The Story, the Reality & The Valuation
The Story - Everbridge (EVBG) provides software to enable organizations to rapidly respond more effectively to emergency situations, like natural disasters, terrorist attacks and school shootings to name some examples. (See the EVBG IPO Slide Deck for more.)
The software enables effective mass communication and alerting to the right people in minutes. Everbridge fills the gap that exists between when a disaster strikes and the 15 minutes it takes a typical "first responder" to arrive at the scene.
It's a growing niche market and Everbridge has already secured the leading position in the market (in 8 of 10 largest cities, 8 of 10 largest investment banks, 4 of 4 largest CPA firms, 24 out of 25 busiest airports, etc.) These are also very "sticky" customers - once this software is in it is hard to move away from. Their market share gives them an edge in selling where CYA and FUD are potent weapons. (Cover Your Ass and Fear Uncertainty and Doubt for those of you unfamiliar.)
This fact supports the economics of customer acquisition at EVBG. They spend almost a $1 to acquire a $1 of revenue but then only .07 to retain that $1 of recurring revenue (they had a 116% revenue renewal rate in the last year.)
Large corporate customers spend several hundred thousand dollars per year and state government contracts get into the millions. The current revenue mix is 50% corporate, 34% government and 16% hospitals.
Everbridge is really a specialized communication platform for emergencies and critical events. Not only are the functions they offer tailored to the application, but the company has also invested much in having redundant systems across the entire technology chain including datacenter, communication networks, operation centers, and access points.
From their roots as a mass communication and alerting company they are investing in new products to extend their reach and increase the number of applications they can sell into their client base. Most of the thrust is into more predictive and analytical applications that are related to “smart sensors” and the so-called “Internet of Things” or IoT space.
Positioning the company as an IoT play is a bit desperate and feels more like investment banking “spin” then reality. However, IoT is real and as it spreads it does give them a bigger market opportunity since those devices will provide alerts that generate the need for core Everbridge functions.
There are quite a few selling stockholders in this deal. Given the strength of the story it’s a little surprising to see how many would like to sell shares right away at the IPO price rather than wait six months for what would presumably be considerably higher prices. From a financial planning perspective it makes sense, the CEO for example would be selling only about 10% of his holdings and that’s only if the green shoe is exercised. Diversification is your friend. Still it’s somewhat rare to see a company with these seemingly stellar growth prospects with insiders selling in the IPO.
Revenue growth as decelerated. Growth was running at about 40% in 2014 and 2015. So far in 2016 it’s 30%. It’s especially surprising since beginning in 2015, Everbridge dramatically increased their spending on sales and marketing. This increase is still going on in 2016, yet sales growth remains slower than prior periods. The company is mum about this in their public roadshow so we are left to wonder.
One reason could be a focus on new accounts. During the roadshow the CEO did mention that the company “signed up 150 new accounts last quarter” which sounds like too many for what is typically a fairly large sale. That suggests that many of these accounts were in the five figure range and may be a way to seed more growth in later quarters. If true, it would be a very smart strategy because it “builds in” an acceleration of growth post-IPO. This team doesn’t seem that smart. And if they were why sell any in the IPO? We’ll know in 6 to 12 months which it is!
The Deal & Valuation
It's a solid group of underwriters but not the "A-team" of Goldman and/or Morgan Stanley. The leads are Credit Suisse and BofA with the selling group being fairly good on the research side with Stifel, Canaccord, Pacific Crest, William Blair and Raymond James.
It's a $90M deal at the $12 mid-point of the range. 7.5M shares are being offered and post-IPO total outstanding will be 28M for a market capitalization of $336M.
They should do between $75M and $80M in revenue in 2016 which gives them a current P/S ratio of 4.3x, which is not bad for a SaaS company.
This stock could trade in a very wide range. In this IPO market we have seen how with some stocks valuation feels like it is "all in the eye of the beholder" rather than traditional consensus methods. Look at how names like Twilio (TWLO) have performed.
In terms of EVBG, they would like to have investors compare them to a ServiceNow (NOW) which trades at 11x sales. This has become a fairly common level of a successful SaaS company. That would put the shares at $30. We've done a base case IV which straight lines the top line growth and gets them to the middle of their target financial model figures. That suggests a valuation of just over $24/share.
We suspect that in the recent quarter EVBG may have sandbagged some revenues and is prepared to announce strong results for the September and December quarters, but it's hard to know. It also stands at odds with insiders selling here. As a grow-by-acquisition company there's some messiness to the underlying business versus the carefully painted picture of the powerpoint presentation. But the company does have a solid niche that they should be able to execute in.