is a positive on the SMB side.
Terry Tillman (Managing Director)
Okay. Thank you all. Take care.
Bob Bennett (CEO)
Thank you.
Cassandra Hudson (CFO)
Thank you.
Operator (participant)
Our next question comes from Bob Napoli with William Blair.
Cris Kenedy (Research Analyst)
Good morning. Actually, it's Chris on for Bob. Thanks for taking the question. I just wanted to get an update on the M&A environment, kind of what you're seeing out there and what your appetite is to pursue deals.
Bob Bennett (CEO)
Right. Hey, Chris, it's Bob. We are pursuing a lot of different threads right now in M&A, nothing immediate to announce. You know, I'm not sure that the ask side on the M&A has quite achieved the equilibrium with the public market multiples, but we're certainly exploring it and are very active in it. You know, we intend to continue to, you know, drive our growth inorganically as well as organically. We're an organic-first company, as you know.
Cris Kenedy (Research Analyst)
Understood. One last one on marketing. Just can you talk about kind of, as you increase your marketing spend, how your customer acquisition costs are trending? Thanks a lot.
Cassandra Hudson (CFO)
I mean, you know, certainly, I think we touched on this a lot on our call where we gave 2022 guidance. You know, our intent with our marketing spend this year is really to reach a broader set of customers. We're investing in branding, for example, testing a lot of new programs on the digital marketing side. And as you know, we have a very highly efficient customer acquisition model, especially on the mental health side. You know, our expectation is that obviously efficiency ticks down as we invest more, but still, you know, at a very attractive best-in-class rate.
You know, I think we're kind of, you know, early days still, especially in Q1, as we're rolling out new programs, onboarding, you know, a new marketing team, if you will, over the past 6-9 months on the SMB side. Certainly more to come. You know, we're keep a keen eye to efficiency and ROI, and that's how we manage our business and, you know, investing to drive long-term growth.
Cris Kenedy (Research Analyst)
Understood. Thank you.
Cassandra Hudson (CFO)
Thanks.
Operator (participant)
Our next question comes from John Davis with Raymond James.
John Davis (Analyst)
Hey, good morning, Bob and Cassandra. Wanted to touch on the SMB segment for a second, and specifically the you know net customer adds, I think very strong at you know roughly 4,000, given the pricing changes. Do you think most of the churn's done at this point, you know any churn that you would have had from pricing that likely occurred in the first quarter, or is there some spill over to 2Q, or can we get back to more of that kind of 5,000 customer add a quarter cadence that you had last year?
Cassandra Hudson (CFO)
I mean, I think by and large, we're through the major overwhelming majority in Q1, John Davis, to your point. But you know, it's still the pricing and packaging, you know, had happened. The migration for our existing customers happened by and large in February and March. I do think there is the potential for some lingering effects in Q2 to kind of spill over, but by and large, we're through the most of it.
John Davis (Analyst)
Okay. On the ARPU side of things, I think it was really strong, up 17% year-over-year in the SMB business specifically, you know, versus 11% in 4Q. Is it simple enough just to say that kind of 600 basis points acceleration is largely driven by pricing, and kind of a half quarter impact. Is that a fair way to think about it?
Cassandra Hudson (CFO)
You know, it's actually a little bit of both between pricing and payments. We saw really strong payments results in Q1, kind of above the typical average that we've been seeing. It is a little bit of both.
John Davis (Analyst)
Okay. Last one for me. Given the investor focus on profitability these days, really good to see the flow through there. Cassandra, as we step back, I think the guide has roughly a 13% and change margin this year. How should we think about the trajectory longer term? Or how do you guys think about it, you know, kind of in 2023 and beyond? Not trying to pin you to a number, but I think it'd be helpful for, you know, myself and investors and others to just kind of understand how you guys think about the cadence of margin expansion longer term.
Cassandra Hudson (CFO)
Yeah, I mean, you know, certainly this year we're investing in a lot in engineering, product development and marketing on the SMB side. We're also absorbing the public company costs. I think once we get through 2022, we expect to see, you know, modest increases in adjusted EBITDA margin expansion over the next few years. You know, it's a balance. We're always gonna look through the lens of ROI and the investments that we're making, and those investments are always intended to drive top-line revenue growth for us. It's a balance, but I think you'll start to see things tick up in 2023.
John Davis (Analyst)
Okay, great. Thanks.
Operator (participant)
We'll go next to Scott Berg with Needham.
Scott Berg (Senior Analyst)
Hi, Bob, Cassandra. Congrats on a great quarter, and thanks for taking my questions. I guess I got two, not sure who wants to take the first one, but I think it's interesting, both of your business segments showed revenue growth acceleration from Q4 to Q1. I guess as you look back at Q4 and try to explain two segments, which is certainly different than one, was there any impact of maybe the Omicron variant in terms of, I don't know, new bookings, transaction processing in Q4 that might have came out in Q1? Or is, I guess, maybe the rationale is something different than that.
Cassandra Hudson (CFO)
I mean, I wouldn't say that we saw any direct acceleration in our top line as a result of COVID or the most recent Omicron surge. You know, I think, and we messaged this, you know, certainly over the last couple of quarters, you know, we had some tougher compares in 2022 just given the revenue acceleration we saw in 2020. You know, really, I think it's more of a compare issue in 2021. We've also been investing pretty heavily over the past couple of years to continue to drive this level of growth. You know, really, kind of pleased with how things are playing out on the top line now given those investments.
Scott Berg (Senior Analyst)
Got it. Helpful. From a modeling perspective, you had your best gross margin quarter in about 5 quarters and kind of got back to, you know, call it levels in 2020 and 2019 versus, you know, a little bit of softer gross margins in 2021. Is this kind of 78.5%-79% range the right way to think about margins throughout the rest of the year or does it maybe diverge from, you know, the Q1 performance? Thank you.
Cassandra Hudson (CFO)
I mean, we certainly saw obviously the pricing and packaging had a slight positive impact on our growth margins. You know, we're still. We still have to invest directly in our business and, you know, in 2021, we made a lot of investments in telehealth. We continue to make a lot of investments in customer support and just back-end platform and licensing. I think those investments will continue. As you know, we're pretty well optimized on the margin line today, so, you know, it may tick up slightly, but I think we're in kind of the ZIP code that we're gonna be in for a while.
Scott Berg (Senior Analyst)
Great. That's all I have. Thanks for taking my questions.
Cassandra Hudson (CFO)
Thank you.
John Davis (Analyst)
Thank you.
Operator (participant)
We'll go next to Ashwin Shirvaikar with Citi.
Ashwin Shirvaikar (Managing Director)
Thank you. Hey, Bob. Hey, Cassandra.
Cassandra Hudson (CFO)
Hi, Ashwin
Ashwin Shirvaikar (Managing Director)
Very solid results, and a great start to the year.
Cassandra Hudson (CFO)
Thanks.
Ashwin Shirvaikar (Managing Director)
Yeah. That takes me where my first question is going. Obviously, one Q growth rate's higher than the full year expectation, even though the comps are easier in the back half, and there seems to be acceleration in the base. I'm reading this as conservatism in the outlook, you know, given that it's just one Q. I just wanna make sure I'm not missing any seasonal or other nuances as far as the cadence of numbers is concerned through the course of the year.
Cassandra Hudson (CFO)
I mean, I don't think there's any, you know, nuance, if you will, in terms of seasonality that you'd be missing. You know, we obviously put guidance out that we're confident in delivering against. I think, you know, we're really pleased with performance in Q1. You know, but there's still a lot of stuff that we're working through. Pricing and packaging is relatively new, and a lot of things need to go right. It's early in the year, but we're happy with where we are and also happy with being able to increase the range on revenue for the year.
Ashwin Shirvaikar (Managing Director)
Okay. No, just making sure. On the enterprise pipeline, if you can talk a little bit more about sort of the distribution and diversification of it. Any color there would help.
Bob Bennett (CEO)
Hi, Ashwin. We did have a strong quarter of bookings in the first quarter. It actually was our strongest bookings quarter for our insurance segment, but very strong as well across, you know, all of the InvoiceCloud, you know, government, utility, tax billing, as well as insurance there. I think it was a robust selling quarter. You know, I think that's all I can say about enterprise. Yeah, this is all good. I would say that the, you know, the engine there is, you know, is working, right? We've done some a little bit of focusing based on alliances, you know, internally, and it seems to be having a strong yield.
Ashwin Shirvaikar (Managing Director)
Could you, if you don't mind, just kinda get a little bit deeper into that, in terms of the alliances. Sorry.
Bob Bennett (CEO)
You know, without giving away too much information that, you know, could become readily available to competitive entities, it's just more of a focus around alliances, teaming around alliances to get deeper into our partnerships and, you know, drive higher and better relationships, if you will, throughout the end-to-end, you know, top of funnel all the way through the integration and support on the other side of it. It's just deeper relationships with both the alliances, the customers within those alliances that we mutually are going after and supporting long-term. Integrations, including integrations and the depth of our integrations so that we bring. As you know, our product is the InvoiceCloud and all of our enterprise products, all of our products actually are leading products.
Part of the product is the way that we integrate with our customer information systems, alliances. The depth in which we do that and the value that we can drive to our customers through those integrations is a critical part of our value proposition. Lots of effort and work being done there to drive, you know, highly effective value and stickiness among our customer base.
Ashwin Shirvaikar (Managing Director)
Got it. Understood. Thank you.
Bob Bennett (CEO)
Thank you.
Cassandra Hudson (CFO)
Thank you.
Operator (participant)
Our last question comes from Josh Beck with KeyBank.
Maddie Schrage (Senior Equity Research Analyst)
Hey, guys. Congrats on the quarter. This is Maddie on for Josh. Wanted to touch back a little bit to the strong payments results in SMB. Wondering if that strong ARPU lift we should see continuing on the transaction front as you further penetrate percentage of revenues within those customers, if that should remain stable. And then wanted to touch again on ARPU growth. Where could we see ARPU reaching in the near term? And what's the most popular pricing package you guys are seeing? Thanks. You know, again, I think it was a really strong quarter on the payments side. You know, I think from an ARPU perspective, we'll continue to see strong contribution from payments, continued growth in transactions driving that revenue growth.
Cassandra Hudson (CFO)
You know, add-on to activity was strong in Q1 and something we expect to continue. I do think it will be an important part of our revenue growth going forward, just like it has been. Was there a third question there? Would you mind repeating it? Yeah. I was just wondering what the most popular pricing package is in SMB. We're heavily concentrated in the top two packages today. You know, prior to 2022, before we rolled out this new pricing and packaging, the overwhelming majority of our customers were on our top package. Now, you know, that trend kind of translates to the top two packages. Awesome. Thank you, and congrats again. Thank you.
Operator (participant)
There are no additional questions registered at this time. I'll pass the conference to Bob Bennett for closing remarks.
Bob Bennett (CEO)
Thank you for all your questions. EngageSmart delivered excellent results in our first quarter of 2022. Momentum across the business drove another quarter of record revenue performance with 42% year-over-year growth and record profitability. Standouts are the strong customer growth numbers, increase in average revenue per customer, and exceptional customer retention. Overall, our positioning continues to be compelling as we address this huge U.S. market opportunity. Thank you all for joining us, and we look forward to speaking with you again at the J.P. Morgan Global Technology, Media and Communications Conference in May, at William Blair's Annual Growth Stock Conference in June, and on our Q2 call this summer. Have a great day.
Operator (participant)
This does conclude today's program. Thank you for your participation. You may disconnect at any time.