EngageSmart, LLC (ESMT) Q1 2022 Earnings Call Transcript

EngageSmart, LLC (ESMT)
Q1 2022 Earnings Call
May 05, 2022, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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. [Operator instructions] I'll now turn the call over to Josh Schmidt of EngageSmart.

Josh?

Josh Schmidt -- 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 -- Chief Executive Officer

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 pathologist 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 four-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 white boarding 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 and 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, and 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 road map 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 3 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 solutions.

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 & Sewer 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 collections.

Our key differentiation is that we help our customers drive superior digital adoption. With true SaaS, all customers receive continuous product enhancement 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. And 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-in 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 and customer engagement software with integrated payment capabilities. With that, I'll hand the call over to our CFO, Cassandra Hudson. Cassandra?

Cassandra Hudson -- Chief Financial Officer

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 we're 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 to $294 million or 35% growth at the midpoint of our range, up from our prior guidance of $280 million to $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 to 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. And 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 Group 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 to $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 and $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 and $294 million or a 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 and $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 -- Chief Executive Officer

Thank you to Cassandra. Whew, great numbers. We are off to a great start in 2022. We founded EngageSmart because activities like paying bills, scheduling appointments, on-boarding 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, and 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.

Questions & Answers:

Operator

[Operator instructions] And we'll take our first question from Will Nance of Goldman Sachs.

Will Nance -- Goldman Sachs -- Analyst

Bob, I'll echo the whew, 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. Wonder if you could talk about how much the pricing and segmentation contributed to this quarter's numbers? And then going forward, could you just kind of talk about 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 -- Chief Financial Officer

Great. Thanks, Will. So 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 positive results on the price -- new rollout of the pricing and packaging. So really strong results really 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 roll out new features and functionality and move into new verticals and to make sure that we're aligning our price to the value that we offer to our customers. And we think we did that with this rollout. Results of that rollout, inclusive of churn, have so far exceeded our expectations. Obviously, it's been one quarter.

Originally, we were expecting about a 5% to 10% ARPU uplift from existing customers. And we think, based on what we're seeing so far, that we'll come in a few a few points better than we had anticipated because of the higher adoption that Bob mentioned on the Plus package, largely. But overall, we remain highly encouraged by the continued strength that we're seeing in new trials and conversions. And ultimately, we think we got the new pricing and packaging bundle right.

In terms of trends, I think you'll still continue to see 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 -- Goldman Sachs -- Analyst

Got it. Sounds great. And then 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 had anticipated. And it sounds like there are some opportunities that you're making in customer acquisitions. So just wondering how you're kind of balancing, 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 -- Chief Financial Officer

Yes. I mean, I think you have it exactly right, right? We continue and it's factored into our guidance to be investing more in the new customer acquisition engine on the SMB side. I think having the revenue be it flows through to the bottom line is truly not our intent. It's a matter of execution.

I think the team is executing incredibly well, there's a lot going on. But it takes a while to deploy against these investments between the investments we're making in the product and 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.

Operator

Our next question comes from Bhavin Shah with Deutsche Bank.

Unknown speaker -- Deutsche Bank -- Analyst

This is Rod on the line for Bhavin. So just to kind of follow-up on Will's point a little bit. So on the pricing change, you talked about how revenue -- revenue churn was in line, referrals remain strong. And so that's great.

But 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 to maintain the top of funnel activity. But in medium-term view, do you envision any change in the cadence of the marketing with regards to SMB specifically? I guess I'm trying to think through 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 Starter traction. So yes, how you're thinking about that and the extent to which you use marketing as the lever either in that or maybe response like competitors trying to capitalize on the pricing umbrella and maybe like dissatisfaction on the client base. In checks, we saw that there was a little bit of friction, but a lot of -- obviously, people saying, well, we came back as 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 -- Chief Financial Officer

Yes. I mean, I guess, certainly, we -- 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, 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, and to your point on marketing spend, 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 in their careers at a lower price point. I think about them, I guess, somewhat separately, right? We had -- we migrated our entire customer base to the new pricing and packaging.

The vast -- overwhelmingly vast majority of our existing customers moved over to the new pricing all within Q1. I don't think 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. But 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, as you know, foothold in mental health, and we're seeing traction in a lot of new verticals. So really, those levers are being deployed separately, if that kind of gets to the heart of your question.

Unknown speaker -- Deutsche Bank -- Analyst

Yes. It does. And then I guess as a follow-up, just on transactions, I think you called out how transaction growth is driven by, I think, transactions per client. But just want to make sure I got the -- got that right.

But is it basically on the SMB side specifically? Is it more driven by incremental seats, practices expanding as the solo practitioners grow? Or is it just new customers coming in across the new verticals, across mental health?

Cassandra Hudson -- Chief Financial Officer

It's -- I mean, it is across the board for SMB in terms of the strength that we see in payments, right? So we're seeing continued increase in the average ticket, increase in the number of transactions that are happening per account. And then 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. So it really is all three. And then just overall adoption.

So the more 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.

Operator

Our next question comes from Terry Tillman with Truist Securities.

Terry Tillman -- Truist Securities -- Analyst

Bob, Cassandra and Josh, hopefully, you can hear me OK. And I guess I'd be remiss if I didn't say, whew, great numbers as well. Can you hear me OK, by the way? It's eerily quiet.

Cassandra Hudson -- Chief Financial Officer

Yes. You sound great.

Bob Bennett -- Chief Executive Officer

That whew could have been a little more enthusiastic, but yes --

Terry Tillman -- Truist Securities -- Analyst

Yes. No. I need -- yes, well, maybe next quarter, how about that? So OK. Yes.

So the first question I had is just related to -- you all basically cut your teeth initially in mental health. I mean, if I'm not mistaken, that's basically a 9-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, I don't want to put words in your mouth, but the speech language pathologists, occupational therapists and dieticians, 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, and anything you could share there? And then I had one follow-up.

Bob Bennett -- Chief Executive Officer

OK. Terry. So -- yes, 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 sort of multi-clinician groups, larger -- 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 group practice. It doesn't need to be hundreds of clinicians for it to be a successful group practice.

And 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 and their communities and grow their businesses without administrative hassles that others might have. So they're able to add clinicians, and of course, that drives ARPU up with more seats, more payments and so forth. So 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, they just have different specialties. So what we learn in one, even in terms of driving top-of-funnel free trials typically, applies to others. So 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 -- Truist Securities -- Analyst

It definitely does. Yes. And I guess I don't know if this is for you or Cassandra, but 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 to net revenue retention. And maybe that's the wrong way to look at it.

But just any more you could kind of double-click on digital adoption rates. And 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. So 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.

Cassandra Hudson -- Chief Financial Officer

I mean, ultimately, what we see is the customers that use our payment processing service, especially on the SMB side, 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, very sticky, right, because they're really using all of the capabilities that we offer in our business management solution. We expect that rate of digital adoption to continue to tick up over time.

I think in Q1, it certainly exceeded our expectations. But we think that's kind of a broader macro trend that should be core to our revenue growth over the long term.

Bob Bennett -- Chief Executive Officer

Yes. Terry, the other thing about that, you mentioned inflation. And the inflationary environment, the way we price, is not a negative. So as average clinician hour rates go up and payments go up, that creates more volume for us that actually is a positive on the SMB side.

Operator

Our next question comes from Bob Napoli with William Blair.

Cris Kennedy -- William Blair -- Analyst

Actually it's Cris on for Bob. 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 -- Chief Executive Officer

Right. So hey, Cris, it's Bob. We are pursuing a lot of different threads right now in M&A, nothing immediate to announce. The -- 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.

And we intend to continue to drive our growth inorganically as well as organically. But we're an organic-first company, as you know.

Cris Kennedy -- William Blair -- Analyst

Understood. And then 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?

Cassandra Hudson -- Chief Financial Officer

I mean, certainly, we -- I think we touched on this a lot on our call where we gave '22 guidance. But 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. So -- and as you know, we have a very highly efficient customer acquisition model, especially on the mental health side.

So our expectation is that obviously, efficiency ticks down as we invest more, but still at a very attractive best-in-class rate. I think we're kind of early days still, especially in Q1 as we're rolling out new programs, onboarding a new marketing team, if you will, over the past six to nine months on the SMB side. So certainly more to come. We're -- we keep a keen eye to efficiency and ROI, and that's how we manage our business and investing to drive long-term growth.

Operator

Our next question comes from John Davis with Raymond James.

John Davis -- Raymond James -- Analyst

I wanted to touch on the SMB segment for a second, and specifically the net customer adds. I think very strong at roughly 4,000 given the pricing changes. Do you think most of the churns done at this point, any churn that you would have had from pricing that likely occurred in the first quarter or is there some spillover 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 -- Chief Financial Officer

Yes. I think by and large, we're through the overwhelming majority in Q1, JD, to your point. But it's still -- the pricing and packaging had happened, the migration for our existing customers has happened, by and large, in February and March. So 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 -- Raymond James -- Analyst

OK. And then on the ARPU side of things, I think it was really strong, up 17% year-over-year in the SMB business specifically versus 11% in 4Q. Is it simple enough just to say that kind of 600 basis point acceleration is largely driven by pricing and kind of a half quarter impact? Is that a fair way to think about it?

Cassandra Hudson -- Chief Financial Officer

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. So it is a little bit of both.

John Davis -- Raymond James -- Analyst

OK. And then last one for me. Given the investor focus on profitability these days, really good to see the flow-through there. But Cassandra, as we step back, I think the guide has roughly 13% unchanged margin this year.

How should we think about the trajectory longer term? Or how do you guys think about it kind of in '23 and beyond? Not trying to pin you to a number, but I think it would be helpful for myself and investors and others to just kind of understand how you guys think about the cadence of margin expansion longer term.

Cassandra Hudson -- Chief Financial Officer

Yes. I mean, certainly, this year, we're investing a lot in engineering, product development and marketing on the SMB side. We're also absorbing the public company costs. So I think once we get through 2022, we expect to see modest increases in adjusted EBITDA margin expansion over the next few years.

But it's a balance. We're always going to 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. So it's a balance, but I think you'll start to see things pick up in '23.

Operator

We'll go next to Scott Berg with Needham.

Scott Berg -- Needham and Company -- Analyst

Bob, Cassandra, congrats on a great quarter. I guess I got two, I'm 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 is, was there any impact of maybe the Omicron variant in terms of, I don't know, new bookings transactions processing in Q4 that might have came out in Q1? Or I guess, maybe the rationale is something different than that?

Cassandra Hudson -- Chief Financial Officer

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. I think -- and we messaged this, certainly, over the last couple of quarters. We had some tougher compares in 2022 just given the revenue acceleration we saw in 2020. And so really, I think it's more of a compare issue in 2021.

But we've also been investing pretty heavily over the past couple of years to continue to drive this level of growth. So really kind of pleased with how things are playing out on the top line now given those investments.

Scott Berg -- Needham and Company -- Analyst

Got it. Helpful. And then from a modeling perspective, you had your best gross margin quarter in about five quarters and kind of get back to, call it, levels in 2020 and 2019 versus a little bit of softer gross margins in '21. Is this kind of 78.5% to maybe 79% range the right way to think about margins throughout the rest of the year? Or does it maybe diverge from the Q1 performance?

Cassandra Hudson -- Chief Financial Officer

I mean we certainly saw -- obviously, the pricing and packaging had a slight positive impact on our gross margins. We're still -- we still have to invest directly in our business. And 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. So I think those investments will continue.

As you know, we're pretty well optimized on the margin line today. So it may tick up slightly, but I think we're in kind of the ZIP code that we're going to be in for a while.

Operator

We'll go next to Ashwin Shirvaikar with Citi.

Ashwin Shirvaikar -- Citi -- Analyst

Pretty solid results and a great start to the year.

Cassandra Hudson -- Chief Financial Officer

Thanks.

Ashwin Shirvaikar -- Citi -- Analyst

Yes. That's actually where my first question is going. Obviously, 1Q growth rates are 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. So I'm reading this as conservatism in the outlook, given that it's just 1Q.

But I just want to 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 -- Chief Financial Officer

I mean I don't think there's any nuance, if you will, to -- in terms of seasonality that you'd be missing. We obviously -- we put guidance out that we're confident in delivering against. I think we're really pleased with performance in Q1. 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 -- Citi -- Analyst

OK. OK. No. Just making sure.

And 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 -- Chief Executive Officer

Yes. We had -- Ashwin, we did have a strong quarter of bookings in the first quarter. And it actually was our strongest bookings quarter for our insurance segment, but very strong as well across all of the InvoiceClouds -- all of the InvoiceCloud: government utility, tax billing as well as insurance there. And I think it was a robust selling quarter.

I think that's all I can say about Enterprise. Yes. It was all good. I would say that the engine there is working, right? So we've done some -- a little bit of focusing based on alliances internally, and it seems to be having a strong yield.

Ashwin Shirvaikar -- Citi -- Analyst

Could you, if you don't mind, just kind of get a little bit deeper into that in terms of the alliances?

Bob Bennett -- Chief Executive Officer

Well, the -- without giving away too much information that could become readily available to competitive entries, it's just more of a focus around alliances, teaming around alliances to get deeper into our partnerships and drive higher and better relationships, if you will, throughout the end-to-end, top of funnel all the way through the integration and support on the other side of it. So 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 integration so that we bring -- as you know, our product is -- the InvoiceCloud and all of our enterprise products, all of our products actually are product-leading product. Part of the product is the way that we integrate with our customer information systems alliances.

So 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. So lots of effort and work being done there to drive highly effective value and stickiness among our customer base.

Operator

Our last question comes from Josh Beck with KeyBanc.

Maddie Schrage -- KeyBanc Capital Markets -- Analyst

Congrats on the quarter. This is Maddie on for Josh. I 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 I 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?

Cassandra Hudson -- Chief Financial Officer

So I do -- again, I think it was a really strong quarter on the payment side. I think from an ARPU perspective, we'll continue to see strong contribution from payments, continued growth in transactions driving that revenue growth. Add on to activity was strong in Q1 and something we expect to continue. So I do think it will be an important part of our revenue growth going forward just like it has been.

And was there a third question there? Would you mind repeating it?

Maddie Schrage -- KeyBanc Capital Markets -- Analyst

Yes. I was just wondering what's the most popular pricing package is in SMB.

Cassandra Hudson -- Chief Financial Officer

We're heavily concentrated in the top two packages today. Prior to 2022 before we've rolled out this new pricing and packaging, the overwhelming majority of our customers were on our top package, and now that trend kind of translates to the top two packages.

Operator

There are no additional questions registered at this time. I'll pass the conference to Bob Bennett for closing remarks.

Bob Bennett -- Chief Executive Officer

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. Stand outs 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 JPMorgan 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

[Operator signoff]

Duration: 54 minutes

Call participants:

Josh Schmidt -- Investor Relations

Bob Bennett -- Chief Executive Officer

Cassandra Hudson -- Chief Financial Officer

Will Nance -- Goldman Sachs -- Analyst

Unknown speaker -- Deutsche Bank -- Analyst

Terry Tillman -- Truist Securities -- Analyst

Cris Kennedy -- William Blair -- Analyst

John Davis -- Raymond James -- Analyst

Scott Berg -- Needham and Company -- Analyst

Ashwin Shirvaikar -- Citi -- Analyst

Maddie Schrage -- KeyBanc Capital Markets -- Analyst

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