Description

Everbridge Inc. in an interesting situation arising from the SaaS fallout (+ recent downside catalyst) over the past 3-4 months. If you are looking for companies with “Fort Knox” balance sheets, this is not the one, please stop reading this now. If you are looking for durable moats and a company with really no comparable competition in its core CEM platform business, then by all means proceed reading further.

Everbridge is a cloud-based software-as-a-service (SaaS) platform that allows corporations, governments and organizations to automate the delivery of critical information to help keep people safe, supply chains moving, and businesses running. Everbridge offers a unified platform of varying degrees of complexity that can deliver large targeted messages to a large group of people affected during critical situations…i.e. Hurricanes, floods, earthquakes, terrorist events, active shooter events, etc..  Everbridge has evolved 5-6 years ago from being solely a mass notification company to now automating and accelerating response to disruption of various forms. This business entity is named Critical Event Management (CEM) which is now the largest component of the business and also the fastest growth segment for Everbridge.

What has created the opportunity?

We believe what has created a tremendous opportunity is the massive re-rating in the business for what we believe to be some temporary headwinds and perhaps some investor confusion. Everbridge is one of the few SaaS companies trading back at late 2016 multiples, one of the last periods where SaaS companies had a big re-rating and when value worked for about 12 months. 

Everbridge’s business has significantly expanded since 2016 and the platform is more robust than at the time of the IPO. In fact, since being public Everbridge has completed 14 acquisitions/bolt-ons and significantly expanded the overall system capabilities and client appeal. The offering is so robust they consistently tell investors that they don’t compete on price, because no one offers the complete platform that Everbridge offers. It also shows in the retention metrics, customers that choose 2-3 features have less contract churn than those with 1 feature, and a similar linear relationship for customers with 5-6+ features. 

“But when you look at things like statewide opportunities, who competes for those, very few of us. It's us and very few or CEM. When there's an RFP for critical event management, we're pretty much the only ones who show up with anything that can achieve all of the ends of the customer. So, there is competition but we can either outflank them, and in some cases, we can go deeper than them even with point solutions.“ – Patrick Brickley, Stephens Conference Dec. ‘21

Q3 2021 Call:

“William Power: Great, thanks. I guess a couple of questions. You all referenced that the record number of 500,000 plus deals I love to just get more color on what's driving the increasing traction there. Similarly, each quarter. I mean is it, is it taking more modules as a tight added distribution that has a greater upmarket focus just love to get more color as to what's driving the larger and larger deals?

A: David Meredith:  Yeah Will, thank you. Great question. So, it's multiple factors, one is that we have been trying to sell higher into the organization. So if you start by selling into the C-suite. And if we can into the board even of that helps that helps you drive bigger deals. Two is various bundling strategies. A lot of our competitors are selling point solutions. And so one way we compete and try to avoid competing on price is by putting together a bundle of capabilities that is difficult for them to match because they just don't have those capabilities.”

The majority of the recent re-rating came from CEO David Meredith’s departure (announced 12/15/2021) which dropped the stock ~50% on the day of the announcement. Meredith was only at the company a little over 2+ years, but did a good job growing the business and guiding its trajectory. While Meredith was a decent CEO, it was clear given his past history of short tenures at other tech companies and legacy corporations it was not all that surprising that David accepted another role at what we believe was a large total compensation bump. In discussions with folks about David Meredith, he was characterized by many as a “job hopper”, constantly looking for the next best thing, better pay, and/or career advancement.

In fact, if you look at his career history he has only had one gig that lasted 8 years, 

IT Consulting at CGI-AMS, early in his career. All other roles have been 4 years or less.

Other stints include:

Senior Manager Capital One (‘93-’96);  3.5 years

IT Consulting at CGI-AMS (‘96-’04);  8 years 

SVP Verisign (‘04-’07) 3 years

CEO MIS Inc. (‘07-’11) 3 years

President ePals (‘11-’13): 2 years 

President at Centurylink/Savvis (‘13-’17). 4 years

COO RackSpace (‘17-19): 2 years

Everbridge from July ‘19 to Jan. ‘22. 

While it was at first a bit puzzling why he left Everbridge, there were plenty of rumors to fill the information void, hinting at major problems with the business and other pie in the sky fear mongering rumors on the demise of Everbridge. So needless to say the stock got absolutely slaughtered ($178 [peak] → $44; down ~75% from the peak), then came the news that David had actually taken a job at a Dell spin-off (PE owned), Boomi, a SaaS application integration platform, that does not compete with Everbridge. It appears he got a much better total comp package, with a decent percentage stake in the company which vests over a number of years. While Boomi is private and all this information is really just hearsay, it is likely that the total annual comp at Boomi far exceeds the ~$7M annual comp at Everbridge.

The next shoe to drop was the information that was released with Meredith’s departure, which was the company guiding down revenue guidance for 2022 from ~ 26% growth to 20-23% growth. While we don’t know exactly what the mix of changes were, Co-CEO Patrick Brickley alluded to dampening expectations given that some large deals that have been tied to Meredith may be delayed or possibly in jeopardy due to his departure. Brickley also stated that some EU countries and organizations were slowing the deal making process by only taking an initial lower end version of Everbridge’s offering, sort of a trial phase. We think the biggest chunk of this delta is temporary from deals tied to Meredith that may be in flux given his departure. Brickley has also tended to err on the side of conservatism with respect to Everbridge’s historical guidance, typically beating and raising consistently by a wide margin.

The elongation of the EU signing process likely has slowed some business 1H 2022, but there is a mandate in place that all EU member states need to have countrywide alerting implemented by June of 2022, of which Everbridge has won the vast majority of the available contracts. Everbridge was also the first company awarded a country mandate within the EU, which likely gives additional confidence in adjacent country wins.

Business Overview

Everbridge is a leader in the Critical Event Management (CEM) sector, and derives approximately 55% of its revenue (including services) from CEM. Everbridge also competes in the Mass Notification market which is a more competitive space, but still growing in the mid-high teens. Everbridge retains over 160+ Global patents, has an NPS score 2x+ the software industry as a whole and a 4.6 rating on Glassdoor. Everbridge’s total TAM is approximately $41B+, Everbridge is early in its lifecycle given they really created the platform solutions to the CEM category.

Everbridge is one of only a few corporations that have FedRAMP authorized clearance from the U.S. government, FedRAMP stands for “Federal Risk and Authorized Management Program” it standardizes security assessment and authorization for cloud products and services used by U.S. federal agencies. The main goal of FedRAMP is to ensure Federal data is consistently protected at a high level in the cloud. There are only 249 companies listed as authorized on FedRAMP, and most of Everbridge’s competition is not authorized through FedRAMP. Everbridge currently has 16 FedRAMP authorizations covering various aspects of SaaS software with the U.S. government.

The key to Everbridge’s land and expand strategy and securing state contracts (land) and then expanding to country and city levels (expand). Drilling down even further, once these large government contracts are secured Everbridge’s sales team has found it much more seamless to target organizations & corporations within that jurisdiction i.e. Heathcare, Education, and Transportation organizations.

Example of the Visual Command Center

Long-term Operating Targets:

• Co-CEO Patrick Brickley believes this is an 80% gross margin business long-term; currently ~73-74% GMs, in ‘22 believes that should be around 75% or so.

• Management focused on keeping S&M around 40% of sales, S&M has been as high as low 70s.

• Believes at scale this could be producing adj. EBITDA margins at scale 25-30% range; considers scale ~ $1B in annual sales

• 2-year on average contracts w/ ~110% avg. retention rates given the upsales to existing clients.

• Average maintenance cost for existing contracts between 6-10% of sales, depending on client and complexity, has recently been ~ mid-single digits.

• Business is at an inflection with regards to profitability as the business continues to scale and flex its operational leverage.

Valuation:

While there is some skepticism around short-term headwinds, we don’t think this is a high margin SaaS business that should be trading at 4.8x ‘23 EV/sales, especially when consensus still has them growing at > 20% per annum. Pagerduty, an indirect competitor, much more involved in the IT alerting and response space, has a similar growth profile and trades at almost a 3x premium to ‘23 EV/Sales. While we would argue that Pagerduty’s core business is in a much more competitive space than Everbridge’s CEM business, something that we believe is not at all reflected in today’s multiple.

If one believes Everbridge is a 20% top line grower, with operating margins approaching 25-30%, this is a business that could easily get to a multiple of 25x+ EBIT.  Other dominant cloud-based businesses like Workday are trading at ~ 50x operating inc. on ~18% margins for ‘23, and growing only in the high teens. If Everbridge gets half that multiple on more normalized operating income investors are looking at a > 100% return looking 3 years out for a pretty stable underlying business.

Questions about churn:

Q: First question here is on the '22 guidance. Your '22 guidance only makes sense if you assume significant churn, do you anticipate higher than usual churn, especially in big deals up for renewals in 2022. 

A: Well, we are sensitive to some isolated risks within the base. We have heard from a lot of our largest customers proactively over the past number of weeks. A lot of inbound asking sort of what's going on, and those calls have generally gone very well in particular, large customers that are multi-product critical event management. We're very sticky, right, we're all looking forward to 2022 and hopefully up selling even more, but -- where customers are single products, less adopted than just like any -- anyone selling anything those customers are inherently less sticky and so, there's a subset of customers that we have to put a lot of heightened focus on and they do create risk for us, in terms of revenue in 2022. I would put that in the short term, sort of one-time bucket that to the extent, that they cause disruption. That's not systemic. That is isolated and all the more reason why despite the near term disruption, we are excited about getting through this, we'll get through this year and getting onto 2023 and beyond with, we anticipate will be very durable growth.

We’ve also spoken to a few customers that could give us insight into the CEO change and how that affected their outlook. The response was fairly consistent, in that Everbridge would continue to be assessed on the merits of the product and team (direct service team), and was not dependent on the CEO. There was really no concern over the CEO role, as long as the service and quality of the product continued. Obviously this is from a small fraction of Everbridge customers, and not customers under RFPs, so potentially customers actively bidding for contracts could be more susceptible. Overall, communication was still positive and all clients remained happy with the service and quality of the platform.

Notable recent corporate and government wins:

• Government/Country deals: Spain (mass notification), US Department of Agriculture's Office of Homeland Security lead security, U.S. Marshalls, Medicaid & Medicare Services, US attorneys Middle District of Florida, US Department of Commerce CEM

• Corporate Deals: Goldman Sachs, Discover, NBC Universal, Stryker, Dow, Alexion, Takeada,  

Merger Possibility:

Given the notable re-rating in the valuation Everbridge is now in the crosshairs of many quasi competitors and/or potential acquirers. We think in the security & IT service space Everbridge might be an interesting acquisition for clients that require a multitude of security/risk analysis and response planning platforms. Everbridge is a unique collection of assets that we think fits well into adjacent product offerings, and is something that more and more clients are requesting given the complicated nature of resources, distribution/supply chains, employees, and system security. 

Summary

Over its history Everbridge was consistently viewed by many analysts as a 25%+ organic topline grower given steady demand from both mass notification and the newly created category, Critical Event Management. Management has guided for 20-23% growth, and we now look at the business conservatively through the lens of a 20%+ grower, but we think the business has been de-risked substantially and now trades at a large discount (EV/Sales) to many SaaS 20%+ organic growers who aren’t necessarily the clear leader in a growing niche category such as CEM. If Everbridge turned off (hypothetical) the sales and marketing switch, and just maintained maintenance expenses on the recurring revenue stream, you would get a very sticky and low churn ~45% operating margin business at what we estimate > $550M in sales in ‘23. This is not likely at all given the very high ROIC reinvestment opportunities, but the optionality certainly exists, especially for a private buyer. The business also has de-risked substantially from the perspective of scale, product roadmap, and corporate and government relationships– yet the business is trading at the same valuation (EV/sales) at the time of the IPO, and furthermore the business is just starting to inflect towards profitability. The last time Everbridge was trading at its trough EV/sales multiple was during a brief window during its IPO, at that time approximately 80%+ of the business was mass notification which is much more competitive and has a slower growth profile than CEM. CEM is now above 55% and is continuing to grab more of the overall mix, and is Everbridge’s most defensible portion of the revenue base given the high switching costs for existing clients.

Catalyst

Strategic buyout, PE led buyout, continued organic growth after lapsing a few quarters of disruptions from the CEO departure, a re-rating of the overall multiple more in-line w/ peers.