Everbridge, a market leader in critical event management (CEM) software, has an extremely resilient business model and — despite recent missteps from management — has the potential to be an attractive private equity investment. Everbridge’s CEM platform is used by companies during critical business events such as IT outages and cyber-attacks as well as other public safety threats such as severe weather conditions or active shooter situations. In such situations, the platform can send out mass notifications, track key physical assets, enable two-way communication between employees and first responders and automate incident reporting. In constrast, on-premise solutions traditionally only enable one-way communication and often do not have the scale to operate well for large organizations. While industry leaders like Everbridge may have <5% market share in the $10B industry today, customers’ transition from on-premise to SaaS solutions has potential to offer companies multiple avenues for future growth.
Business Model
The enterprise SaaS model allows the company to have relatively predictable revenues and when considering the mission critical nature of the product, Everbridge’s business model looks appealing. The company has been actively growing its subscription business, which accounts for 96% of total revenue today. Short-term contracts are the norm and while revenewal rates are high at 95%, the average contract length is only 2 years long. Given this, an investor could likely increase contract length post-acquisition as the company expands into new geographies which may ultimately further stability of future cash flows.
Everbridge has benefitted greatly from the first mover advantage. In 2011, the company merged with Cloudfloor and was the first major player in the industry to offer both IT outage reporting in addition to other public safety event management. This allowed Everbridge, which was historically limited to a mass notification system, to begin cross-selling Cloudfloor’s products to its existing customers. This cross-selling strategy has remained crucial for the company’s growth even today and most revenue growth today (~20%) comes from ARPU growth while just ~15% comes from customer growth, leading to net revenue retention > 100%. As one of the only players in the market to offer both services, Everbridge can outcompete larger players like PagerDuty by reinforcing higher switching costs through add-on services. These add-on services utilize the same list of contacts as Everbridge’s pre-existing applications and therefore, the incremental cost of each add-on service should decrease over time as well. High switching costs are also reflected in the company’s LTV/CAC of nearly 14x. While CAC is equal to 1 year of customer ARR, customer retention costs are quite low at 6 cents for every $1 of ARR. Furthermore, a 20-year average customer life implies a high LTV/CAC ratio.
Thesis and Value Creation Opportunities
At 3.5x and 3.2x LTM and NTM revenue respectively, Everbridge trades at a noticeable discount to comps trading at 5.2x and 4.4x. This is in large part due to the company’s turbulent history with management.
Last year, activist investor Ancora Holdings purchased a 4% stake in the company to push for a sale and replacement of the company’s board of directors. First, Ancora pointed out that four members of the board had been net sellers of the company’s stock despite having been at the company for over a decade. In fact, some board members had never purchased a single share of the company. Next, the former CEO of the company had also founded a venture capital firm and drained signficiant top talent from the company. Finally, the company’s management team had made extremely poor capital allocation decisions. Multiple shareholder lawsuits claimed that inorganic growth clouded revenue visibility and that management had been lazy by pursuing M&A activity that obfuscated organic growth stagnation. Ancora also mentioned that Everbridge had bought companies at increasingly greater valuations and spent more on acquisitions in 2021 than it had done it in its entire history to date. Furthermore, some acquisitions such the Anvil Group (employee travel risk management) strayed away from the company’s core recurring revenue software business that had made it so successful.
Ultimately, Ancora’s efforts helped replace the management team but the company’s valuation is still depressed due to high turnover. I believe that a new owner could offer the company stability and through a management rollover and higher stock-based compensation post-LBO, a buyer can better align management’s incentives with that of shareholders (this has been reflected in the LBO model).
Due to unfavorable capital market conditions and a poor historical strategy, it makes little sense for the company to continue pursuing inroganic growth in the short term. As a result, I expect ARPU growth to slow down in the near future as cross-selling opportunities have limited room to grow due to minimal product expansion. However, EVBG can still look to geographic expansion and capitalize on a fragmented market. While the company only segments its operations into “North America” and “Rest of World”, which make up 70% and 30% of revenue respectively, I suspect that the “Rest of World” category is primarily limited to Western Europe even though the company has been playing up its Asian operations in its filings. Technical support is only offered in North America and London, England, suggesting that the company’s presence in EMEA and APAC outside of the UK is likely small. Additionally, geographic expansion in the future would allow Everbridge to begin introducing longer term contracts with new customers. As mentioned above, high renewal rates but short-term contracts still present a material risk of the company’s long-term revenue growth and this would act as a mitigation against that.
Finally, the current valuation of the company is appealing enough to imply a 25% IRR even with no multiple expansion. Despite multiple expansion accounting for nearly half of value creation in software private equity deals, the model conservatively assumes an exit multiple equal to the entry multiple of 3x NFY revenue to achieve the 25% IRR. Now this IRR is partly driven by higher margins in the future. I believe that high integration costs in the short term may have depressed margins and gross profit margins should return to an industry average of 70–75% soon. With no expectation of margin expansion, the IRR would tick down to 24%, still acceptable for a PE investment.
The most notable risk for the company is the new management team. While I believe some of that risk can be mitigated through higher stock-based compensation and a rollover to align incentives, there is still a possibility that the new management team is just as incompetent as the last one. However, Everbridge’s shares are still down over 30% from when Ancora purchased its stake in the company. Even if the new management team does a poor job executing its new strategy, there is little to suggest that the company should be trading at such a steep discount. This is another reason why I believe the investment is worthwhile; regardless of your opinion of Everbridge as a company, its price today (~$30/share) is attractive enough to warrant an investment. Additionally, the company’s shares are down over 80% from its peak valuation in 2021. The share price is unlikely to recover its losses in the short term and an acquisition at a 40% premium to the current share price would be very appealing.
