Everbridge: Too Many Problems Under The Surface

Summary

• Beneath its strong momentum a very different reality emerges.
• This SaaS business's growth rates are being bolstered by consistent and increasing acquisitions.
• Even though 20x sales is the going rate for a SaaS business, Everbridge is not like other SaaS businesses. Investors should be careful here.
• Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Get started today »

Investment Thesis

Everbridge (NASDAQ:EVBG) is everything an investor wishes for: high and stable revenue growth, steadily increasing share price, while its shares swap hands at 20 times multiple.

However, underneath its revenue line, I demonstrate just how inorganic its revenues actually are. And demonstrate that it will be very difficult to grasp what its profit margin profile could ultimately transpire to be.

Having said that, for now, in 2020, momentum is all that matters. And this stock is highly likely to continue to trade higher, notwithstanding its underlying bubbling problems.

Growth Rates Are Stable -- On The Surface

Everbridge is a critical event management SaaS, not too dissimilar from PagerDuty (PD).

For now, all that investors demand are stable, predictable, and strong revenue growth rates from their most endeared SaaS business. On this front, Everbridge doesn't disappoint:

Source: author's calculations, *** 2020 guidance

You can see just how stable its top-line growth rates are. Very consistently hitting higher than 30%, and in this market, investors will give these companies a very wide pass without asking much in the way of critical questions. Indeed, looking over on SA's premium tools, one can see that Wall Street analysts are simply euphoric.

Further, before getting into some critical aspects, I wish to note one further positive and reassuring aspect for investors to be optimistic about Everbridge.

Positive Note: Balance Sheet is Strong

The most positive aspect by far is that its balance sheet is very flexible. With close to $500 million of gross cash, it has plenty of maneuverability. Even if this is offset by the $450 million (total unamortized) convertibles. Altogether, this implies a large runway ahead.

Now For A Dose of Reality

To declare that Everbridge is barely organically profitable wouldn't even cause frustration with readers, by now accustomed to the narrative of 'investing for growth'.

However, reading through its 10-K, one can see that auditors had an issue with how Everbridge both recognizes its revenue and its acquisitions are valued. Namely, this caught my interest:

Changes in these estimates of standalone selling prices can have a material effect on the amount of revenue recognized from each distinct performance obligation.

This sounds complicated, but it's relatively straight forward. The auditors (Ernst & Young) were unsure as to whether Everbridge's revenues are accurately recognized. This made me dig deeper and understand the biggest driver of Everbridges revenues.

In actuality, we can see that as each year goes by, Everbridge makes consistently bigger acquisitions. Specifically, in 2017 $21 million was deployed, with $36 million deployed in 2018 (towards Unified Messaging Systems, PlanetRisk, and Respond), and in 2019 $58 million set aside to acquire both MissionMode and N4C.

To put these figures in perspective, each year the total cash outlay towards acquisition is increasing. Furthermore, thus far into 2020, just for Q1, Everbridge put aside a further $32 million towards Connexient (stock and cash), as well as $36 million stock acquisition for CNL Software.

Thus, in 90 days, Everbridges acquisitions have eclipsed the whole of 2019.

Trying to integrate all these companies in a short space of time is difficult. However, the issue gets even more complicated, because the incident reporting space right now is very expensive. Consequently, further acquisitions are going to be made at huge premiums, leaving little underlying value.

Valuation -- Multiple Expansion Soars

Having said that, the vast majority of investors will not be willing to ask difficult questions from their investment. And indeed, as long as the share price is going up day after day, investors will turn a blind eye and management will be obliging.

Moving on, the graph below speaks for itself:

Source: author's calculations

We can see that with the passage of time, investors are becoming positively enchanted with Everbridge and willing to pay increasingly large multiples for a company which is essentially a roll-up.

Presently, investors are satisfied with paying 21 times trailing sales for a company with minimal organic revenue growth rates.

Indeed, the plot thickens further, because investors have no idea of just how much of Everbridges revenues are organic and SaaS derived, compared with service-based/professional services. Why does this matter?

Because SaaS companies get the large multiple, often in the 20x to 30x to sales, because customers are locked in. But in the case of Everbridge, there's simply no way of knowing what percentage of Everbridge's total revenue is actually derived from customers being locked in.

The Bottom Line

Investors are willing to pay a very large multiple of 20x sales for Everbridge's revenue, while at the same time having very little way of knowing just how valuable its margins are.

Not only is Everbridge GAAP unprofitable, with increasing losses with the passage of time, but there's very little way to justify its valuation. Even if at some point in the future, Everbridge had GAAP operating margins of 20% (which is doubtful), investors would be paying already more than 200x multiple to operating income.

Further, I demonstrate how the biggest driver of Everbridge's revenue growth rates is its expensive and consistently increasing acquisitions.

However, at the same time, I understand that in the interim, momentum is likely to continue to carry its shares forward.

Analyst’s 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.

Comments

[halba12]

The TAM is still fairly large - CEM one of the largest TAM's out there. Market doesnt have any issue with acquisitions, provided it augments organic growth(in this case it does) - as we see growth is largely being maintained.

[Legal McCloud]

Interesting and thanks for the article. One area not covered in the article is whether it's a "covid stock" or not. Given the nature of the company's service (critical event management and communications), wouldn't you expect a surge in demand from companies and governments trying to coordinate during the pandemic?

[Irwin R. Schyster]

Good job digging in. This is the kind of insight I like to see more of on SA and less cheerleading or doomsday articles.

[Michael Wiggins De Oliveira]

Nice!

[HardytheTrader]

Thanks for sharing your POV. As usual our views don't align. I believe you are missing some bright spots for $EVBG.
Look at the guidance. The company is guiding for FY20 Non-GAAP EPS of $(0,19)-$(0,16). If you compare this with expected EPS of Q1 and Q2 one has to figure out that the company pushes to profitability real quick in the latter half of the year.
Lots of upward EPS revisions are yet to come putting a strong floor under the current share price

Long EVBG

[Michael Wiggins De Oliveira]

OKay. And I respect your point of view. But I don't see people pricing this stock off EPS. It is not an EPS story, what-so-ever.

But hopefully, I'm wrong. I hope it works out for you. Good luck @HardytheTrader