Description

Everbridge, Inc. (NASDAQ: EVBG)

Everbridge is a fast-growing cloud-based software-as-a-service (SaaS) provider of enterprise applications that allow organizations to manage and coordinate responses during critical events in order to keep people safe and operations active.  

The Company has an attractive business model with numerous opportunities for management to deploy capital at high rates of return into a large and growing addressable market.  Everbridge enjoys strong moats and can grow revenue north of 20%+ over an extended period of time benefiting from secular tailwinds of rising global threats and enterprise clients shifting from on prem to cloud based solutions.  With greater scale, the platform will drive gross margin expansion and further increase the value of the installed base of subscribers. I believe Everbridge represents an attractive investment opportunity with IRRs in the low to mid-20s return.

+10% Customer growth
+10% Net dollar expansion @ 110%
+5% Increase in ACV and multiple-product bookings
-1% Other impacts
+24% Revenue growth
+4% Gross margin expansion
+28% Gross profit growth
-5% Valuation multiple compression from lower growth at exit
+23% IRR

Everbridge has several sources of competitive advantage:

• A sticky product addressing a mission critical need and providing high ROI to customers

• Strong network effects

• Effective customer acquisition with low customer retention costs

• A scale advantage relative to peers that continues to widen as the Company continues to reinvest into new product offerings that increase revenue attachment rates and drive higher annual contract values via a higher number of multi-product bookings

• A lower churn and higher lifetime value from cross selling new products into the customer base

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Everbridge is an industry leading provider with a best-in-class offering and reputation that is significantly ahead of the competition.  Within the critical event management industry, Everbridge has a unique product offering that allows enterprise clients the ability to operate multiple critical event management solutions over a single SaaS platform with a single unified user experience, unified contact, and unified mobility.  Rather than piece together disparate solutions, Everbridge enables clients to run multiple solutions over a single seamless software platform. The Company’s early transition to the cloud and unique offering has allowed Everbridge to establish itself as an industry leading SaaS provider of critical event management solutions, capturing a platinum client set.

The Company’s products provide a mission critical service with high ROI and high customer retention.  Everbridge’s product is sticky with a low customer attrition rate of below 5%.  The Company’s software is deeply integrated with a customer’s daily operations and switching software vendors is not simple.  To migrate to a competitor requires porting data to a new platform, changing operational procedures, and retraining employees to learn a new system.  

Moreover, Everbridge’s software applications provide high ROI by improving organizational responses during critical events.  Operational value drivers for enterprise clients include:

• Revenue: Reducing lost revenue from events impacting services, assets, supply chain, personnel

• Costs: Deferring or cutting costs for response management through automation

• Hours: Reducing worker hours spent/wasted on manual response activities
  

The Company’s moat is further reinforced by scale advantages and strong network effects.  Large-scale events that expand beyond territorial jurisdiction lines and affect multiple constituents (e.g. communities, hospitals, universities, transportation agencies, and businesses) require a multi-regional, multi-organizational response approach that ensures communication between previously unconnected groups so that all affected parties can operate in sync and receive critical information quickly.  

A scale provider thus becomes important in unifying multiple constituent groups during times of crisis.  Because multiple levels of government and private sector groups are often involved in responding to major events, there is value in regions and different constituents coming together to establish a shared approach to incident management.  Having a common platform results in efficient communication, enhanced coordination, increased awareness, and streamlined training and support.

Everbridge operates an attractive and highly predictable SaaS recurring revenue model

• 95% renewal rate (vs. 90% SaaS average)

• 96% revenue is recurring subscription

• 90%+ of revenue is contracted prior to quarter start

• 2 years in average length of customer contract

• Capital lite business model with cash collected at the beginning of the 2-year contract before services are performed

Given the billings focused business model, Everbridge collects cash up front and then spends over the course of the year, which suggests management has significant ability to control margins.  As such, investors should focus on revenue, rather than profitability or cash flow because those metrics are artificially depressed by investment spend today.  The important assessment is whether the investment spend (S&M, product development) is being made appropriately to yield attractive ROI over time. See below for a discussion of the Company’s sales and marketing and product development spend:

Sales and Marketing: Everbridge has high LTV / CAC implying effective customer acquisition.  The Company has been acquiring customers at an attractive LTV/CAC of 6.5x (or 4.1x discounted at 10%).  For each $1 invested in customer acquisition, Everbridge is returning ~$6.50 in future gross profits.

Investment risk to acquire customers is mitigated by a fast payback period:  CAC Months is approximately 12 months (on revenue), or 18-24 months (on gross profit).  Per the Company’s 10-k, Everbridge spent $1.00 and $0.95 to generate $1.00 of new sales in 2017 and 2016, respectively.  Moreover, the cost to retain customer revenue is low. In 2017 and 2016, Everbridge spent $0.06 to renew each $1.00 of sales.

Product Development: Everbridge has a scale advantage that allows the Company to reinvest in product development to further widen competitive lead.  Management has been investing in R&D and making acquisitions to expand the product line beyond the Company’s core Mass Notification offering (currently ~75% of sales).  The Company currently has 10 products and management plans to release 1 product every 12-18 months, ultimately reaching ~18 products.  The attachment rate potential is significant, and Everbridge is showing signs of early success with customers.

With success in product development, new products are representing a larger percentage of bookings, reaching nearly half of all new and growth bookings.  

Attachment revenues are representing a greater percentage of sales

• Multi-product deals are increasing, resulting in higher average contract value and salesforce efficiency

Everbridge has an attractive business model with numerous opportunities for management to deploy capital at high rates of return into a large and growing addressable market.  Everbridge is still in the early innings of both (i) market penetration and (ii) customer penetration, providing ample opportunity to continue reinvesting back into the business.

Market Penetration: Everbridge is still in the early innings of its industry penetration.  Current customers represent:

• 10% of the Fortune 100

• 5% of the world’s 2000 largest companies

• 4 of the 50 states

• 4 of the 195 countries

• 50 of the 100 busiest North American airports

• 25% of the 280,000 hospital beds

• 30 of the 100 largest US higher education institutions

Customer Penetration: The revenue potential of the existing installed base is significant.  Given these customers have already been acquired, much of this upsell revenue opportunity will drive operating leverage for the business.  

As of Q1-18, Everbridge had ~3,811 customers, of which 2,660 are corporate and healthcare clients.  There is a particular opportunity to upsell Everbridge’s Critical Event Management Suite (CEM) into these clients.  The CEM suite was launched late 2017 and began ramping up in 2018.  Management believes deal sizes for its corporate and healthcare clients can range from $210k – 1.4mm, resulting in a CEM value for these current customers of $1.8bn.  This opportunity is significant given firmwide total revenue in 2017 was only $104mm.

Management noted it currently has fewer than 50 customers on its platform but has booked several large enterprise transactions, including one with ACV greater than $1mm.

The FedRAMP government opportunity is imminent and will further accelerate revenue growth.  Everbridge’s public sector clientele (~31% of revenues) is comprised primarily of local and state governments but the Company has an imminent opportunity to expand into the Federal government market, which is 10x the size of the state and local market.  

With the Federal government transitioning from on-premise to the cloud, Everbridge is now seeking FedRAMP approval to become a certified provider, especially with agencies related to national security.  Everbridge is now in the final stages of FedRAMP approval and management has already staffed up a new Washington DC office to pursue this opportunity.

Once Everbridge is approved (expecting mid-late 2018), there will only be two FedRAMP certified providers.  The only other competitor is AtHoc, a foreign Canadian company owned by Blackberry. Everbridge has several advantages over AtHoc: (i) the current political environment favoring US companies, (ii) national security concerns and the need for domestic SaaS companies with servers securable on US soil, and (iii) AtHoc is primarily a legacy on-premise solution vs. EVBG which is SaaS based.

I believe the chance of landing new business from the Federal government is very high.  Everbridge expects public sector revenue to nearly double with the addition of the Federal vertical (the annualized revenue run rate for the public sector was $38mm at the end of Q1-18).  In discussions with Everbridge management, they already know which specific ancillary products the Federal government is interested in buying. There are at least 3-4 products the Federal government is interested in purchasing on top of Mass Notification.  

In addition to increasing ACV and average revenue per customer, cross-selling new products will lower attrition and further increase the value of the installed base.  

The typical customer currently has 1.7x products.  Products are modular (a la carte) and can be rolled out seamlessly through Everbridge’s cloud platform.  Increasing the number of products per customer would reduce attrition and increase the lifetime value of subscribers.  Per Ken Goldman, CFO of Everbridge, retention rates are 95% (or 5% churn) if clients use one product, 96-97% if 2 products, and 97-98% retention if clients use 3 products.  Management believes Everbridge can increase from 1.7x products today to 4-5x (and potentially 6-7x) products per customer.

Reaching 4-5x products per customer would result in attrition rates of 2-3% (or better), resulting in best-in-class SaaS churn rates with an extremely valuable, high quality, and highly strategic customer base.

Accelerated revenue growth will drive gross margin expansion, which will further increase the value of the installed base of subscribers.  The street underestimates Everbridge’s gross margin expansion potential.  This is because street analysts are anchored on management’s prior guidance.  At the time of the IPO in late 2016, management provided a 5-year guidance for gross margin to reach 77-82% by 2021 (see chart below).  However, 2021 is not an end state for gross margin but simply an intermediate term goal. We know this because of the nature of the COGS, which is leverageable.  Over time, we expect Everbridge’s gross margin to reach high 80s after 2021.

Everbridge’s existing installed base of subscribers generates cash flow for several years out and provides downside margin of safety.  Everbridge has 3,811 customers paying an average recurring ARPU of $29k at a 72% gross margin over an average life of 20+ years; this results in a lifetime value (LTV) of $378k per customer, or ~97% of enterprise value.  

Nevertheless, we believe the downside valuation math above is conservative because it excludes:

• (1) Product cross-selling, which reduces churn and extends customer lifetime.  Everbridge has added 9 solutions to its product line.  The investment spend to develop or acquire these products is complete.  A reduction of 1pt of churn from 5% to 4% would increase coverage of enterprise value from 97% to 121%.

• (2) Impact of gross margin expansion.  Every 1pt increase in gross margin would add ~2pts to coverage of enterprise value.  Everbridge currently operates at 71% gross margin, which should increase with higher sales.

• (3) Future growth.

Outlook

Everbridge is a high-quality business with attractive unit investment economics, a large total addressable market, and a deep moat.  At the most recent Everbridge June 2018 Investor Day, CFO Ken Goldman signaled management may revise its 5-year 2021 plan and delay raising Adjusted EBITDA margins to 23-25% by 2021.  I believe this is a positive development because (i) unit economics (LTV/CAC) are attractive and there is still plenty of room to grow, and (ii) management sees more reinvestment potential to the original plan they provided in 2016 at the time of IPO.  

Compared to the time to IPO, we now have more proof points and successful case studies to validate our thesis.  All new products were added in the last 3 years, so investors before had less information. Today, we have much more data as it relates to attrition rates based on # of products per customer, new product sales as % of bookings, growth in # of multi-product deals, larger ACV contracts signed, etc.  With more information, I believe our conviction in the Company’s long-term prospects today should be stronger than before.

Given that Everbridge has an opportunity to (i) accelerate revenue growth and (ii) drive higher gross margin leverage, I believe the right valuation metric to capture these dual effects would be investing at a multiple of gross profit.  Street analysts typically focus on EV/sales multiples for SaaS companies; however, in this case, while a revenue multiple captures top line growth it misses the opportunity for gross margin expansion (a critical variable in valuing the installed base).  

Source: Bloomberg.  Screen based on horizontal SaaS companies with 2019 revenue growth >=20%

As shown above, Everbridge is one of the fastest compounders of gross profit among its peer group, but trades at a valuation in line with the middle of the pack.  A multiple re-rating to the peer group would yield nearly a ~$60 share price today (or ~20% upside).

Over the long run, the Company’s platform represents a solid long-term compounding engine with a plethora of opportunities to reinvest capital at high rates of return.  Ultimately, I see this franchise compounding at a low to mid-20s IRR over time. A summary of my revenue forecast and returns analysis is provided below.

Catalyst

Final approval of FedRAMP

Acceleration of revenue growth