Alta Fox Opportunities Fund – Everbridge: A High-Quality SaaS Business At ~3x Forward Revenue

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The following segment was excerpted from this fund letter.

Everbridge Inc (NASDAQ:EVBG)

Everbridge is an enterprise SaaS business that provides mass notification and critical event management (CEM) software in a world with increasing risks (natural disasters/weather, civil unrest, pandemic, active shooters, etc.). The software allows large corporates to better manage employees and assets during times of disruption. Everbridge serves 47 of the Fortune 50, has 110%+ net revenue retention, gross margins approaching 80%, and EBITDA margins that are beginning to meaningfully inflect higher. This is a great business.

However, the stock has always been far too expensive for us to underwrite to acceptable IRR thresholds within a reasonable valuation framework. As recently as late last year, investors were willing to pay ~14x forward revenue for Everbridge as the stock price topped out at ~$160/share. The sudden departure of the company’s CEO in December 2021 as well as forward guidance below the Street’s lofty expectations, prompted a precipitous fall in EVBG’s share price.

In December, when Everbridge’s former CEO left to take the CEO role at a large PE-backed cloud business, he likely knew that EVBG trading at 14x revenue with slowing growth meant limited upside ahead (and limited personal wealth creation).

Since the CEO’s departure and decline in stock price, a prominent activist investor has taken a stake in the business and is advocating that the board initiate a process to sell the business. Given investors have lost confidence in the management team and board’s ability to create long-term value in the public markets, we agree that the company should immediately pursue a sale.

We believe the quality of the business along with the upside potential for profit margins and the current valuation make Everbridge an extremely attractive target for private equity buyers who are currently sitting on substantial amounts of dry powder. Orlando Bravo, the co-founder of tech PE giant Thoma Bravo said it best during his appearance on CNBC on May 24: “For us in private equity, as a buyer and operator of software companies, this environment of five times forward revenue is the buying opportunity of a lifetime.”

We believe the CEO departure, two disappointing 2022 guides, and broader market volatility have put Everbridge into the penalty box. Current sell-side expectations appear far too low, as consensus assumes the company will grow revenue 16% in 2023 and EBITDA margins will expand to 12.5%.

The company’s Co-CEO clearly believes the business will perform better than sell side expectations, as he stated the following at an investor conference in May: “Wouldn’t be surprised if next year, there’s a quarter where adjusted EBITDA margin starts with a two and ultimately, we’ll see where that top line growth rate shakes out. If it looks like we’re going to be growing in the mid-teens, then we will drive adjusted EBITDA towards mid-20s, maybe even 30%.”

Today, EVBG is valued at ~3x consensus 2023 revenue (which appears low) with the stock at ~$30/share, down more than 80% from its 2021 highs. At ~3x forward revenue, investors can buy a high-quality enterprise software business with sticky and recurring revenue, inflecting margins, and a potential take-private catalyst. While we believe a sale of the company is in the best interest of all stakeholders, even if the company stays public, we estimate investors can achieve a ~30% IRR over the next several years as Everbridge’s EBITDA margins expand to the mid-30s and assuming a modest 13x EBITDA multiple.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.