Everbridge, Inc. (NASDAQ:EVBG) Q3 2023 Earnings Call Transcript

Everbridge, Inc. (NASDAQ:EVBG) Q3 2023 Earnings Call Transcript November 9, 2023

Everbridge, Inc. beats earnings expectations. Reported EPS is $0.46, expectations were $0.42.

Operator: Good afternoon. Welcome to Everbridge Third Quarter 2023 Earnings Conference Call. My name is Jason and I’ll be your operator today. Following management’s remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay a link in the investor relations section of the company’s website. Now I would like to turn the call over to Vice President of Investor Relations, Nandan Amladi. Sir, please proceed.

Nandan Amladi: Thank you, Jason and good afternoon everyone. Welcome to Everbridge’s earnings call for the third quarter of 2023. With me on today’s call are Everbridge’s President and CEO, David Wagner; and Executive Vice President and CFO, Patrick Brickley. After the market closed, we issued our earnings release and supplementary materials, which can be accessed on the IR page at ir.everbridge.com. This call is being recorded, and a replay of the teleconference will be available on our Investor Relations website at the conclusion of today’s event. During today’s call, we will make forward-looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties. The company’s actual results may differ materially from the projections described in such statements.

Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K as well as other subsequent filings with the SEC. Information provided on this call reflects our perspective only as of today and should not be considered representative of our views as of any subsequent date. We explicitly disclaim any obligation to update any forward-looking statements or our outlook. Also, during today’s call, we will refer to certain non-GAAP financial measures. A reconciliation of our GAAP to non-GAAP financial measures to the extent reasonably available is included in our earnings press release, which you can find on our Investor Relations website. Our earnings press release includes highlights from our third quarter of 2023 in addition to our financial results and outlook.

After we review our business and financial highlights, we will open the call for questions. With that, let me turn the call over to Dave. Dave?

David Wagner: Thanks, Nandan, and good afternoon, everyone. We delivered solid Q3 results, including revenue of $114.2 million, an increase of 3% year-over-year, adjusted EBITDA of $23.7 million, an increase of approximately $9 million dollars, and 56% from a year ago and annual recurring revenue of $399 million, up $4 million dollars quarter-over-quarter and 8% year-over-year. These results align with our strategy of enhancing shareholder value by prioritizing increasing ARR, the more valuable recurring part of our business and growing efficiently and profitably to achieve our goal of reaching the ‘Rule of 40’ by 2027 and enhancing our go-to-market approach, evidenced by the Q3 improvements. In this context, our subscription revenues of $104.3 million grew 8% in the third quarter.

However, revenues from professional services, perpetual software licenses and one-time services were down $4.7 million or 32%, bringing total revenue growth to 3%. The decline in one-time revenues is due to prioritizing recurring revenues and changes in the macro environment affecting large deal opportunities. Efficiency-wise, we improved adjusted EBITDA by 56% year-over-year or $8.5 million, while also absorbing a $4.7 million decrease in professional services and one-time revenues. Our efforts to enhance efficiency are allowing us to reduce costs while continuing to enhance our product portfolio. Improvements we are seeing in our third quarter results that we believe demonstrate the progress we are making to increase our ARR growth rate in 2024 are as follows: 1.

Q3 was our highest bookings quarter of the year both for recurring and one-time bookings. 2. Our sales productivity improved 11% quarter-over-quarter and 16% year-over-year. 3. Our average transaction size increased again quarter-over-quarter to the highest level of the year. 4. Our total number of transactions remains consistent with last year. 5. Our total pipeline is continuing to build. During Q3 we supported our customers through a range of critical events including heat waves, wildfires, hurricanes, and geopolitical unrest. We supported states and countries around the world with life-saving alerts in the face of unprecedented heat waves and wildfires this summer. We delivered millions of messages to Floridians leading up to, during, and after Hurricane Idalia to support their life safety and recovery goals.

And more recently, as a result of the conflict in the Middle East, and the resulting geopolitical unrest, we’re assisting multinational businesses with critical situational awareness and risk intelligence to keep their employees and travelers safe and to keep their businesses running efficiently. The value of the Everbridge platform has never been more apparent. We also just published our inaugural Sustainability Report that is posted on our IR page. I am delighted with the progress Everbridge is making in this area, showing our commitment to developing new policies and processes to align our strategy and operations with key sustainability principles. Again, I am pleased with our continued progress, especially the improved bookings traction we demonstrated in the third quarter.

Now, I’ll turn the call over to our CFO, Patrick Brickley, to provide further details on our financial results and outlook. Patrick?

Patrick Brickley: Thanks, Dave. During the quarter we saw a healthy year-over-year increase in our profitability metrics. This increase reflects the substantial, ongoing improvements that we are making to operational efficiency across all areas of our business, work that we intend to continue as we drive towards profitable growth and ‘Rule of 40’ by 2027. I will now discuss our results for the quarter in more detail. For the third quarter ARR increased to $399 million, up 8% year-over-year. Revenue was $114.2 million, up 3% from a year ago. Subscription revenue was $104.3 million, up 8% from a year ago, while non-subscription revenue of $9.8 million was down 32% from a year ago. Our gross revenue retention rate was consistent year-over-year; however, it dipped slightly relative to the first half of 2023, primarily due to a bit more renewal contraction than we’ve seen in recent quarters.

We signed 44 deals over $100 thousand, down from 75 a year ago. That said, as Dave mentioned, in Q3 our average deal size rebounded relative to what we saw in the first half of 2023. GAAP gross margin was $81 million, or 71% margin, compared to the year ago period’s result of $76 million, or 68% margin. Adjusted gross margin was 74%, compared to 73% a year ago. GAAP net income was nearly $2 million, or negative $0.23 of diluted earnings per share, compared to the year ago period in which we generated a net loss of $22 million, or negative $0.56 of earnings per share. GAAP net income in the third quarter benefitted from a nearly $13 million gain from retiring debt early and at a discount. This gain was partially offset by an $8 million charge related to our legal dispute with certain former shareholders of Anvil.

Non-GAAP net income was $20 million or $0.46 of diluted earnings per share, compared to the year ago period’s net income of $12 million or $0.27 of diluted earnings per share. Our adjusted EBITDA of $23.7 million represents a 21% margin, compared to the year ago period’s result of $15.2 million or 14% margin. Cash flow from operations was an inflow of $17 million compared to the year ago period of $18 million and adjusted free cash flow was an inflow of $15.5 million compared to the year ago period of $15.4 million. Our liquidity remains in a healthy position. We ended Q3 with $100.5 million in cash, cash equivalents, and restricted cash, down from $201.6 million dollars at the end of 2022. In the third quarter we used roughly $130 million of cash to repurchase $145 million of outstanding convertible debt.

In doing so, we locked-in a desirable yield-to-maturity and we reduced our net debt to $263 million, down 22% from a year ago. Our debt repurchase reflects our confidence in our increasing ability to drive positive cash flow. For example, year-to-date, adjusted free cash flow has increased nearly 300% year-over-year, and we will continue to see further year-over-year improvements in our cash flow in the quarters ahead. We will have more than enough cash to retire the $63 million of debt that will mature in December 2024, to address any potential outflows related to the Anvil legal dispute, and to continue to fund investments in growth. Moving to guidance, we are revising our guidance for the remainder of 2023. A reconciliation of our updated guidance to the guidance which we gave last quarter is provided on Slides 26 and 27 of the quarterly Investor Relations presentation which you can find on our Investor Relations website.

For the fourth quarter, we anticipate results which reflect the same pattern that we experienced in Q3; continued year-over-year growth in subscription revenue; continued decrease in non-subscription revenues; and continued improvement in profitability. As I describe our revenue outlook for the fourth quarter, I will talk separately about subscription and non-subscription revenue. We anticipate subscription revenue of between $104.6 million and $105.0 million, up 3% year-over-year. The year ago period included roughly $3 million of subscription revenue from entities that we have since divested, and subscription amounts that were recognized on an annual basis during the year ago period, but will not have the same timing this year. This bridge is illustrated on Slide 27 of our quarterly Investor Relations presentation.

This outlook for Q4 subscription revenue reflects sequential growth of between $0.3 million and $0.7 million. Our subscription revenue in the third quarter included roughly $1 million of subscription revenue that is recognized on an annual basis, and no such subscription revenue is included in our outlook for the fourth quarter. This bridge is also illustrated on Slide 27 of our quarterly Investor Relations presentation. We anticipate non-subscription revenue of between $9.4 million and $10.5 million, down from nearly $16 million in the year ago period. This Q4 decrease of non-subscription revenue is larger than what was reflected in the outlook that we provided in August. In particular, owing to macroeconomic factors, there are a few on-premise sales opportunities which we now expect to deliver in 2024 rather than our recent projection of fourth quarter 2023.

Therefore, in summary, we anticipate total revenue for the fourth quarter to range between $114 million and $115.5 million, which reflects a year-over-year decrease of between 3% and 1%. We anticipate a GAAP net loss of between $6.3 million and $5.1 million, and non-GAAP net income of between $21.5 million and $23 million or diluted earnings per share of $0.48 to $0.52. We expect adjusted EBITDA to be between $25.6 million and $27.1 million, a margin of 23%. We remain well on track with our plan to generate continuous year-over-year improvement in quarterly adjusted EBITDA and adjusted EBITDA margin, despite the pressure that’s created by our revised outlook for non-subscription revenue. Moving to full year guidance, for 2023 we now anticipate total revenue in the range of $447 million to $448.5 million, representing year-over-year growth of 4%.

Within that, we anticipate subscription revenue of between $409.5 million to $409.9 million, representing year-over-year growth of 7%. And, we anticipate non-subscription revenue of between $37.5 million and $38.6 million, representing a year-over-year decline of 18% to 21%. We expect a GAAP net loss of between $34.3 million and $33.1 million and non-GAAP net income of between $66 million and $67.5 million or between $1.48 and $1.52 of diluted earnings per share. We expect to deliver adjusted EBITDA in the range of $83.5 million to $85 million, representing an adjusted EBITDA margin of 19% at the midpoint. In summary, we continue to make progress towards our goal of increasing ARR more profitably. Taking an early look ahead to 2024, we are committed to expanding our profitability and although too soon for forecasting GAAP profitability, we expect to grow our full year adjusted EBITDA by roughly 25%.

We remain confident that we can deliver the targets laid out at our December 2022 Investor Day, making disciplined ‘growth-first’ investments that will drive steady progress towards the ‘Rule of 40’ by 2027. I will now turn the call back over to Dave.

David Wagner: Thanks, Patrick. In Q3, we delivered our best bookings performance of the year. While still down compared to last year, the recent recovery underscores the ongoing improvements we’ve made to our sales productivity. Furthermore, our pipeline and especially our large deal pipeline has continued to expand as the year has progressed. Notably in Q3, we successfully closed four deals over $500,000, which was three more than last quarter, and we closed one deal over $1 million, also marking a sequential improvement. Our largest new client in the quarter was a Smart Security deal for a shipping port in the Middle East. Among the remaining top five deals, three were new CEM customers including a Federal Government department, an Australian Bank, and a large international charitable organization.

The fifth significant new client was an enterprise mass notification win. Regarding growth deals, our two largest deals were Government add-ons, one a state-level emergency notification win and the other in the U.S. Federal space. We also had a large Smart Security cross-sell into a CEM account. Two CEM extensions round out the top-five add-on deals. In total, we added 32 new CEM customers in Q3, bringing our total CEM customer count to 405. While average deal sizes are smaller this year, we are maintaining a healthy mix of new and growth CEM customer wins. In terms of retention, gross retention was slightly lower than the past few quarters but was consistent with the same period last year. The slight, sequential increase in churn was due primarily to increased renewal contraction, as Patrick noted.

We’re pleased with the progress we’ve made executing our go-to-market strategy. The underlying metrics affirm our growth path. Our sales representative productivity is rising, and our forward pipeline indicators show traction. We’re successfully adding a balanced mix of new and growth CEM customers and we’re reinforcing our strong market position. Customer feedback assures us that we are on the right track. Our high customer satisfaction, solid renewal rates, and positive response to our product enhancements are all strong indicators. As the market improves, we’re anticipating a corresponding growth in bookings in 2024. In the current environment, our execution is improving, and Everbridge remains the market leader. In summary, the third quarter demonstrated another “step up” in profitability of $9 million or 56% year-over-year.

We delivered stronger bookings quarter sequentially as a result of increasing deal size and improved sales productivity. We are confident that we are well-positioned to deliver year-over-year recurring bookings growth in 2024, which will contribute to increasing ARR growth rates later in 2024, and we are also confident that we can grow our adjusted EBITDA by a further 25% in 2024. In closing, I want to emphasize our steadfast commitment to assisting our customers in achieving resilience. We are living in uncertain times when organizations and governments are prioritizing the safety of their people and the continuity of their operations. Our Everbridge team is innovating to help organizations monitor risk more comprehensively than ever before and to combine that situational awareness with a market-leading platform for managing critical events to empower a more resilient world.

I will now turn the call over to the operator to facilitate the question-and-answer period. Jason?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Alex Sklar from Raymond James. Please go ahead.

Alexander Sklar: Great. Thank you. Dave, just on your confidence on an improved bookings outlook, I realize there’s still some important weeks ahead this quarter, but historically Q4 is your largest bookings quarter in terms of kind of sequential ARR growth. Can you just talk about your level of confidence or visibility that’s going to continue again this year? And then just a little bit more color on your confidence at the end of the prepared remarks in terms of an improved bookings activity next year assuming no macro improvements? Thanks.

David Wagner: Yes, good question. As I pointed out, our pipeline has been improving, so productivity is improving. The average deal size is improving. Q4 is sequentially our strongest quarter, so those are the kinds of things that give us confidence. As we head into Q4 and think about year-over-year ARR improvement, we’re still cognizant that Q4 last year was a strong quarter, particularly a strong yes quarter for ARR growth. So we’re not expecting the same kind of strength we saw last year, but we are expecting a good quarter. As we look forward into 2024, that’s where the comparables and the sequential improvements, give us confidence and will continue those sequential improvements into 2024. We hit those tougher compares which again the way the ARR snowball works, of course it takes a couple of quarters till the AR growth rate is moving up rather than down. So that’s what we were alluding to in those remarks. And thank you for the follow up question.

Alexander Sklar: Great color there. And then I don’t know if Dave or Patrick, in terms of the comments on the higher renewal contraction, can you just elaborate on what’s driving that? Is that macro related? Is it competition? And did that continue through kind of October or was that kind of isolated in the third quarter? Thanks.

David Wagner: I’d say it was isolated. The third quarter had been really consistently run contractions within a band about a couple 100,000, within a band of a couple 100,000 up and down quarter-to-quarter. It wasn’t a huge increase, but there was an increase in the third quarter. We reviewed the — and we think it’s largely constrained to the third quarter. It was largely headcount related, but there were some customers contracted services. I think it’s also a bit indicative of the sort of the budget pressures we’ve seen in our clients throughout the year.

Alexander Sklar: All right. Great. Thank you for the color.

Operator: Our next question comes from Arjun Bhatia from William Blair. Please go ahead.

Unidentified Analyst: Hi, this is Chris on for Arjun and thanks for taking my question. I want to circle back to sales productivity. It’s great to hear about some of the improvements there. What would you point to as kind of some of the key strategies that could most effective in delivering these improvements? Thanks.

David Wagner: Well, it’s a team effort when that happens. One of the key things that’s happened, we talked about last quarter with the sales tenure improving and so we continue to have great retention of our sales force and that’s one of the strongest statistic. Correlated evidence we have and so I think that is thing one the marketing team. Has really gotten in a much tighter group swing in the last you know couple of quarters. And so, we’re seeing a lot more efficiently generation that I think is also supporting those sales team members as they’ve on board. And then sales execution is a journey and we are we’re journeying through it, but just to give John a lot of credit in the second full quarter, getting the team rack aligned.

Operator: Our next question comes from Brian Colley from Stephens. Please go ahead.

Brian Colley: Hi guys. Thanks for taking my question here. On the updated guidance was the reduction in sales 100% from the one time revenue or was there any change in the subscription outlook there?

Patrick Brickley: Hey, Brian, this is Patrick. We, you know the midpoint, we basically brought it down by about $3 million and you could think of that as $2 million from non-subscription and $1 million from subscription. The story over the years really has been the non-subscription, but when you look at subscription we began the year roughly with guidance, I’ll call it around $411 million which is up 7% year-over-year. And then our ASPs continue to come down early in the year which was a headwind, but we were able to offset that. We have improved retention year-over-year and just now as you sort of pull all that together and we’re exiting the year, we’re looking at $410 million rather than $411 million, still 7% year-over-year, but it is down by $1 million.

Brian Colley: Okay. Perfect. That’s super helpful. And then, Dave, one for you. I’m curious kind of where you stand today in terms of completing some of the product integration work that you’ve talked about kind of needed to upsell or convert those 150-plus customers from RC9 and Anvil over to the CEM platform. And then any progress update that you’ve made converting some of your Mass Notification customers within the G2K over to CEM as well?

David Wagner: Those are both great questions. Thanks for asking. So on the RC9, the momentum is picking up, as you remember, from a year ago at this call, we talked about that cohort of customers and then by Q1, kind of goals think [ph] half. But we had good migrations this quarter. It was the highest migration fourth quarter of the year-to-date. The road map for them for the migration is finishing up. The product work to actually go-to-market with the end of life, which will drive the remaining customers with more force will be coming up around the end of the year. So that program continues to make good progress. We did slow down to focus on retention that has worked for us to date. So I’m pleased with where that’s going. The feature parity will be done in Q1, and we’re doing end of life before then.

On the second cohort of the mass notification in the Global 2000, the upgrades, we had another good quarter, a nice mix of new customers. Those three new customer wins I talked about are really exciting wins, a U.S. federal government department. We’ve got a really nice opportunity there is a nice size deal on – top five. A really nice Australian bank that we think is an anchor account from that region, those were new accounts. On the upgrade side, it was also — just real balance on the upgrade side. So I think we had a few more CEM customers the last quarter, CEM customer as we think down a little bit year-over-year if we continue to see a real good mix of both new customer add-ons and migrations for CEM.