2023-06-01 21:21:00 ET
Summary
- Everbridge, Inc. provides a comprehensive critical event management platform for businesses to communicate emergency notifications to employees during crises.
- The company has experienced strong growth due to increasing corporate focus on safety and security, as well as broader digital transformation trends.
- I view EVBG stock as a hold at the current level.
Investment Thesis
Everbridge, Inc. ( EVBG ) offers a comprehensive critical event management platform which enables businesses to effectively communicate emergency notifications to their employees during various crises. The company specifically targets key use cases, including ensuring business continuity, addressing supply chain disruptions, utilizing IoT for physical security, and safeguarding IT systems from internal and external threats. Everbridge's strong growth can be attributed to factors such as the increasing focus of corporations on safety and security, as well as broader trends favouring digital transformation. While the current market conditions are favourable, it is important to note the presence of competition and the possibility of moderating tailwinds. The stock currently trades in line with its peers, which is why I view the stock as a hold at current levels.
Post Q1-2023 Earnings: Thriving Through a Difficult Environment
Despite facing a more challenging business environment for enterprise deals, EVBG exceeded expectations in the first quarter of 2023 with a revenue beat of approximately 1.5%. This beat was slightly higher than the previous quarter's beat of 0.8% and the beat in the third quarter of 2022, which stood at 0.5%. Additionally, the company's EBITDA for the quarter was $15.9 million, surpassing the guidance of around $10 million. These results highlight EVBG's strong execution despite the difficult macroeconomic conditions. However, EVBG's management maintained its fiscal year 2023 guidance. The management cited smaller deal sizes and a continued focus on divesting non-core business lines as factors limiting potential near-term growth. While EVBG holds a dominant position in its industry niche, the market may require consistent improvement in net new Annual Recurring Revenue ((ARR)) and billings before regaining confidence in the company's shares.
Singular Platform Serves Multiple Functions
Everbridge offers a unique and comprehensive critical event management platform that enables businesses of all sizes to effectively communicate emergency notifications to their employees during various crises. The platform is cloud-based, providing a centralized solution for organizations to gain clarity, respond quickly, and achieve better outcomes during critical events on a large scale. It utilizes automated, real-time threat detection capabilities for over 100 different types of risks. Leveraging smart send technology, smart location tracking, and two-way communication, the platform ensures maximum reach and performance while utilizing modern 5G technology for reliable connectivity.
The Everbridge CEM platform delivers five key benefits. Firstly, it serves as a business continuity function, allowing businesses to maintain operations during crises and facilitating incident management. Additionally, it provides HR support, addressing employee care and concerns related to events like COVID-19. It also functions as an operational tool, helping organizations manage supply chain disruptions, monitor IoT devices and sensors, and mitigate internal and external cybersecurity threats.
Everbridge has built a robust network of partners in various domains, including location services, risk assessment, operational disruption management, and swift action. These partnerships enhance the platform's capabilities. The CEM platform combines aggregated third-party risk data, curated threat intelligence, Everbridge's own network data, and insights from its customer base to offer a comprehensive and holistic approach to business protection.
Large Addressable Market
Everbridge was established in 2002 as a response to the tragic events of 9/11. The company's primary objective is to enhance safety during critical situations and offer businesses the tools for continuity and employee well-being. Everbridge focuses on the critical event management ((CEM)) market by providing emergency and mass notifications. Despite the unpleasant reality of numerous threats in today's world, companies and their employees must be prepared. Unfortunately, there has been an increase in the number of potential crises, including a significant rise in billion-dollar disasters, mass shootings, and terrorist incidents compared to two decades ago. These escalating threats have significant economic consequences, amounting to $500 billion annually, as demonstrated by the impact of COVID-19, which alone caused an $8.8 trillion impact. Consequently, the demand for Everbridge's solutions has only grown, supported by Forrester's estimation of a remarkable 314% return on investment and a payback period of only one month for a CEM system.
According to Grandview Research, the CEM market is projected to grow at a CAGR of 15% to $32 billion by 2030. Furthermore, Everbridge identifies additional opportunities within a potential TAM of $41 billion, including population alerting, IT and IoT alerting, and core CEM. This TAM estimation is based on the total addressable population of customers in each market segment and the respective average selling prices. Considering Everbridge's focus on an attractive and expanding market, its differentiated technology platform, and the potential for gaining market share, I anticipate the company will continue to experience benefits and drive sustainable revenue growth.
Profitability Could Become a Burden for Growth
From a profitability standpoint, the business has been operating close to breakeven, with adjusted EBITDA and free cash flow margins below 5% in recent years. The lack of significant margin expansion can be partly attributed to slightly lower gross margins compared to similar subscription-based software companies. EVBG's gross margins experienced a slight decline in 2018 and 2019 due to acquisitions but returned to around 72% after the integration process. Now that the integrations are complete and the platform's scalability is in place, I expect margins to improve gradually, reaching approximately 75% in FY23.
Furthermore, EVBG has not seen significant leverage in its operating expense lines. Research and development investments have remained steady at around 20%, while there have been modest efficiency gains in sales and marketing and general and administrative expenses. Looking ahead, I anticipate S&M, G&A, and R&D expenses to remain at similar levels, with slight improvements in each area as the company continues to enhance its product and pursue market opportunities.
Net net, Everbridge's current operating profile is below 'the Rule of 40' (3% FCF margin and 8% y/ y revenue growth in FY22). I believe maintaining investment into both the platform and market opportunity is prudent and should drive durable growth but at the expense of gaining leverage in profitability and cash flow.
Valuation
I have compared Everbridge to similar companies in the communication software space, such as Twilio Inc. ( TWLO ), RingCentral, Inc. ( RNG ), Zoom Video Communications, Inc. ( ZM ), and Five9, Inc. ( FIVN ). I observe that Everbridge trades broadly in line with the comp group. I see limited potential for multiple upside re-rating, which is why I view the stock as a hold.
Conclusion
I anticipate Everbridge to experience positive effects from the return to office after COVID-19 and gain enterprise spending. However, the uncertainty relating to the success of the company’s strategy of selling higher into the organization to C-suite executives and the possibility of growth deceleration make me cautious as it can negatively impact the company's stock performance in the near term. The stock trades in line with the comp group, which is why I view the stock as a hold.
For further details see:
Everbridge: Empowering Businesses With Critical Event Management Solutions