Everbridge - Q3 2023

Executive Summary

• Q3 2023 delivered modest top-line growth with revenue of $114.2M (+3% YoY) and a return to GAAP profitability ($1.7M), while non-GAAP results showed strong margin expansion; subscription revenue grew 8% YoY, offset by continued weakness in one-time services and perpetual licenses.
• Actuals outperformed prior Q3 guidance on multiple lines: revenue modestly exceeded the prior guidance high of $114.0M and non-GAAP net income surpassed the $18.5–$19.0M range to $20.2M; adjusted EBITDA rose to $23.7M versus Q2’s $18.3M, reflecting disciplined cost management and subscription strength.
• FY 2023 revenue guidance was lowered to $447.0–$448.5M (from $450.0–$452.0M), while adjusted EBITDA was trimmed to $83.5–$85.0M (from $84.0–$86.0M); management reiterated profitability improvement into Q4 and 2024 driven by subscription momentum and expense discipline.
• Key catalyst: clear narrative shift toward profitability and ARR/CEM growth amid headwinds in one-time revenue; product innovation (Everbridge 360) and public warning wins underpin medium-term positioning, with management targeting “Rule of 40” by 2027.

What Went Well and What Went Wrong

What Went Well

• Strong recurring momentum: subscription revenue $104.3M (+8% YoY); ARR reached $399M (+8% YoY), with CEM customers rising to 405 (+32 sequential, +59% YoY), underpinning durability of the core model.
• Material non-GAAP margin expansion: adjusted EBITDA increased to $23.7M (vs. $15.2M in Q3’22) and non-GAAP operating income rose to $18.6M (vs. $9.8M in Q3’22), reflecting cost discipline and streamlined product portfolio.
• Management tone on execution: “We delivered solid third quarter results… strongest recurring bookings quarter of the year” — David Wagner, CEO; “Our improving profitability is supported by continued strength in our subscription revenue growth…” — Patrick Brickley, CFO.

What Went Wrong

• Ongoing one-time revenue headwinds: professional services, software licenses and other fell to $9.8M (-33% YoY), weighing on total revenue growth despite subscription strength.
• FY revenue guidance lowered: current FY 2023 revenue guided to $447.0–$448.5M versus prior $450.0–$452.0M; adjusted EBITDA trimmed to $83.5–$85.0M (prior $84.0–$86.0M).
• Q4 one-time revenue caution: management expects one-time revenues to decrease by about $6M vs. Q4 2022, limiting near-term total revenue trajectory despite stable subscription growth.

Transcript

Operator (participant)

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.

Nandan Amladi (VP of Investor Relations)

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 Brickley. 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 involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements.

Factors that might cause such differences include, but are not limited to, those discussed in our Forms 10-Q and 10-K, 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. A 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?

David Wagner (President and CEO)

Thanks, Nandan, 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 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 quarter 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.

2, our sales productivity improved 11% quarter-over-quarter and 16% year-over-year. 3, our average transaction size increased again quarter-over-quarter to the highest level of the year. 4, our total number of transactions remains consistent with last year. 5, 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 resulting 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 bookings 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?

Patrick Brickley (EVP and CFO)

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. GAAP gross margin was $81 million, or 71% margin, compared to the year ago period's result of $76 million, or 68% margin. Adjusted gross margin was 74%, compared to 73% a year ago. GAAP net income was nearly $2 million, or -$0.23 diluted earnings per share, compared to the year ago period in which we generated a net loss of $22 million, or a -$0.56 earnings per share.

GAAP 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 $0.46 of diluted earnings per share, compared to the year-ago period's net income of $12 million, or $0.27 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 slides 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 million 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 million 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 million 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 million and $5.1 million, and non-GAAP net income of between $21.5 million and $23 million, or diluted earnings per share of $0.48-$0.52. We expect adjusted EBITDA to be between $25.6 million 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-$448.5 million, representing year-over-year growth of 4%. Within that, we anticipate subscription revenue of between $409.5 and $409.9 million, representing a 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%-21%. We expect a GAAP net loss of between $34.3-$33.1 million, and a non-GAAP 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 million-$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 GAAP 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.

David Wagner (President and CEO)

Thanks, Patrick. In Q3, we delivered our best bookings performance of the year. While still down compared to last year, the recent recovery underscored the ongoing improvements we've made to our sales productivity. Furthermore, our pipeline, and especially our large deal pipeline, has continued to expand as the year has progressed. Notably, in Q3, we successfully closed 4 deals over $500K, which was 3 more than last quarter, and we closed 1 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 5 deals, 3 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 Notification win.

Regarding growth deals, our two largest deals were government add-ons, one a 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 5 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, but was consistent with the same period last year. The 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 four pipeline indicators show traction. We're successfully adding a balanced mix of new and growth CEM 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, solid renewal rates, and positive response to our product enhancements are all strong indicators. As the market improves, we are anticipating a corresponding growth in bookings in 2024. In the current environment, our execution is improving, and Everbridge remains the market leader. In summary, the third quarter demonstrated another step up in profitability of $9 million, or 56% year-over-year. We delivered 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, where 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?

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press Star, then One 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 Two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Alex Sklar from Raymond James. Please go ahead.

Alex Sklar (VP of Application Software Sector)

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.

David Wagner (President and CEO)

Yeah, good, good question. As I pointed out, our pipeline has been improving, sales productivity is improving, the average deal size is improving. Q4 is sequentially our strongest quarter, so 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, you know, the comparables and the sequential improvements, you know, give us confidence that we'll continue those sequential improvements into 2024.

We hit those tougher compares, which again, the way the ARR snowball works, of course, it takes a couple of quarters, so that 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 question.

Alex Sklar (VP of Application Software Sector)

All right. Great color there. 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? Did that continue through kind of October, or was that kind of isolated in the third quarter? Thanks.

David Wagner (President and CEO)

You know, I'd say it was isolated to the third quarter. We have been really consistently, you know, running, you know, contractions within a band of a couple of hundred thousand dollars up and down, quarter-over-quarter. It wasn't a huge increase, but, you know, there was an increase in the third quarter. We've reviewed 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 who contracted services, so it, I think it's also a bit indicative of the, you know, some of the budget pressures we've seen in our clients, throughout the year.

Alex Sklar (VP of Application Software Sector)

All right, great. Thank you for the color.

Operator (participant)

Our next question comes from Arjun Bhatia from William Blair. Please go ahead.

Speaker 13

Hi, this is Chris on for Arjun, 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.

David Wagner (President and CEO)

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, you know, that's one of the strongest statistically correlated evidences 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, you know, couple of quarters, and so we're seeing, you know, a lot more efficient lead generation. I think it's also supporting those sales team members as they've onboarded.

You know, sales execution is a journey, and we're, you know, 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.

Operator (participant)

Our next question comes from Brian Colley from Stephens. Please go ahead.

Brian Colley (VP of Equity Research - Security Software)

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?

Patrick Brickley (EVP and CFO)

Hey, Brian, this is Patrick. We, you know, 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 it 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 we sort of pull all that together and we're exiting the year, we're looking at $410 million rather than $411 million.

7% year-over-year, but it is down by $1 million.

Brian Colley (VP of Equity Research - Security Software)

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 and 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.

David Wagner (President and CEO)

Those are both great questions. Thanks for asking. So on the RC9, the momentum is picking up. We, as you remember from a year ago, at this call, we talked about that cohort of customers, and then by Q1, we had cut our goals in half. But we had good migrations this quarter. It was the highest migration quarter of the year to date. The roadmap for them, for the migrations is finishing up. The product work to actually go to market with, you know, with an end-of-life, which will drive the remaining customers with more force, will be coming up around the end of the year. So that program continues to make good progress.

We did slow it down to focus on retention, and that has worked for us to date, so I'm pleased with that, with where that's going. The feature parity will be done in Q1, and we'll be doing an end-of-life before then. On the second cohort of the mass notification 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've got a really nice opportunity there. It was 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, you know, a few more CEM customers than last quarter. The CEM customer adds 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.

Brian Colley (VP of Equity Research - Security Software)

Got it. Thank you.

Operator (participant)

The next question comes from Scott Berg from Needham. Please go ahead.

Scott Berg (Managing Director and Senior Research Analyst)

Hi, everyone. Thanks for taking my questions. I guess a couple for on the bookings in the quarter. You sound pretty positive on obviously the improvements that you're seeing there. The company did though only add $4 million of ARR, which was not the highest of the year so far, at least to date. 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.

David Wagner (President and CEO)

No, that's exactly it. It's those two offsets and, you know, the primary drivers there.

Scott Berg (Managing Director and Senior Research Analyst)

Okay. And then, Patrick, from a follow-up, the $1 million of revenue, annual subscription revenue recognized in Q3, but not Q4. I guess I'm a little confused by that. Is... I'm not sure why it's not being recognized this, this quarter. Maybe that's the downsell 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-- or in Q4, and then does it come back in Q1 for some reason?

Patrick Brickley (EVP and CFO)

Yeah. So what that $1 million is, is ASC 606 has taken something that, you know, a service that we provide ratably but requires us to recognize annually, and it's related to subscription, 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 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 $2 million of our subscription revenue a little uniquely.

David Wagner (President and CEO)

It's ongoing. Just to be clear, it's ongoing customer, et cetera. It'll come back around next year in 2024.

Patrick Brickley (EVP and CFO)

Probably in Q3 in twenty-

David Wagner (President and CEO)

Probably in Q3 in 2024. Yeah.

Scott Berg (Managing Director and Senior Research Analyst)

Kat, very helpful. Thank you.

Patrick Brickley (EVP and CFO)

Yeah.

Operator (participant)

The next question comes from Michael Berg from Wells Fargo. Please go ahead.

Michael Berg (VP of Equity Research)

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 $1 million, and when I think about perpetual deals that come off, I think of those as very high margin. So maybe you can help just, give me some puts and takes on what is driving the lower EBITDA guidance. Is it, you know, some strength in the quarter offset by the lowered perpetual, primarily, or maybe, you know, help level sit there? Thank you.

Patrick Brickley (EVP and CFO)

Yeah. Look, in the back half of 2023, we've removed $10+ 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. It's the offset is a continued 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 is up, deal sizes are coming up, and 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.

David Wagner (President and CEO)

Then, if I could just add, it, it's a, you know, it's a minor point, but I think it's worth noting. In addition to that, you know, that Anvil accrual, there's OpEx for that, for that case, and so we're, we're further absorbing the OpEx 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, the expense management that Patrick talked about. But in my way of thinking, it's that last $1 million quarter or just under this quarter, maybe, you know, we're, we're planning about that amount for next quarter, that, that additional $1.5 million-$2 million of OpEx related to the, that Anvil matters. But, but as it's bringing the, 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.

Michael Berg (VP of Equity Research)

Got it. So maybe one quick follow-up to that is, you know, you just gave the $1 million-$2 million OpEx with the Anvil. 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 the 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, should, you know, things have come across as you had originally expected.

Patrick Brickley (EVP and CFO)

Yeah, well, I think, we mentioned that we're as we look forward to 2024, we're anticipating that we can increase our adjusted EBITDA by 25%, with our existing, you know, existing cost structure and continuing to make gradual optimizations to it. So whereas, you know, in Q4, we've got adjusted EBITDA-related expenses of around $89 million. That's what we would anticipate continuing to run into next year with. There'll be seasonality, there'll be payroll tax, you know, tax seasonality, et cetera. But... And then, you know, over 90% of our revenue is subscription, and 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 gonna be around $12.5 million-$13 million with really high margin. But we, you know, we originally thought there'd be a lot more than $12.5 million-$13 million, and most of the reduction that we're talking about came out of the back half of the year. So we've had to. But fortunately, we've been able to manage through it.

David Wagner (President and CEO)

and Michael, for the first time, we put into our guidance that split between subscription, 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 table of the press release, so you can, you know, get that breakout, 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 that to take that thing to trial that are coming in through the P&L in the, they're not adjusted out, but in the EBITDA expenses, just under $9 million for Q3 and probably just over $9 million for Q4.

Michael Berg (VP of Equity Research)

Got it. Helpful. Thank you.

David Wagner (President and CEO)

Yes.

Operator (participant)

The next question comes from William Power from Baird. Please go ahead.

Yanni Samoilis (Equity Research Analyst)

Hi, this is Yanni Samoilis for William Power. 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.

David Wagner (President and CEO)

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 if you looked again at the investor deck, we gave a quarterly trend of those numbers over a period of time. But we went through a season in the last two years, 2021 and 2022, 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 it 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. You know, one thing I think we've demonstrated this year is we're gonna be able to manage expenses around those one-time. I don't wanna run here where 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, you know, in that way, I, you know, I'm not expecting a tailwind from non-subscription the way we're trying to run the business.

Yanni Samoilis (Equity Research Analyst)

Fair enough. Thanks. I'll pass it back.

Operator (participant)

The next question comes from Terry Tillman from Truist. Please go ahead.

Connor Passarella (Equity Research Associate)

Oh, hey, good afternoon, team. This is Connor Passarella on for Terry. Appreciate you taking the questions. Just curious on what changes you've made in the customer success organization to better serve your existing customer base and enable that cross-sell, upsell, opportunity. And then, I guess, also, what kinds of conversations they're having with the existing base around the value of organizational resilience?

David Wagner (President and CEO)

Yeah, so that's a great question. You know, customer success is an area where we're focused on. We have some really great account managers and renewal specialists that work with our clients. You know, that is an area that John is spending a lot of attention on, and we're expecting to make some changes to further drive alignment between those two teams and support the customers even better. On the customer journey, we're getting really good feedback. The Everbridge 360 is delivering the ease of use and the integration.

We hit events, you know, like the geopolitical unrest and our ability to deliver messages in a really, you know, a 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 teams and how we're able to service them in, you know, in their time of need.

Connor Passarella (Equity Research Associate)

Great. That's helpful. Thank you.

Operator (participant)

The next question comes from Ryan MacWilliams from Barclays. Please go ahead.

Ryan MacWilliams (VP and Software Equity Research Analyst)

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 a return to stronger growth or continuous sequential improvement? Love to hear your color there. Thanks.

David Wagner (President and CEO)

Yeah, Ryan, that's a good follow-up question. I'll put a little more detail. And the most pointed thing that Patrick and I mentioned was, you know, we're, you know, early, but looking ahead with a focus on growing EBITDA 25% year-over-year. You know, so we think we can continue to deliver operating improvements as we continue to grow. When you look at the ARR, you know, growth, it has come down quarter-over-quarter. You know, 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 in Q1 on our, on our recurring bookings for full performance, which, you know, with our strong renewal rates, will start to drive ARR growth rates later next year, because we're still, you know, lapping some stronger compares with a lot more salespeople through this quarter.

Ryan MacWilliams (VP and Software Equity Research Analyst)

Perfect. And then, Patrick, glad to see the convertible debt retirement, definitely some over the past few quarters. The slides were helpful there. I guess, just for investors, how should we think about the path ahead for Everbridge capital structure and what you plan to accomplish over the next few years? Thanks.

David Wagner (President and CEO)

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'll 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 2022, 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, you know, adjusted EBITDA, you know, to leverage of roughly 3-to-1.

We're gonna get that down to 2 to 1, and by then, it may be right around 1 to 1. So, we don't know what debt markets will look like in late 2025 or late 2026, but we're confident that we're gonna be able to have a lot of different options that are not dilutive to be able to satisfy that remaining obligation.

Ryan MacWilliams (VP and Software Equity Research Analyst)

Appreciate the color. Thanks, guys.

David Wagner (President and CEO)

Yeah.

Operator (participant)

Again, if you have a question, please press Star, then one. The next question comes from Koji Ikeda from Bank of America. Please go ahead.

Koji Ikeda (Director of Enterprise Software Equity Research)

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? You know, any sort of color there to help understand the contraction would be great. Thank you.

David Wagner (President and CEO)

Yeah, it's, it's primarily seats. Of course, you know, we're dealing with over 6,000 customers and, you know, lots and lots of renewals. So the aggregate, you know, the aggregate, you know, in the summary of the down pace accounted for the, the quarter-over-quarter decline in retention. But retention remains, you know, where it was this quarter last year. So it's, it's, you know, it's in a, it's in a good spot, not the better spot that, that we want it in. The contractions in the quarter, headcount reductions are certainly part of it. It's anecdotal, but if there's a concentration, you know, there was a lot of...

There was some consolidation, which, the customers, you know, being purchased and, you know, a little bit maybe more in our digital operations than our core CEM business. But just generally, you know, it added up to the 8 or 100 basis points increased churn in the quarter.

Koji Ikeda (Director of Enterprise Software Equity Research)

Got it. Okay, that's helpful. Then just one follow-up here. When I look at the deck and it's slide, what is 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 in 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. You know, the question here is: What gives you the confidence that these deals, these push deals, will eventually close? Thanks, guys.

David Wagner (President and CEO)

Well, you know, the ones that are at the bottom of the pipeline, I can tell you that, you know, we've got, you know, confidence. We can, we know that the national programs where they're working and, you know, they take time to close, and it's hard to, you know, to control the government's closing timeline, but we know that they're, you know, nationally approved projects. So, you know, that's what gives us confidence. In terms of larger, top-of-funnel pipeline and where the direction goes, you know, next year and the year after, you know, that's where we're just not in a position yet to be guiding on the one-time for next year at this time.

Koji Ikeda (Director of Enterprise Software Equity Research)

Thanks for taking the question, guys.

David Wagner (President and CEO)

Sure thing. Thank you.

Operator (participant)

The next question comes from Kash Rangan from Goldman Sachs. Please go ahead.

Speaker 12

Hey, guys. This is Jacob on for Kash. Thanks so much for taking the question. A lot of good questions ahead of me, so just a couple simple ones from me. The 32 sequential adds 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 basis points, 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.

David Wagner (President and CEO)

I don't have a split on the CEM, but I gave it in the top five. We had three new CEMs and two, two upsells in the, in the top five. I think, you know, it is roughly, you know, 50/50. We could follow up with you on, on, on that, and I'm going to follow up with you. On stock-based comp, you're seeing, beginning to see a real intentional focus, you know, on the management team and, and the comp committee, to, yeah, to just to focus in on, on, on stock-based, comp. And the number I've shared with others is, you know, 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, you know, working towards a 3%-4% net and gross equity burn for the next three years. So 2023 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, you know, several, you know, I think, good reasons. But as that moves through, you know, we'll be moving down into the you know closer to the 4% range.

Operator (participant)

Mr. Wagner, for his closing remarks.

David Wagner (President and CEO)

Well, thank you, everybody, for for participating. I just want to... Lots of good questions on, on the one-time and those are important, and we remain focused on profitable growth and driving the re- and recurring revenue and, and the recurring parts of our business forward. Over the next few weeks, we're gonna be on the road with investors at several conferences, including the Needham Virtual Tech Conference on November 16, the UBS Global Tech Conference on November 28, the Wells Fargo TMT Summit on November 29, the Raymond James TMT & Consumer Conference on December 4, and the Barclays Tech Conference on December 7. 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?

Operator (participant)

Thank you. Thank you for joining us today for the Everbridge third quarter 2023 earnings conference call. You may now disconnect.