2023-10-25 05:57:03 ET
Summary
- Everbridge's growth trajectory has slowed significantly, partially due to it not being best placed within the industry due to its lack of a comprehensive suite of products.
- Margin improvement has been small, implying no operating cost leverage and a linear customer acquisition cost relative to revenue. This suggests material margin improvement will not occur post FY23.
- We do believe fundamentally the industry will grow well but it remains uncertain where Everbridge's sustainable growth rate is if its targeting margin improvement.
- Everbridge currently has a FCF yield of 7% and represents an attractive takeover target, which makes us hesitant about implying a sell rating.
Investment thesis
Our current investment thesis is:
- We believe Everbridge is not wholly attractive commercially, with high competition from better-placed businesses. Its standalone CEM specialization is weak compared to businesses with a suite of cybersecurity products.
- Everbridge has struggled to improve margins, as its customer acquisition cost remains high relative to revenue. This separately suggests a weakness in its commercial attractiveness.
- Everbridge's valuation does suggest the potential for upside but our competitive concerns lead us to a hold rating.
Company description
Everbridge, Inc. ( EVBG ) is a global software company that provides critical event management and enterprise safety applications. It offers a platform that enables organizations to manage and respond to critical events, such as natural disasters, cyberattacks, and other emergencies.
Share price
EVBG's share price performance has been disappointing, only gaining slightly over 30% at a time when both the S&P and Tech section have performed exceptionally well.
Its shares made large gains during a short period post-2020, at one point having returned in excess of 800%. This was due to an increase in demand for its core products, as well as a development in the use case.
Financial analysis
Everbridge financials (Capital IQ)
Presented above is EVBG's financial performance in the last decade.
Revenue & Commercial Factors
EVBG's revenue growth has been incredibly strong in the last 10 years, with a CAGR of 33% into LTM Jun23. This growth trajectory has been generally consistent, exceeding 30% into FY22, at which point it has marginally slowed.
Business Model
EVBG offers a comprehensive Critical Event Management ((CEM)) platform that enables organizations to identify, assess, and respond to critical events such as natural disasters, cybersecurity threats, workplace incidents, and public health emergencies.
EVBG's platform facilitates real-time communication and coordination among various stakeholders within an organization, ensuring that the right information reaches the right people through multiple channels, including mobile apps, emails, SMS, voice calls, and more. EVBG's objective is to ensure corporations and governments can protect their people against any real-time threats at all times.
EVBG serves a wide range of industries, including government agencies, healthcare, corporate enterprises, utilities, educational institutions, and transportation. Its solutions are applicable across various sectors, making its market reach extensive. This is critical to achieving scale, with the product fairly uniform and dependent more so on the scale of the industry. Financial Services, for example, is a lucrative industry due to the international nature of the industry, enhancing the value proposition. The following illustrates the broad use case.
EVBG's platform leverages automation and integration capabilities to aggregate data from various sources, analyze potential threats and trigger predefined responses. This has been enabled by the vast access to useful information, in conjunction with the computing capabilities to do this in real-time. Our view is that AI could enhance, further supporting data analysis and interpretation.
KPI snapshot
The company operates a subscription-based model (90% of revenue), generating lucrative recurring revenues. This is because, theoretically, it allows the business to focus on incremental growth, with the belief that a good product will mean customers do not churn YoY. In EVBG's case, there has been a clear revenue slowdown since FY22, with the company only gaining $12m on a quarterly basis between Q4-21 and Q2-23.
This revenue weakness is reflected in ARR development, which remains broadly positive but is slowing (a leading indicator for revenue progression). The number of customers continues to grow well but ARR QoQ has noticeably slowed. Based on this current trajectory, the business will likely land at MSD growth in FY23, a noticeable departure from its prior rates.
Our belief is that the reason for this is due to competition, which we will analyze future later.
This decline in growth rate is not a concern if it can be offset by profitability. The tech industry uses a simple rule to balance these two facts: the "Rule of 40". The Rule of 40 is a principle that states a software company's combined revenue growth rate and profit margin (either EBITDA-M, FCF margin or Adj. EBITDA-M based on who you ask) should equal or exceed 40% . Businesses that consistently achieve the RO40 outperform the market. Management is currently targeting this level, with profitability being the key driver. We do not consider this an achievable level.
EVBG is currently in the process of transitioning from growth to profitability, having consistently spent a significant amount on customer acquisition. Management's current strategy is as follows:
- Improving go-to-market velocity - Improve sales productivity as tenure improves and expands market reach. This is critical for the long-term success of EVBG as its growth has been costly to achieve (S&A spending is 60% of revenue, peaking at 72% in FY20).
- Simplifying the product offering - Despite the clearly defined product offering ((CEM)), EVBG's desire to upsell has muddied the product offering. Streamlining this via bundling should help clearly define this.
- Driving profitability - Both the above points are incredibly important and they will support this final point, which from a wider investment perspective, is critical. Management has identified that this is not an issue on one end of the spectrum (costs or revenue) but both, which is positive. The issue is that improving both is incredibly difficult. The business essentially needs to cut costs (R&D and customer acquisition), while maintaining strong growth, while justifiably charging more to customers.
Realistically, we struggle to see how this can be achieved. The business has essentially remained on the same trajectory for years, with almost no operational cost leverage achieved despite its scale. The reason is likely because if it does not invest in growth, growth will disappear. This is damning for a business looking to achieve attractive profitability.
Competitive Positioning
The rise in "disaster" events, cybersecurity threats, and other critical events has highlighted the need for organizations to have robust incident management and communication strategies. This has contributed to the growing demand for such services, accelerated by the pandemic, from multinational businesses and those operating in countries at higher risk. Management estimate that the TAM of this industry is $20bn, with a growth rate of 12-15%.
EVBG's services are generally well regarded, with a range of awards and recognition. This has been supported by good innovation and a strong foundation from which to develop further.
Everbridge
Above, we have discussed the company's slowing ARR development and our belief that EVBG will not achieve the Ro40 or Management's current objectives. The reason for this is competition. Despite having a strong offering, the company faces substantial competition from other businesses, primarily those in the cybersecurity industry. Gartner ( IT ) lists 8 alternatives to Everbridge, many of which have better reviews, such as AlertMedia and Alertus. This contributes to the perception of a "commoditized" industry, with pricing increasingly important, contributing to margin contraction.
Further, we believe the broad service offering of cybersecurity businesses is a major competitive concern for EVBG. EVBG specializes in CEM but there are many cybersecurity companies that provide CEM as part of their wider suite of products. This is far better because many businesses will lack the technical know-how to make informed decisions and so will seek a provider that is able to offer everything they want in one package/from one provider.
Margins
EVBG is currently spending 12% of revenue in SBC, 60% of revenue on S&A, and 21% on R&D. The significance of SBC while the share price has disappointed is poor but not surprising. The question becomes how far S&A and R&D spending can decline while maintaining growth.
We are not very confident of this beyond FY23. The reason, which we touched on before, is the lack of operating cost leverage. There is no reason why EVBG at $59m in revenue is spending the same percentage of revenue on R&D as it is now at $447m. The same is the case for S&A spending. This implies linearity in growth to costs. For this reason, improving profitability will mean growth is eliminated, falling to MSD (potentially LSD).
Based on its current quarterly results, EVBG will likely reach EBITDA positivity in FY23, with an adjusted EBITDA-M of 17-19% in our view (Analysts are targeting 19%). We struggled to see any material improvement beyond this point without foregoing growth beyond MSD.
Valuation
Valuation (Capital IQ)
EVBG is currently trading at 2.7x NTM Revenue, 12x NTM EBITDA, and at a 7.6% FCF yield. This is a deep discount to its historical average as the company has experienced contraction through growth.
Assessing EVBG's valuation is difficult due to its unique circumstances. Similar to other technology businesses, its growth and FCF are good (making it comparable on a financial basis alone), however, it lacks commercial attractiveness in our view. Purely on financial metrics, EVBG receives an A+/B rating from Seeking Alpha.
Factor rating (Seeking Alpha)
The key in our view is to assess whether the FCF yield is sufficiently attractive to warrant the investment, as this is the variable we are most confident will not be negatively affected. According to Seeking Alpha, EVBG's FCF ratio is rated a "B-", with a 6% discount to the market. This is a good level (without standing out) in our view considering the reasonable scale EVBG has achieved.
Further, with margin improvement and an EV of <$2bn, the business could represent a takeover from a larger business with a suite of services looking to acquire the expertise/platform. They will be less concerned about growth as their focus will shift to upselling.
The question for prospective investors is whether the commercial concerns are sufficient to offset the attractiveness of the cash flows.
Final thoughts
Everbridge offers a reasonably attractive product that is within an industry that is growing well, with all evidence suggesting a robust upward trajectory. The company's business model is robust and the growth thus far is respectable, however, we are concerned that it is at a difficult crossroads. Financial results imply the company can have growth or margins but not both, with Management now forced to choose margins. The question is how margins and growth will develop. Compounding this are our concerns about the attractiveness of the company's services relative to its competitors.
The cash flows are attractive and so this may represent a good investment for some but for us, we need greater commercial strength.
For further details see:
Everbridge: Challenges In A Competitive Industry