Description

We tried to post this idea a month or so ago, but unfortunately were unable to due to a previous write-up of evbg within six months.

However, despite Bloomberg reporting that the company is working with an advisor on a potential sale, we are posting this write up as we think EVBG shares present an attractive opportunity even after the stock price spiked in afterhours trading on the news. We see significant upside in a potential takeout and a solid IRR should the company remain independent in public markets.

Business Overview

Everbridge is an enterprise SaaS business that provides mass notification and critical event management (CEM) software in a world with increasing risks (natural disasters/weather, civil unrest, pandemic, active shooters, etc). The software provides a “single pane of glass” command center for corporates to manage employees and assets during times of increasing risk and business disruption. In addition to enterprise clients, the company also counts governments across the globe as clients that use Everbridge software to monitor potential hazards and respond to incidents. The majority of Everbridge’s competition is in the form of smaller companies providing disparate point solutions. Everbridge has an impressive customer base with more than 6,000 customers and includes 47 of the Fortune 50.

Situation Overview

As recently as late last year, investors were willing to pay ~14x forward revenue for Everbridge as the stock price topped out at ~$160/share. In December 2021 the company announced: 1) the CEO was suddenly departing and 2) forward guidance that was below the Street’s lofty expectations. This led to a precipitous fall in EVBG’s share price. The CEO departed to take the CEO role at a PE-backed cloud business, likely knowing that EVBG trading at 14x revenue with slowing growth meant limited upside ahead (and limited personal wealth creation). In February, the company again cut forward expectations on its fourth quarter earnings call. We believe management has now “cleared the deck” with two disappointing guides well below Everbridge’s historical growth trends.

Since the end of 2021, there has been significant turnover in the company’s shareholder base. Several of Everbridge’s largest active shareholders have exited or meaningfully reduced their positions. Additionally, activist investor Ancora Advisors took a stake in Everbridge and has been publicly pushing the board to sell the company.

Thesis

·       Everbridge is a high-quality enterprise SaaS business

o   Everbridge’s software is in demand as enterprises and governments are navigating increasingly complex and risky operating environments due to natural disasters, cyber attacks, pandemics, civil unrest and more

o   More than 85% of Everbridge’s revenue is recurring, 110%+ net revenue retention and multi-year contracts with enterprise clients

o   We think it is unlikely that enterprise clients cancel subscriptions with Everbridge even in a recession or downturn, given the critical nature of the software and increasingly risky operating environment

·       Street estimates are likely too low as management shifts its focus to profitability and inflecting margins

o   Consensus estimates for 2023 EBITDA margins are low teens, despite management commentary suggesting margins could be substantially higher

§  Per EVBG’s CFO Patrick Brinkley on the 1Q’22 earnings call, EBITDA margins should be at least in the mid-teens in 2023: “And as we exit this year, we still anticipate, for example, Q4 adjusted EBITDA margins in sort of the mid-teens and that's our exit run rate as we head into next year, while continuing to focus on revenue growth. The 2Q’22 earnings press release reaffirmed that the company is on track to achieve mid-teens EBITDA margins exiting 2022.

§  Per Patrick Brinkley at the JPM Technology Conference in May: “Wouldn't be surprised if next year, there's a quarter where adjusted EBITDA margin starts with a two and ultimately we'll see where that top line growth rate shakes out. If it looks like we're going to be growing in the mid-teens, then we will drive adjusted EBITDA towards mid-20s, maybe even 30%.”

§  According to management, Everbridge’s portfolio restructuring should eliminate $15-18 million of costs

o   Revenue growth for 2022 is negatively impacted by the company’s portfolio restructuring in which the product portfolio is being streamlined to simplify its go-to-market resulting in some products being eliminated

§  Management believes that Everbridge’s revenue growth should-reaccelerate to 20%+ organic revenue growth in 2023 and beyond, significantly higher than the Street’s current estimate of 14% revenue growth in 2023

§  Our checks with experts in the industry confirm management’s expectations that revenue growth should re-accelerate to 20%+ in 2023 and beyond, as the industry is growing north of 20%+ and Everbridge has the best offering in the market

·       Everbridge is too cheap at current prices, trading at a low multiple of revenue and reasonable multiple of forward EBITDA

o   Even at $40 (the current price in afterhours trading on the news that the company is exploring a potential sale) EVBG shares trade at ~4x the consensus revenue estimate for 2023 (which only assumes a modest ~14% revenue growth), which we believe is far too cheap for an enterprise software business of this quality

o   Assuming the business remains independent, we believe EVBG will be worth ~$90/share based on ~14x 2026e EBITDA of ~$280 million. This represents an attractive ~22% IRR from the $40 price reflecting the news of a potential sale

·       Potential near-term catalyst if the business is sold

o   We agree with Ancora’s position that there are likely several interested private equity buyers and that the board should sell the business

§  Orlando Bravo, the co-founder of tech PE giant Thoma Bravo said it best during his appearance on CNBC on May 24: "For us in private equity, as a buyer and operator of software companies, this environment of five times forward revenue is the buying opportunity of a lifetime."

o   The new CEO, David Wagner, is no stranger to selling public companies and has experience with private equity

§  David Wagner’s experience lends itself to a potential sale or PE involvement, as his role as CEO of publicly traded Zix ended when he sold the business and prior to Zix he held leadership positions of a Thoma Bravo portfolio company

§  The new CEO’s pay package implies that there is a chance the business could be sold in the next 12 months, as the new CEO’s employment contract specifically states that a change of control within 12 months would result in accelerated vesting of 25% of the RSU and PSU grant

§  Our checks indicate that the new CEO will maintain his permanent residence in Texas and plans to commute to Everbridge, which is headquartered in Massachusetts. Is this because he doesn’t view his role at Everbridge as long term?

o   Following the CEO departure in December, three directors on the board made open market purchases of EVBG stock at prices more than 100% higher than EVBG’s current price

§  Is it possible that insiders are locked out of buying stock at substantially lower prices because they are aware of a potential sale process?

o   In a takeout scenario, we think EVBG could fetch at least 5.5x 2023e revenue or more than $60/share (~50% upside from current prices)

Risks

·       Everbridge’s revenue proves to be less resilient in a weaker macro economic environment

·       Nearly 1/3 of the revenue is generated outside of North America and could be negatively impacted by stronger USD

·       Everbridge is unable to achieve the EBITDA margins that the CFO has publicly discussed 

Catalyst

-Sale of the business

-Continued scaling of margins and trading on an EBITDA multiple (rather than rev)