Everbridge, Inc. (NASDAQ:NASDAQ:EVBG) provides an enterprise-level software solution to detect and respond to critical events including IT outages, supply chain disruptions, severe weather, and public safety threats. The company is capitalizing on the Coronavirus outbreak by highlighting the capabilities of its critical event management suite. The company has benefited in recent years from a theme among global corporations recognizing the importance of IT security, internal controls, and compliance-regulations protocols. While recognizing several positive trends, we take a more cautious outlook on valuation as the stock trades at an increasingly aggressive premium.
Everbridge last reported its Q4 earnings on February 19th with Non-GAAP EPS of $0.05 which was $0.01 ahead of expectations. A GAAP EPS loss of $0.39 was also $0.06 better than the market estimate. The spread here between GAAP and the adjusted measure is based on the amortization of intangibles and stock-based compensation of executives. For the full year, the non-GAAP EPS loss was $0.21.
More importantly, the story is exceptional top-line growth. Revenue in the quarter at $57.1 million represented an increase of 36.6% y/y and slightly above estimates. The gross margin of the business is steady around 68%, highlighting the favorable economics of the core service product. The revenue mix has been consistent with 59% from corporate clients, 29% from government agencies, and 12% from healthcare.
(source: Company IR)
For 2019, the adjusted EBITDA, which excludes stock-based compensation, was positive at $5.7 million compared to negative $2.7 million in 2019. Operating expenses were driven by higher SG&A along with continued R&D investments.
The company now has 5,024 enterprise clients, adding 173 in the last quarter. While many of these clients have one or two specific products, the company sees its integrated Critical Event Management 'CEM' suite as the growth driver. These deals are potentially worth millions of dollars of revenue depending on the scale of the client organization. The average selling price increased by 9% to $73,000 in the quarter. As described in the conference call:
CEM is used by organizations to monitor and manage business disruption, coordinate risk intelligence and execute mitigation and recovery plans in order to protect their people, assets, customers and supply chains, eliminate or circumvent costly interruptions and to protect and improve brand reputations.
Our strong CEM and other large wins drove our average selling price over the last four quarters to $73,000 in the fourth quarter, up 9% from $67,000 a year-ago. In addition to stellar CEM activity, we closed 128 multi-product deals in the fourth quarter, up 38% from a year-ago, which also contributed to our growth in ASP.
EVBG has gained some momentum as a "coronavirus" play. From the conference call, management highlighted how customers are already using the Everbridge solutions to prepare and respond to the outbreak. Corporate clients using the 'Safety Connection Solution' can determine the global location of all employees to access risk levels to infected areas. There are a variety of features on the platforms that can deal with supply chain disruptions, assessments and informational context.
In the case of coronavirus, organizations need to know who has been in an affected area. How do they avoid possible infection of their organization? How was the event impacting the supply chain? And how can they plan to avoid business disruption and keep their employee population safe?
The company launched a coronavirus specific feature to the CEM suite in February. The features are meant to aggregate sources of information on a single portal for organizations to understand the latest developments. From the press release:
The new, specialized threat data feed tracks developments related to the virus, including health-related incidents and bulletins, airport closures, transportation delays, movement restrictions, and manufacturing disruptions. The feed combines thousands of verified data sources with review by an experienced team of analysts to create a continually updated stream of validated information, and directly integrates into Everbridge's CEM platform so security, business continuity, emergency management, and supply chain teams can visually see on a "single pane of glass" how new developments may impact their employees, travelers, residents, facilities, suppliers, and distribution routes.
We sense that even with the applications mentioned above, it's likely not enough to represent a near term incremental growth driver for the company. Anecdotally, clients may have these functions included in the broader enterprise suite but it's unclear that new business is being generated because of the features. Nevertheless, it's a positive development that adds to the list of the company's real-world case studies.
Management offered full-year guidance, targeting revenues in a range between $260.3 and $262.3 million. If confirmed the estimate at the midpoint represents an increase of 30% compared to the 2019 result. Nevertheless, the non-GAAP EPS loss for the year is expected to be between $0.77 and $0.75 per share.
(source: Company IR)
In terms of consensus expectations, the company is not expected to reach profitability through at least the next two years. A revenue growth estimate of 30% this year is expected to moderate towards 25% in 2021 as an average across 12 analysts.
(source: Company IR)
Everbridge has a variety of products and solutions, that in our view, have varying levels of commercial strengths and limitations. It's clear that not every business needs or wants the entire integrated CEM suite. While the foundational "mass-notification" product has a clear value proposition and widespread appeal, some of the other add-on solutions are more niche. For reference, the mass-notification system allows management to send an email, text, or voice message across an organization and solicit a response and was the basis for the company's founding over 15 years ago.
source: Company IR
The main concern we have is that when viewed based on the company's marketing material, we get a sense that the "low-hanging fruit" has already been captured. Everbridge counts on 9 out of 10 largest investment banks, 9 out of 10 largest U.S. cities, 46 out of 50 busiest North American airports, 6 out of 10 largest global consulting firms, as current clients. Going forward, the company will need these same customers to simply add features and spend more on a wider range of solutions. The implication here is to question the addressable market and long-term growth outlook.
source: Company IR
Compared to revenue of $200 million in 2019, Everbridge highlights what it believes to be a total addressable global market of $41 billion for the entire enterprise suite. Indeed, the bullish case for the stock implies it will eventually capture a significant portion of this estimate. Again, some of these applications have very specific targeted customers like government agencies, police departments, and airport operators for example. While we are confident there is more growth ahead for the company, current valuation places the stock into the speculative category.
EVBG currently trades at an 18x P/S multiple 2019 revenues in terms of both price and enterprise value. What's curious here is that both of these multiples are at the highest levels for the stock over the past three years.
The stock price gains over the past year outpaced the revenue growth rate. On a forward basis, the EV to revenue and price to sales multiple of 14x based on 2020 consensus estimates are also significantly higher compared to 9x the stock traded as recently as October of 2019.
Considering the adjusted EBITDA level of $5.7 million in 2019, this implies an EV to EBITDA level of 345x. The market applies an aggressive growth premium on the stock given its leadership position or near dominance in key segments.
While some of this bullishness is warranted, the context here is decelerating growth on an annual basis. For 2020, the revenue growth guidance in the 30% range is below the 36% rate achieved in 2019. We would prefer to see this multiples expansion accompanied by accelerating growth and earnings. Similarly, the gross margin at 68% in 2019 is down marginally from 70% 2-years ago.
Our bearish case for the stock can be summarized by the following points:
There is a lot to like about Everbridge given its impressive growth rate and market leadership position in an emerging segment. Despite overall solid fundamentals, we think that the stock at $108 is just too expensive into the highly speculative territory. The market appears to be extrapolating growth too far into the future adding to risks in terms of execution or underperforming expectations.
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This article was written by
BOOX Research is now Dan Victor, CFA
15 years of professional experience in capital markets and investment management at major financial institutions.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.