This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Good afternoon. Welcome to the Everbridge third quarter 2023 earnings conference call. My name is Jason, and I'll be your operator today. Following management's remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via a link in the investor relations section of the company's website. Now, I would like to turn the call over to Vice President of Investor Relations, Nandan Amladi. Sir, please proceed.
spk10: Thank you, Jason, and good afternoon, everyone. Welcome to Everbridge's earnings call for the third quarter of 2023. With me on today's call are Everbridge's President and CEO, David Wagner, and Executive Vice President and CFO, Patrick Prithee. After the market closed, we issued our earnings release and supplementary materials, which can be accessed on the IR page at ir.everbridge.com. This call is being recorded, and a replay of the teleconference will be available on our Investor Relations website at the conclusion of today's event. During today's call, we will make forward-looking statements regarding future events or the financial performance of the company that involves certain risks and uncertainties. The company's actual results may differ materially from the predictions described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in our forms 10Q and 10K, as well as other subsequent filings with the SEC. Information provided on this call reflects our perspective only as of today and should not be considered representative of our views as of any subsequent date. We explicitly disclaim any obligation to update any forward-looking statements or our outlook. Also during today's call, we'll refer to certain non-GAAP financial measures. Reconciliation of our GAAP to non-GAAP financial measures to the extent reasonably available is included in our earnings press release, which you can find on our Investor Relations website. Our earnings press release includes highlights from our third quarter of 2023, in addition to our financial results and outlook. After we review our business and financial highlights, we will open the call for questions. With that, let me turn the call over to Dave. Dave?
spk13: Thanks, Nandai, and good afternoon, everyone. We delivered solid Q3 results, including revenue of $114.2 million, an increase of 3% year-over-year, Adjusted EBITDA of $23.7 million, an increase of approximately $9 million and 56% from a year ago, and annual recurring revenue of $399 million, up $4 million quarter over quarter, and 8% year over year. These results align with our strategy of enhancing shareholder value by prioritizing increasing ARR, the more valuable recurring part of our business, and growing efficiently and profitably to achieve our goal of reaching the rule of 40 by 2027 and enhancing our go-to-market approach, evidenced by the Q3 improvements. In this context, subscription revenues of $104.3 million grew 8% in the third quarter. However, revenues from professional services, perpetual software licenses, and one-time services were down $4.7 million, or 32%, bringing total revenue growth to 3%. The decline in one-time revenues is due to prioritizing recurring revenues and the changes in the macro environment affecting large deal opportunities. Efficiency-wise, we improved the adjusted EBITDA by 56% year-over-year, or $8.5 million, while also absorbing the $4.7 million decrease in professional services and one-time revenues. Our efforts to enhance efficiency are allowing us to reduce costs while continuing to enhance our product portfolio. Improvements we are seeing in our third core results that we believe demonstrate the progress we are making to increase our ARR growth rate in 2024 are as follows. One, Q3 was our highest bookings quarter of the year, both for recurring and one-time bookings. Two, our sales productivity improved 11% quarter over quarter and 16% year over year. Our average transaction size increased again quarter over quarter to the highest level of the year. Four, our total number of transactions remains consistent with last year. And five, our total pipeline is continuing to build. During Q3, we supported our customers through a range of critical events, including heat waves, wildfires, hurricanes, and geopolitical unrest. We supported states and countries around the world with life-saving alerts, in the face of unprecedented heat waves and wildfires this summer. We delivered millions of messages to Floridians leading up to, during, and after Hurricane Idalia to support their life safety and recovery goals. And more recently, as a result of the conflict in the Middle East and the result of geopolitical unrest, we're assisting multinational businesses with critical situational awareness and risk intelligence to keep their employees and travelers safe and to keep their businesses running efficiently. The value of the Everbridge platform has never been more apparent. We also just published our inaugural sustainability report that is posted on our IR page. I'm delighted with the progress Everbridge is making in this area, showing our commitment to developing new policies and processes to align our strategy and operations with key sustainability principles. Again, I am pleased with our progress especially improved booking traction we demonstrated in the third quarter. Now, I'll turn the call over to our CFO, Patrick Brickley, to provide further details on our financial results and outlook. Patrick?
spk15: Thanks, Dave. During the quarter, we saw a healthy year-over-year increase in our profitability metrics. This increase reflects the substantial ongoing improvements that we are making to operational efficiency across all areas of our business. work that we intend to continue as we drive towards profitable growth and Rule of 40 by 2027. I will now discuss our results for the quarter in more detail. For the third quarter, ARR increased to $399 million, up 8% year-over-year. Revenue was $114.2 million, up 3% from a year ago. Subscription revenue was $104.3 million, up 8% from a year ago, while non-subscription revenue of $9.8 million was down 32% from a year ago. Our gross revenue retention rate was consistent year over year. However, it dipped slightly relative to the first half of 2023, primarily due to a bit more renewal contraction than we've seen in recent quarters. We signed 44 deals over $100,000, down from 75 a year ago. That said, as Dave mentioned, In Q3, our average deal size rebounded relative to what we saw in the first half of 2023. Gap gross margin was $81 million, or 71 percent margin, compared to the year-ago period's result of $76 million, or 68 percent margin. Adjusted gross margin was 74 percent compared to 73 percent a year ago. Gap net income was nearly $2 million, or negative 23 cents of diluted earnings per share compared to the year-ago period in which we generated a net loss of $22 million, or a negative 56 cents of earnings per share. Gap net income in the third quarter benefited from a nearly $13 million gain from retiring debt early and at a discount. This gain was partially offset by an $8 million charge related to our legal dispute with certain former shareholders of Anvil. Non-GAAP net income was $20 million, or 46 cents of diluted earnings per share, compared to the year-ago period's net income of $12 million, or 27 cents of diluted earnings per share. Our adjusted EBITDA of $23.7 million represents a 21% margin compared to the year-ago period's result of $15.2 million, or 14% margin. Cash flow from operations was an inflow of $17 million compared to the year-ago period of $18 million, and adjusted free cash flow was an inflow of $15.5 million compared to the year-ago period of $15.4 million. Our liquidity remains in a healthy position We ended Q3 with $100.5 million in cash, cash equivalents, and restricted cash, down from $201.6 million at the end of 2022. In the third quarter, we used roughly $130 million of cash to repurchase $145 million of outstanding convertible debt. In doing so, we locked in a desirable yield to maturity and, we reduced our net debt to $263 million, down 22% from a year ago. Our debt repurchase reflects our confidence in our increasing ability to drive positive cash flow. For example, year-to-date adjusted free cash flow has increased nearly 300% year-over-year, and we will continue to see further year-over-year improvements in our cash flow in the quarters ahead. We will have more than enough cash to retire the $63 million of debt that will mature in December 2024, to address any potential outflows related to the Anvil legal dispute, and to continue to fund investments in growth. Moving to guidance, we are revising our guidance for the remainder of 2023. A reconciliation of our updated guidance to the guidance which we gave last quarter is provided on slide 16. 26 and 27 of the quarterly earnings investor relations presentation, which you can find on our investor relations website. For the fourth quarter, we anticipate results which will reflect the same pattern that we experienced in Q3, continued year-over-year growth in subscription revenue, continued decrease in non-subscription revenues, and continued improvement in profitability. As I describe our revenue outlook for the fourth quarter, I will talk separately about subscription and non-subscription revenue. We anticipate subscription revenue of between $104.6 and $105 million, up 3% year-over-year. The year-ago period included roughly $3 million of subscription revenue from entities that we have since divested and subscription amounts that were recognized on an annual basis during the year-ago period, but will not have the same timing this year. This bridge is illustrated on slide 27 of our quarterly investor relations presentation. This outlook for Q4 subscription revenue reflects sequential growth of between $0.3 and $0.7 million. Our subscription revenue in the third quarter included roughly $1 million of subscription revenue that is recognized on an annual basis, and no such subscription revenue is included in our outlook for the fourth quarter. This bridge is also illustrated on slide 27 of our quarterly investor relations presentation. We anticipate non-subscription revenue of between $9.4 and $10.5 million, down from nearly $16 million in the year-ago period. This Q4 decrease of non-subscription revenue is larger than what was reflected in the outlook that we provided in August. In particular, owing to macroeconomic factors, there are a few on-premise sales opportunities which we now expect to deliver in 2024 rather than our recent projection of fourth quarter 2023. Therefore, in summary, we anticipate total revenue for the fourth quarter to range between $114 and $115.5 million, which reflects a year-over-year decrease of between 3% and 1%. We anticipate a GAAP net loss of between $6.3 and $5.1 million, and non-GAAP net income of between $21.5 and $23 million, or diluted earnings per share of 48 to 52 cents. We expect adjusted EBITDA to be between $25.6 and $27.1 million, a margin of 23%. We remain well on track with our plan to generate continuous year-over-year improvement in quarterly adjusted EBITDA and adjusted EBITDA margin, despite the pressure that's created by our revised outlook for non-subscription revenue. Moving to full-year guidance, for 2023, we now anticipate total revenue in the range of $447 to $448.5 million, representing year-over-year growth of 4%. Within that, we anticipate subscription revenue of between $409.5 to $409.9 million, representing year-over-year growth of 7%. And we anticipate non-subscription revenue of between $37.5 and $38.6 million, representing a year-over-year decline of 18 to 21 percent. We expect a gap net loss of between $34.3 and $33.1 million and a non-gap net income of between $66 and $67.5 million, or between $1.48 and $1.52 of diluted earnings per share. We expect to deliver adjusted EBITDA in the range of $83.5 to $85 million, representing an adjusted EBITDA margin of 19% at the midpoint. In summary, we continue to make progress towards our goal of increasing ARR more profitably. Taking an early look ahead to 2024, we are committed to expanding our profitability. And although too soon for forecasting gap profitability, we expect to grow our full-year adjusted EBITDA by roughly 25%. we remain confident that we can deliver the targets laid out at our December 2022 investor day, making disciplined growth first investments that will drive steady progress towards the rule of 40 by 2027. I will now turn the call back over to Dave.
spk13: Thanks, Patrick. In Q3, we delivered our best bookings performance of the year. While still down compared to last year, The recent recovery underscores the ongoing improvements we've made to our sales productivity. Furthermore, our pipeline, and especially our large field pipeline, has continued to expand as the year has progressed. Notably, in Q3, we successfully closed four deals over $500K, which was three more than last quarter, and we closed one deal over $1 million, also marking a sequential improvement. Our largest new client in the quarter was a smart security deal for a shipping port in the Middle East. Among the remaining top five deals, three were new CEM customers, including a federal government department, an Australian bank, and a large international charitable organization. The fifth significant new client was an enterprise mass certification win. Regarding growth deals, our two largest deals were government add-ons, one at state-level emergency notification win and the other in the U.S. federal space. We also had a large smart security cross-sell into a CEM account. Two CEM extensions round out the top five add-on deals. In total, we added 32 new CEM customers in Q3, bringing our total CEM customer count to 405. While average deal sizes are smaller this year, we are maintaining a healthy mix of new and growth CEM customer wins. In terms of retention, gross retention was slightly lower than the past few quarters and was consistent with the same period last year. A slight sequential increase in churn was due primarily to increased renewal contraction, as Patrick noted. We're pleased with the progress we've made executing our go-to-market strategy. The underlying metrics affirm our growth path. Our sales representative productivity is rising. Our forward pipeline indicators show traction. We're successfully adding a balanced mix of new and growth CEN customers. And we're also reinforcing our strong market position. Customer feedback assures us that we're on the right track. Our high customer satisfaction solar renewal rates, and positive response to our product enhancements are all strong indicators. As the market improves, we're anticipating a corresponding growth in bookings in 2024. In the current environment, our execution is improving, and Averbridge remains the market leader. In summary, the third quarter demonstrated another step up in profitability of $9 million, or 56% year-over-year. We deliver a stronger booking score sequentially as a result of increasing deal size and improved sales productivity. We're confident that we are well-positioned to deliver year-over-year recurring bookings growth in 2024, which will contribute to increasing ARR growth rates later in 2024, and we are also confident that we can grow our adjusted EBITDA by a further 25% in 2024. In closing, I want to emphasize our steadfast commitment to assisting our customers in achieving resilience. We are living in uncertain times when organizations and governments are prioritizing the safety of their people and the continuity of their operations. Our Everbridge team is innovating to help organizations monitor risk more comprehensively than ever before and to combine that situational awareness with a market-leading platform for managing critical events to empower a more resilient world. I will now turn the call over to the operator to facilitate the question and answer period. Jason?
spk04: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Alex Glar from Raymond James. Please go ahead.
spk11: Great, thank you. Dave, just on your confidence on an improved bookings outlook, I realize there's still some important weeks ahead this quarter, but historically Q4 is your largest bookings quarter in terms of kind of sequential ARR growth. Can you just talk about your level of confidence or visibility that's going to continue again this year? And then just a little bit more color on your confidence at the end of the prepared remarks in terms of an improved bookings activity next year, assuming no macro improvements. Thanks.
spk13: Yeah, good question. As I pointed out, our pipeline has been improving. So productivity is improving. The average deal size is improving. Q4 is sequential strongest quarters. And those are the kinds of things that give us confidence. As we head into Q4 and think about Year-over-year ARR improvement, we're still cognizant that Q4 last year was a strong quarter, particularly a strong quarter for ARR growth. So, you know, we're not expecting the same kind of strength we saw last year, but we are expecting a good quarter. As we look forward into 2024, you know, that's where – The comparables and the sequential improvements give us confidence that we'll continue those sequential improvements into 2024 when we hit those copper compares, which, again, the way the ARR snowball works, of course, it takes a couple of quarters until the ARR growth rate is moving up rather than down. So that's what we were alluding to in those remarks, and thank you for the follow-up questions.
spk11: All right. Great call there. And then I don't know if Dave or Patrick, in terms of the comments on the higher renewal contraction, can you just elaborate on what's driving that? Is that macro related? Is it competition? And did that continue through kind of October or was that kind of isolated in the third quarter? Thanks.
spk13: I'd say it was isolated in the third quarter. We had been really consistently at, you're running, you know, contractions within a band of a couple hundred thousand, you know, within a band of a couple hundred thousand up and down, quarter to quarter. It wasn't a huge increase, but, you know, there was an increase in the third quarter. We reviewed the, and we think it's, you know, it's largely constrained to the third quarter. It was largely headcount related, but there were, you know, some customers contracted services. So I think it's also, a bit indicative of some of the budget pressures we've seen in our clients throughout the year.
spk07: All right, great. Thank you for the call.
spk04: Our next question comes from Arjun Bhatia from William Blair. Please go ahead.
spk02: Hi, this is Chris and thanks for taking my question. I want to circle back to sales productivity. It's great to hear about some of the improvements there. What would you point to as kind of some of the key strategies that are the most effective in delivering these improvements? Thanks.
spk13: Well, you know, it's a team effort when that happens. You know, one of the key things that's happened, we talked about last quarter, was the sales tenure improving. And so we continue to have great retention of our sales force, and that's one of the strongest statistics statistically correlated evidence we have. And so I think that is thing one. The marketing team has really gotten in a much tighter groove swing in the last couple of quarters. And so we're seeing a lot more efficient lead generation. I think it's also supporting those sales team members as they've onboarded and You know, sales execution is a journey, and we're journeying through it, but, you know, just give John a lot of credit in his second full quarter, you know, getting the team aligned.
spk04: Our next question comes from Brian Coley from Stevens. Please go ahead.
spk03: Hi, guys. Thanks for taking my question here. On the updated guidance, was the reduction in sales 100% from the one-time revenue, or was there any change in the subscription outlook there?
spk15: Hey, Brian, this is Patrick. We, at the midpoint, we basically brought it down by about $3 million, and you could think of that as $2 million from non-subscription and $1 million from subscription. And the story over the years has really been the non-subscription, but When you look at subscription, we began the year roughly with guidance of call of around $411 million, which is up 7% year over year. And then our ASPs, you know, continued to come down early in the year, which was a headwind, but we were able to offset that with improved retention year over year. And, you know, just now as sort of You'll pull all that together, and we're exiting the year. We're looking at $410 million rather than $411, still 7% year over year, but it is down by a million.
spk03: Okay, perfect. That's super helpful. And then, Dave, one for you. I'm curious kind of where you stand today in terms of completing some of the product integration work that you've talked about kind of needed to upsell or convert those 150-plus customers from RC9 into an anvil over to the CEM platform, and then any progress update that you've made converting some of your mass notification customers within the G2K over to CEM as well.
spk13: Those are both great questions. Thanks for asking. So on the RC9, the momentum is picking up. As you remember from a year ago, this call, we talked about that cohort. of, uh, customers. And then by Q1, we kind of cut our goals in half. Um, but we had, we had good migrations this quarter. Um, it was the highest migration quarter of the year to date. Um, the roadmap for them, for the migrations is, is finishing up. Um, the, the product work actually going to market with, you know, with an end of life, which will drive the, um, the remaining, uh, customers with, with, um, more, more, uh, force, uh, will be coming up around the end of the year. So that program continues to continue to make good progress. We did slow it down, um, to focus on retention that, uh, that has worked for us to date. So I'm pleased with that, with where that's going. Um, the, uh, the feature parody will be done in Q1 and we'll be doing it at the end of life, uh, before then. On the, uh, on the, on the, uh, The second cohort of the mass certification in the Global 2000, the upgrades, we had another good quarter, a nice mix of new customers. Those three new customer wins I talked about are really exciting wins, a U.S. federal government department. We got a really nice opportunity there with a nice-sized deal, one of our top five. A really nice Australian bank that we think is an anchor account for that region. Those were new accounts. On the upgrade side, it was also just real balance on the upgrade side. So I think we had a few more CEM customers in the last quarter. CEM customer ads were, I think, down a little bit year over year, but we're continuing to see a real good mix of both new customer add-ons and migrations. For CEM, got it. Thank you.
spk04: The next question comes from Scott Berg from Needham. Please go ahead.
spk01: Hi, everyone. Thanks for taking my questions. I guess a couple. First, Dave, on the bookings in the quarter, you seemed pretty positive on obviously the improvements that you're seeing there. The company did, though, only have $4 million of AR, which is not the highest of the year so far, at least today. How do we kind of reconcile those two commentaries? My guess is probably from some of the downsell pressure that you talked about, but I didn't know if there was anything else that's kind of comprising or making up that gap.
spk13: No, that's exactly it. It's those two offsets and the primary drivers there. Okay.
spk01: And then, Patrick, from a follow-up, the million dollars of revenue, annual subscription revenue recognized in Q3 but not Q4, I get a little confused by that. I'm not sure why it's not being recognized this quarter. Maybe that's the down sell that you all talked about. But just trying to help understand what that is that won't be recognized in Q3 and then does it actually come back in Q4 and then does it come back in Q1 for some reason?
spk15: Yeah. Um, so what that million dollars is, is, uh, ASC 6 0 6, uh, has taken something that, you know, uh, a service that we provide radically, but, uh, requires us to recognize, um, annually and it's related to subscription. Uh, but we only recognize it primarily one time a year in 2022. we recognized it in Q4. That was part of the year over year that I was talking about with Q4. And in 2023, we recognized it in Q3. So it's, so the timing is different, you know, year over year. There were a couple other items like that in Q4 of last year that have already been recognized earlier this year in 2023. So it's subscription, but ASC 606 just, you know, treats, treats a couple million dollars of our subscription revenue a little uniquely. So it's ongoing. Just to be clear, it's an ongoing customer, et cetera. It'll come back around next year in 24.
spk07: Probably in Q3 in 24. Yeah. Very helpful. Thank you.
spk04: The next question comes from Michael Perg from Wells Fargo. Please go ahead.
spk05: Hi, thanks for taking my question. I wanted to kind of take a different angle on this. Your adjusted EBITDA guidance went down by about a million bucks. And when I think about perpetual deals that come off, I think of those as very high margins. So maybe you can help just give me some puts and takes on what is driving the lower EBITDA guidance. Is it some strength in the quarter offset by the lowered EBITDA? perpetual primarily, or these help levels are there? Thank you.
spk15: Yeah. Look, in the back half of 2023, we've removed $10-plus million of non-subscription revenue, much of which is very high margin, in particular those perpetual licenses. So that's created a lot of pressure on our adjusted EBITDA, but we're making our way through it. The offset is a continued increase Focus on efficiency and productivity. If you look at a couple of areas like sales and marketing, we've brought that down year over year as a percent of revenue from 36% to 29%. And yet at the same time, we just delivered our best bookings quarter of the year. And as you heard Dave talk about, productivity's up, deal sizes are coming up. A couple of other key metrics that are part of that are improving. Look at R&D as a percent of revenue. That's come down from 19%. to 17%. But at the same time, we've improved our productivity. We just delivered Everbridge 360, which is critical to customer adoption, renewal, expansion. So we're improving our productivity while improving our profitability, and that has helped to absorb the impact of the reduction in the outlook for a non-subscription revenue.
spk13: If I could just add, it's a minor point, but I think it's worth noting in addition to that, that Anvil accrual, there's op-ex for that case. And so we're further absorbing the op-ex for that. So when I think about the work that the team did, I'm really proud of the work the team's been doing in expense management that Patrick talked about. But in my way of thinking, it's that last, million-dollar quarter or just under this quarter, maybe we're planning about that amount for next quarter, that additional $1.5 million, $2 million of off-ex related to that anvil matters. But as we're bringing the guidance down, we are still targeting that 85. We're doing everything we can as a management team. Yeah, so that's what we've been managing, and I think we're doing a good job of it.
spk05: Got it. So maybe one quick fall to that is, you know, you just gave the one to 2 million OpEx with the end bill. It sounds like that's part of the non-GAAP or adjusted EBITDA on a normal basis. Can you help us quantify, you know, how we could think about the perpetual deals that you took off, how that could flow through to EBITDA? Reason I ask is I think it'd be helpful for the investor community to understand what a more normal EBITDA profile would look like today.
spk15: should you know things have come across as you had originally expected yeah well i think um we we mentioned that we're as we look forward to 2024 we're uh anticipating that we can increase our adjusted evita by 25 percent uh with our existing exiting cost structure and continuing to to make gradual optimizations to it. Um, so whereas, you know, in Q4, we've got adjusted EBIT, uh, related expenses, uh, around $89 million. That's, that's what we would anticipate continuing to, to run into next year with, there'll be seasonality, there'll be payroll tax, you know, tech seasonality, et cetera. But, um, and then, uh, you know, over 90% of our revenue is subscription and, uh, the gross margin on that's very high. So yeah, it, the margin on the one-time licenses, software licenses and other is really high. The last year that was $18 million. This year, that's going to be around 12 and a half to $13 million with, with really high margin. And, but we, you know, we originally thought there'd be a lot more than 12 and a half to 13 and, and most of, The reduction that we're talking about came out of the back half of the year. So we've had to – unfortunately, we've been able to manage through it.
spk13: And, Michael, for the first time, we put into our guidance that split between subscription for professional services and software. So you have that for the fourth quarter guide. Patrick, I threw it on the call as well, but it's in the tables. of the press release so you can get that break out, not just of the historical quarters, but of the quarter forecast. And then just a minor correction on the anvil. The $8 million is an accrual for potential damages. In addition to that, there's the operating expenses to take that thing to trial that are coming in through the P&L. They're not adjusted out. They're in the EBITDA expenses. just under $9 for Q3 and probably just over $9 for Q4.
spk07: Got it. Helpful. Thank you.
spk04: The next question comes from William Power from Baird. Please go ahead.
spk12: Hi, this is Yanni Simulaton for Willpower. Thanks for taking the question. So just looking at non-subscription revenue, how do you think that might shake out next year? Should we expect non-subscription revenue to decline in 2024? Or is there any early framework for how to think about that piece? Thanks.
spk13: We're not in a position to do the guide on those, you know, revenues. You know, as Patrick went through the narration of the script and you've seen the guide, you know, in the past couple of quarters, and maybe you'll look again at the investor deck, we gave a quarterly trend of those numbers over a period of time. But And we went through a season in the last two years, 21 and 22, with record public warning deals. You know, this year we're going through a year where there has not been a public warning deal awarded globally to date this year. So, you know, this in some ways this year feels low. But also contextually, everything we're doing is around, you know, growing the recurring revenue. We're working with those. products and those customers to make them more subscription. So our intention over time is to drive those subscription revenues up. One thing I think we've demonstrated this year is we're going to be able to manage expenses around those one time. I don't want to run here what we'll be holding on getting a one-time deal for our business model. So we're building a business model laser-focused on ARR and subscription revenue growth. And in that way, I'm not expecting a tailwind from non-subscription the way we're trying to run the business.
spk07: Fair enough. Thanks. I'll pass it back.
spk04: The next question comes from Terry Tillman from Truist. Please go ahead.
spk14: Good afternoon, Tim. This is Connor Passerall on for Terry. Appreciate you taking the questions. Just curious on what changes you've made within the customer success organization to better serve your existing customer base and enable that cross-sell, up-sell opportunity. And then I guess also what kinds of conversations they're having with the existing base around the value of organizational resilience.
spk13: Yeah, so that's a great question. Customer success is an area where folks are really great account managers and renewal specialists. that work with our clients. That is an area that John is spending a lot of attention on, and we're expecting to make some changes to further dry alignment between those two teams and support the customers even better. On the customer journey, we're getting really good feedback. The Everbreach 360 is delivering the ease of use and the integration. We've hit events. like the geopolitical unrest and our ability to deliver messages in a really troubled, hard environment, delivering messages into our clients' employees and services to get them to safe locations. We're deeply engaged with our clients right now, and I'm pleased with the team and how we're able to serve us them in their time of need.
spk07: Great. That's helpful. Thank you.
spk04: The next question comes from Ryan McWilliams from Barclays. Please go ahead.
spk06: Hey, guys. Thanks for the question. I know it's early, but any early comments on next year? And how should we think about your priorities for next year, like focus on and return to General growth or continuous regression improvement? We'll get your color there. Thanks.
spk13: Yeah, Ryan, that's a good follow-on question. I'll just put a little more detail. The most pointed thing that Patrick and I mentioned was we're early but looking ahead with a focus on growing EBITDA 25% year over year. so we think we can continue to deliver operating improvements as they continue to grow. When you look at the ARR growth, it has come down quarter over quarter. We had some real strong quarters at this time last year. We had a really much bigger team this time last year, and that's why I think the improvements in sales productivity, pipeline build, deal sizes are so important as we look forward into next year. where we expect to be delivering year-over-year improvements beginning with Q1 on our recurring bookings performance, which with our stronger renewal rates will start to drive ARR growth rates later next year because we're still laughing some stronger compares with a lot more salespeople through this quarter.
spk06: Okay. And then, Patrick, glad to see the convertible debt retirement. Definitely some long way over the past few quarters. The slides were helpful there. I guess just for investors, how should we think about the path ahead for average capital structure and what you plan to accomplish over the next few years? Thanks.
spk15: Sure. As we mentioned, we've got enough cash to get through the debt that matures in December 2024. We have another $300 million or so that will mature in March 2026. Between now and then, we will continue to generate more and more cash flow to be able to pay that down. And as we mentioned at our investor day in December 2022, we anticipate that if we're not able to satisfy that obligation in March 2026 entirely out of our own pockets, that by then, we will be driving enough profitability that we could, we'll have a number of options, including just straight bank debt. We're exiting this year with adjusted EBITDA to leverage of roughly three to one. We're going to get that down to two to one and And by then, it may be right around one to one. So we don't know what debt markets will look like in late 2025 or late 2026, but we're confident that we're going to be able to have a lot of different options that are not dilutive to be able to satisfy that remaining obligation.
spk07: Appreciate the color. That's good.
spk04: Again, if you have a question, please press star, then one. And the next question comes from Koji Aikido from Bank of America. Please go ahead.
spk09: Hey, guys. Thanks for taking the questions. I had a question on renewals and specifically on the contraction and the downsells. And I was wondering if you could talk a little bit about what's driving that. Is it seats? Is it pricing? Is it a certain type of product? Any sort of color there to help understand the contraction would be great. Thank you.
spk13: Yeah, it's primarily seats. Of course, we're dealing with contractuals. over 6,000 customers and, you know, lots and lots of renewal. So the aggregate, you know, the aggregate, you know, in the summary of the downtrends accounted for the quarter-over-quarter decline in retention. But retention remains, you know, where it was this quarter last year. So it's in a good spot, not the better spot that we wanted in. The contractions in the quarter, headcount reductions are certainly part of it. Um, it's anecdotal, but if there's a con concentration, um, Uh, you know, there was a lot of, there was some consolidation, which, uh, customers, you know, being purchased and, you know, a little bit, maybe more in our digital operations than our core CEM, uh, business, but, um, just, just really generally, um, you know, it, it added up to the, to the, um, age 100 basis points increased, uh, turn the quarter.
spk09: Got it. Okay, that's helpful. And then just one follow-up here. When I look at the deck and it's a slide, what slide is this? It looks like 26. The reconciliation of the guidance, you know, kind of the previous guide versus the guide that is today, you know, I noticed that there's a reduction in the license and PS due to delays in large on-prem deals. You know, it was $8 million and then an additional $2 million added on for the updated guidance. The question here is, what gives you the confidence that these deals, these push deals, will eventually close?
spk13: Thanks, guys. Well, the ones that are at the bottom of the pipeline, I can tell you that we've got confidence. We know that the national programs where they're working, they take time to close, and it's hard to control a government's closing timeline, but we know that they're nationally approved projects. So that's what gives us confidence in terms of larger top of funnel pipeline and where the direction goes next year and the year after. That's what we're really not in a position yet to be guiding on the one time for next year at this time.
spk09: Thanks for taking the question, guys. Thank you.
spk04: The next question comes from Cash Rangan from Goldman Sachs. Please go ahead.
spk08: Hey, guys. This is Jacob for Cash. Thanks so much for taking the question. A lot of good questions ahead of me, so just a couple simple ones for me. The 32 sequential ads for the CEM customers, can you provide a split on how many of those were net new customers and how many of those were existing customers that adopted CEM. And then additionally, I noticed that stock-based comp was down 700 bps, I think. Yeah, it was 8% of total revenue versus 15% last quarter and 12% in Q1. So how should we think about that on a go-forward basis? Thanks so much.
spk13: I don't have a split on this. I gave it in the top five. We had three new CEMs and two upsells in the top five. I think it is roughly 50-50. We can follow up with you on that, and I'm going to follow up with you. On stock-based comp, you're beginning to see a real intentional focus of the management team and the comp committee to just to focus in on stock-based comp. And the number I've shared with others is it's pretty clear the way our Evergreen program works. It's 3% a year. And so we've got a real specific budget that we're working in. They're working towards a 3% to 4% net and gross equity burn for the next three years. So 2022, Three becomes kind of, in my way of thinking, kind of new normal for Everbridge going forward from a dilution perspective. And 2022 was high for several, I think, good reasons. But as that moves through, we'll be moving down closer to the 4% range. Thank you so much. session I'd like to turn the conference back over to mr. Wagner for his closing remarks well thank you everybody for participating I just want a lot of good questions on the one time and those are important and we remain focused on profitable growth and driving the in a recurring revenue and recurring parts of our business and forward over the next few weeks we're going to be on the road with investors at several conferences including the medium virtual tech conference on November 16th the UBS Global Tech Conference on November 28th, the Wells Fargo TMT Summit on November 29th, the Raymond James TMT and Consumer Conference on December 4th, and the Barclays Tech Conference on December 7th. We look forward to speaking with many of you at those events, and we'll speak with the rest of you again soon. Thank you for your support of our mission and confidence in our ability to achieve it. Jason?
spk04: Thank you. Thank you for joining us today for the Everbridge Third Quarter 2023 Earnings Conference Call. You may now disconnect.
Disclaimer