Everbridge - Q4 2022
February 22, 2023
Transcript
Operator (participant)
Good morning. Welcome to the Everbridge Inc. fourth quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nandan Amladi, VP of Investor Relations. Please go ahead.
Nandan Amladi (VP of Investor Relations)
Thank you, Anthony. Good morning, everyone. Welcome to Everbridge's earnings call for the fourth quarter and full year 2022. With me on today's call are Everbridge's President and CEO, David Wagner, and Executive Vice President and CFO, Patrick Brickley. Earlier this morning, we issued our earnings release, which can be accessed on the investor relations section of our website at ir.everbridge.com. This call is being recorded. 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 uncertainty. 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 Form 10-Q and Form 10-K, as well as 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 will refer to certain non-GAAP financial measures. A reconciliation of our GAAP to non-GAAP financial measures is included in our earnings press release, which you can find on our investor relations website. Our earnings press release includes highlights from our fiscal year 2022, 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. Good morning, everyone, and welcome to Everbridge's earnings call for the fourth quarter and full year of 2022. I am very pleased with the financial results we released earlier this morning. For the fourth quarter, we achieved revenue of $117.1 million, an increase of 14% year-over-year, adjusted EBITDA of $19.6 million, an increase of $19 million from $572,000 a year ago, and annual recurring revenue of $384 million, which is up $14 million or 4% quarter-over-quarter, our largest quarter-over-quarter increase of the year. I am also pleased that the team executed these strong results while also executing a 10% headcount reduction in the quarter.
We entered Q4 with 1,893 employees and ended the year with 1,713. Our team demonstrated incredible resilience. In addition to the strong operational results, we completed the repurchase of over $300 million in face value of our 2024 Notes, reducing our net debt by approximately $28 million in the quarter. Each of these results demonstrates our commitment to execute against the plan we discussed at our Investor Day in December. Our strategy is anchored on our 20-year commitment to keeping people safe and organizations running by digitizing organizational resilience. We deliver our customers intelligent automation technology that empowers them to anticipate, mitigate, respond to, and recover from critical events. We serve customers of all sizes, but our focus for the next five years will be on larger enterprises and governments with the resources to fully leverage our solutions.
We are focused on driving annual recurring revenue with the aim of achieving $1 billion in ARR over the long term. Our results for the fourth quarter demonstrate strong initial steps on our journey. Entering 2023, we are confident in our baseline 6%-7% revenue growth rate and in achieving $85 million in adjusted EBITDA. Before I go further, I will now turn the call over to our CFO, Patrick Brickley, to provide details on our financial results for the fourth quarter and full year, as well as our updated outlook for 2023. After which, I will return to provide more detailed commentary on the quarter. Patrick?
Patrick Brickley (EVP and CFO)
Thanks, Dave. In fiscal year 2022, we exceeded our annual targets for revenue and adjusted EBITDA, we executed a significant restructuring program which resulted in reductions and realignment of resources. We enter fiscal year 2023 with a leaner cost structure and an experienced leadership team in place to build a profitable organic growth business for the long term. I will now recap our results for the fourth quarter and full year. For full details of our P&L and reconciliation of GAAP to non-GAAP measures, please refer to our press release. For the fourth quarter of 2022, our ARR of $384 million was up approximately 11% year-over-year.
Share of ARR coming from customers over $250,000 ticked up to 44% from 43% in the September quarter. Revenue grew 14% year-over-year to $117.1 million, reflecting our growth in ARR, as well as record deliveries of one-time licenses and services of over $16 million, and a modest stub of inorganic contribution from the Anvil acquisition, which was completed in November 2021. Adjusted gross margin was 74%, reflecting seasonally higher perpetual license mix in the quarter and improving platform efficiency. Adjusted EBITDA was $19.6 million or 17% of revenue, which is a little higher than the mid-teens adjusted EBITDA that we guided to at the outset of 2022, and is an early reflection of the streamlined cost structure with which we enter fiscal year '23.
Cash flow from operations was $4.4 million compared to $10.2 million a year ago. Adjusted free cash flow was $4.6 million. This represents free cash flow adjusted for $4.2 million of one-time cash payments related to restructuring. For the full fiscal year 2022, revenue grew 17% year-over-year to $431.9 million. We enter 2023 with a purely organic growth profile, having lapsed all of the acquisitions that we made in 2021 and having made no acquisitions in 2022. Adjusted EBITDA was $42.1 million or 10% of revenue, compared to $11.2 million or 3% of revenue in 2021. Cash flow from operations was $20.2 million compared to $22.2 million a year ago.
Adjusted Free Cash Flow, which adjusts for $12.3 million in one-time cash payments related to our restructuring program, was $13.9 million. Our net revenue retention rate once again tracked at or above 110%, reflecting continued customer satisfaction, combined with demand for additional Everbridge technology to expand within the existing customer base. Our momentum with large transactions continued in Q4, resulted in trailing twelve-month ASPs that were again above $100,000, and a record 80 deals in the quarter that were over $100,000 in annual contract value. Additional business metrics can be found in our investor relations presentation posted on our website.
We recently improved our capital structure by repurchasing approximately $316 million principal amount of our convertible debt using cash on hand of approximately $289 million, a discount of 8.75% to face value. Approximately $134 million of principal amount of 2024 Notes are still outstanding, which we expect to retire using cash on hand on or before their maturity in December of 2024. We ended the fiscal year with cash and cash equivalents of approximately $199 million. I'll turn to guidance. We are reiterating the guidance for fiscal year 2023 that we laid out in detail at our recent Investor Day.
We expect to grow revenue in the range of 6%-7%, with adjusted EBITDA in the range of $84 million-$86 million, a margin of approximately 18.5%. We don't anticipate any significant growth in headcount during 2023, and as such, we expect that we will be poised to make additional progress towards the Rule of 40 in 2024. Our outlook for the first quarter of 2023 is as follows: We expect revenue in the range of $106.3 million-$106.7 million, reflecting year-over-year growth of approximately 6%. This represents a sequential decrease from Q4 2022, which is attributable to a sequential decrease in non-recurring revenue. We expect adjusted EBITDA in the range of $9.8 million-$10.2 million, a margin of approximately .
As you've seen in our historical performance, our Q1 profitability tends to be pressured by seasonal patterns of headcount-related costs, primarily the timing of payroll taxes. In summary, the actions we undertook in 2022 to refocus our business and restructure our costs have positioned us well for 2023, both financially and strategically. With that, let me hand the call back over to Dave.
David Wagner (President and CEO)
Thanks, Patrick. As our $14 million increase in ARR demonstrates, we had a good quarter in our recurring business. We also had a good quarter from both a new and existing customer perspective. From a new customer perspective, we added 97 total new enterprise customers in the fourth quarter, of which 50 were CEM customers, bringing our total CEM customer count to 307. We generated 80 deals over $100,000 in the period, which is up from 66 in the fourth quarter of 2021. While we had strong deal velocity, we only had one deal over $1 million in the quarter and four over $500,000 in the quarter. This compares to five deals over $500,000 in Q4 last year.
The decline is primarily due to lower perpetual bookings in the quarter. Our top five new customer wins in the quarter included two SaaS customers and three perpetual customers. two of the new customers were in the government vertical, one was in healthcare, one was in retail, and one was in construction development. two of the wins were CEM wins, two were Smart Security wins, and one win was in Public Warning. As noted earlier, our perpetual license bookings, which achieved a record level for the year, were lower in Q4. This fact, coupled with the strong perpetual deliveries in the quarter, led to the lowered backlog, which we expected. Moving on to sales to existing customers. We had another strong quarter of solution expansions. Our top five growth deals were all SaaS deals, and they were all CEM customers.
Two of the five were digital resilience customers, and three were people and operational resilience customers. Two were in the finance vertical, two in pharmaceutical, and one in construction development. Another exciting fourth quarter expansion was the Port Authority of New York and New Jersey, which oversees much of the regional transportation infrastructure, including bridges, tunnels, airports, and seaports for one of the most populous regions in the country. Closing out our commentary on ARR growth, we had our largest ARR quarter-over-quarter growth of the year, driven by our strongest quarterly gross retention rate in over two years. We are very pleased with both gross and net retention in the quarter. Putting new wins, growth deals, and retention together, our ARR in Q4 reached $384 million, up $14 million sequentially, positioning us well for 2023.
The share of total ARR coming from customers of 250K or more ticked up slightly to 44%, reflecting the nice growth in agreements with existing customers. In addition to our go-to-market successes, we continue to focus on simplifying our product offerings and making strategic product integrations in order to increase our efficiency and velocity to improve profitability. From an innovation perspective, we recently introduced a new AI-powered situational awareness tool, DigitalOps Insights, to our Digital Operations solutions bundle. This solution enables incident commanders and resolvers to gain deep visibility into IT service disruptions, and it helps organizations save time, maintain customer satisfaction, deliver continuous service uptime, and innovate. From an implementation perspective, we are very proud of the fact that we successfully deployed the Norwegian Public Safety System in December that we were just awarded in September.
Along with the Norwegian government and our partners, we implemented this system in record time, strengthening our reputation as the undisputed leader in this market. This public safety solution will help keep Norway's more than 5 million residents and nearly 7 million annual visitors safe and informed in case of an emergency. Norway is an innovative country and one of the first countries in the world to implement location-based technology to inform and protect its people. We accomplished all of the above while meaningfully improving our profitability and building our leadership team for the future. We added several key individuals to the leadership team and to our board this past quarter. Let me briefly introduce you to each of them. In December, Noah Webster joined as our Chief Legal and Compliance Officer and Corporate Secretary.
He has over 20 years of legal experience, including negotiating agreements, security, compliance, litigation, and M&A. Noah is responsible for leading and managing all legal, compliance, and risk management programs at the company, as well as our ongoing ESG efforts. I've known Noah for several years from our time together at Zix, and I am incredibly excited to have him on board with us. In January, we announced the appointment of Bryan Barney as our new Chief Product Officer. Bryan is responsible for leading Everbridge's global product development strategy, strengthening our platforms, and integrating our products. His extensive background in enterprise software and cybersecurity leadership positions, working for companies like RedSky, Symantec, Sophos, and McAfee, position him well to lead our product vision. Last week, we announced the appointment of John DiLullo as our new Chief Revenue Officer.
John is an extraordinarily customer-focused leader who brings out the best in his teams and works to align the entire organization in support of the customer. He also brings extensive international experience to his role. John and I worked together both at Zix and Entrust. At Everbridge, John will spearhead our go-to-market motions and focus our sales teams on growth and improving our overall go-to-market efficiency. We also added two new board members, David Benjamin and Rohit Ghai. Both bring additional skills and experiences to help shepherd our company through its next phase of growth. David Benjamin is currently the Executive Vice President and Chief Commercial Officer for Blackbaud. His international experience and track record in accelerating public companies' commercial offerings will be invaluable to our go-to-market expansion efforts.
Rohit Ghai is the CEO of RSA Security and brings a deep cybersecurity understanding to Everbridge, which will further bolster us in one of our top focus areas of board governance and risk management. Rohit also has a strong product management background delivering technologies to market at scale, which will also be a valuable addition. These leadership and board appointments further strengthen us as a team. In summary, we delivered a solid financial performance in Q4 as we continue to make progress on our long-term financial goals. We are implementing the strategy outlined during our Investor Day in December. We are entering the year with a strong foundation to achieve our goals for 2023. We are building a foundation focused on delivering consistent, profitable growth on our way to $1 billion in annual recurring revenue.
I look forward to updating you on our progress in the coming quarters. We're now ready to open the call for questions. Anthony?
Operator (participant)
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question will come from Alex Sklar with Raymond James. You may now go ahead.
Alex Sklar (Analyst)
Thanks. David or Patrick, I wanna ask how you're thinking about bookings velocity for 2023, given the macro as part of that 6%-7% revenue guide outlook. Should we think of ARR or RPO growth that should track kind of that revenue growth framework? Thank you.
David Wagner (President and CEO)
That's a good question. You know, the first thing I think about is in terms of the bookings is the normal seasonality. We're entering Q1, which tends to be our lower quarter of the year. When I think about it, I think about the ARR velocity that we're generating in these deals, $100,000 and below. Those are things that really give me, you know, confidence looking forward. You know, I combine that with, for me, the highlight of the quarter personally, was that gross retention rate returning to its highest level in two years. From a bookings velocity perspective, we're really focused on the recurring bookings.
Our pipeline for perpetual deals, you know, remains solid. As you know, those large government deals are more inconsistent in their timing.
Alex Sklar (Analyst)
Okay, great. I guess, Patrick, it's kind of a somewhat of a related question, but given the increased focus on CEM, can you help frame kind of the embedded growth in the 2023 outlook that you're thinking about from CEM versus maybe mass notification or other parts of the business?
Patrick Brickley (EVP and CFO)
Alex, you see in the results from Q4, CEM is really helping to propel the business. This evolution of the ways in which businesses approach resilience is driving a more digitized approach, and we're the leader in the space. We had a great CEM quarter. We're continuing to focus on the platform adoption and moving customers up the CEM stack. Mass notification is also very important, but that's a piece of CEM, and we really wanna be focused on CEM as we move forward.
Alex Sklar (Analyst)
Okay. Thank you both.
Operator (participant)
Our next question will come from Matt Stotler with William Blair. You may now go ahead.
Matt Stotler (Equity Research Analyst of Software and SaaS)
Hey, good morning. Thank you for taking the questions. Maybe, first on the CEM net adds, obviously, you know, very strong in the quarter, above 50, nearly 2x anything you've seen prior in terms of, you know, quarterly adds and acceleration in terms of the year-over-year growth rate. Would love to get some more color on, you know, what's working there from the CEM standpoint. Is this something that's attributable more to Q4 seasonality, or is this kind of structurally higher capacity when you think about the ability to grow the CEM cohort, with the recent changes you've made to the business?
David Wagner (President and CEO)
That's a good question. You know, those adds are, you know, probably the focus area of our go-to-market strategy, especially as we're aligning into 2023. We're paying particular attention to propensity models, account-based marketing for new CEM wins, as well as driving the expansions of our existing point solution customers up into CEM. You know, one of the things that worked well in Q4, as I noted before, the migrations of the Risk Center customers into CEM, that program kicked in in Q4. We expect that to be a steady contributor throughout the course of 2023.
You know, related to that at a more macro level, you know, I'm not so concerned about, you know, CEM versus new customer wins. We know from experience that once we get a customer win into the Everbridge family, the expansion, you know, happens as they mature their resilience strategy. We, you know, we remain, you know, also excited about point solution wins that will grow into CEM over time. It's a really important indicator. You know, I won't be surprised if we have, you know, quarters that move around a little bit as we continue to execute the strategy. I'm probably answering somebody else's question.
You know, one of the things I think you were asking about is just overall capacity, for delivering, you know, CEM deals in particular, but deals of all kinds. We highlighted in November the fact that we did take some sellers out of the organization early mid Q4. We talked about that 6%-7% allowing for, you know, some reduction in capacity, theoretical capacity, from those sellers. You know, as we lean into 2023, we're really focused on retention of everybody in the company, of course, but those quota-bearing reps, that retention, the expansion of capacity that's gonna come through tenure.
We're making good progress on that, you know, OKR as we, you know, kinda hit the midpoint of Q1. That's a really long answer to a straightforward question. Does that help you, Matt?
Matt Stotler (Equity Research Analyst of Software and SaaS)
Yeah, no, that's super helpful. I appreciate that. As a follow-up, you know, obviously, at this point, you mentioned that you're substantially done with the workforce restructuring, at least we've talked about so far. When you look at the technology side of things and the continued efforts to integrate everything, both in back and the front end, and kinda continue moving towards this true platform model, could you give an update on where you are in that process and maybe the updated timeline for completion on that front as well?
David Wagner (President and CEO)
Yeah, there are... You know, I'll hit that in two ways. You know, one, I'm really pleased with the teammates who worked with me in that brief interim, chief product officer that I did with, along with, Happy Wang, who you met, at Investor Day. also very pleased with the addition of Bryan Barney, to the leadership team. His experience, you know, particularly at McAfee, but, you know, also, you know, the other companies, where he's been, he has so much pattern recognition from those experiences, with building platforms, incorporating acquired technologies.
He's early in his journey, but I just tell you, I'm already, you know, really impressed with how he's digging into the technology, digging into the platform, architecture and, you know, further aligning the team to enhance our velocity. We still have, you know, a lot of wood to chop, but I am really confident, you know, six months into my journey and six weeks into Brian's journey, that we've got the right team and the right things moving forward from a product platform perspective.
Matt Stotler (Equity Research Analyst of Software and SaaS)
Great. Thank you very much.
Operator (participant)
Our next question will come from Brian Colley with Stephens. You may now go ahead.
Brian Colley (VP of Equity Research)
Good morning, guys, and thanks for taking my questions. Over the last couple of quarters, your messaging has kinda suggested the macro wasn't really having a material impact on the results. I'm curious, you know, whether or not that was still the case in Q4 and today, and kinda how the sales pipeline trended throughout the quarter, and how you would characterize the demand environment today.
David Wagner (President and CEO)
You know, that's a really good question. You know, to me, the key indicators, you know, from the script were, you know, one, that increasing velocity in the 100K deal range. You know, the interesting, to me, you know, other number was the four deals over 500K versus, five a year ago, and actually, you know, down quite a bit from the Q2, Q3 quarters. That larger deal, velocity, you know, slowed a bit, in the quarter. The third piece that I'm really, you know, to get to me, the highlight of the quarter was the gross retention number, getting back to a multiyear high.
We, you know, it's 90 days later, we remain really confident in the 6%-7% baseline growth, which we built, as you'll recall, you know, not expecting an overly robust outlook, as we look forward into 2023.
Brian Colley (VP of Equity Research)
Got it. Then for a follow-up, I was wondering if you could just provide an update on where you are with regard to, you know, divesting or end-of-lifing the non-core assets that you talked about, the remaining $4 million-$8 million of ARR, and how much of that or how, you know, how much of that impacted Q4 2022, and are you including any revenue from those assets in the Q1 guide and for the full year as well?
Patrick Brickley (EVP and CFO)
Hey, Brian, it's Patrick. There was no impact in Q4. We do have a divestiture under LOI that we are on track to execute shortly here over the next two weeks, and that's a few million dollars of ARR. We have two smaller opportunities that we're looking to execute on by the end of the quarter. Throughout the year, we'll continue to work through the portfolio analysis. As Dave mentioned, Brian is onboarding, applying a fresh set of eyes, and I anticipate throughout the year, we'll continue to have opportunities that we'll take advantage of in order to find better homes for certain assets.
Our guide, you know, it does anticipate, you know, that there could be some, you know, potential headwind related to divestiture, but these are all relatively small. That was part of the bridge that we provided at the Investor Day, from 2022 growth to the guide of 2023, revenue growth of 6%-7%. There, there are, there is $4 million-$8 million of ARR that is up for potential divestiture that we've identified today, and we've got just shy of half of that under LOI as we speak.
Brian Colley (VP of Equity Research)
Okay. Got it. Well, thanks for the time, guys.
David Wagner (President and CEO)
Yeah. Thank you, Bryan.
Operator (participant)
Our next question will come from Michael Turrin with Wells Fargo Securities. You may now go ahead.
Michael Berg (VP)
Hi. You got Michael Turrin for Michael Turrin. Congrats on the quarter. I want to dive into what's baked in the guidance, specifically your Rule of 40 implied for the year is a tick under what you just performed in fiscal 2022. Maybe walk us through if there's any level of conservatism, whether it's from macro or sales pipeline or even on the cost side, if you could walk us through. Thank you.
David Wagner (President and CEO)
You know, the biggest contributor to that difference is the acquired revenue, so the inorganic growth that we had in the revenue number last year. There's not an exact, you know, pinpoint on that, but, you know, that's where it kind of walks you through the 21, 19, 17, 14% ending, you know, revenue growth rates. That's kind of the first big, you know, jump off is, you know, we're entering 2023 with a purely organic, you know, growth rate. Of course, we built in, we just talked about the $4 million-$8 million, of which, you know, $4 million or just under $4 million has already been, well, it's under LOI. It's out of the ARR number.
It's out of the revenue guide. The remaining, you know, would be 0-5 in our, in our, you know, what could come out for future divestitures. As Patrick said, those would be small. You know, we have the, you know, lap and the large customer, so we, you know, have that detailed waterfall from the Investor Day that kind of brings you back. I guess the other one is we're planning for flat one-time perpetuals, software and SaaS year-over-year. The combination of those five factors, you know, brings that waterfall together from last year's overall growth rate to the baseline 6%-7% we have guided for 2023.
Patrick Brickley (EVP and CFO)
Just real quick on the cost side, the restructuring actions that we took already during 2022 will improve our profitability in 2023 relative to 2022, and we'll continue to be optimizing the business throughout 2023, and that'll set us up for continued improvement on profitability we expect as we head into 2024. We've taken a lot of cost actions that'll improve profitability, cash flow. As Dave said, we have to work through some comps on revenue, but you see with the ARR growth that we do think we're moving in the right direction for the long term.
Michael Berg (VP)
Thank you. Then a quick follow-up on ARR seasonality. You know, we have the last four quarters now. In terms of net new ARR additions, can we think of these type of levels being the typical seasonality for ARR progression throughout the year? Looked pretty similar from Q1 to Q2 and Q2 to Q3, then nice big jump in Q4. Thanks.
David Wagner (President and CEO)
Q4 is, you know, seasonality a good quarter, right? You know, we're pleased that we had the highest quarter-over-quarter growth of the year. You know, those are, you know, those being the last, you know, four quarters, printed, the 2022 quarters, you know, those are the only, you know, quote, unquote, "good numbers" we have, you know, going forward as we did the, you know, the going back and re-recreating the ARR numbers. We did not go back into with the level of, you know, time back into the prior year. You know, we're gonna be, you know, having good year-over-year compares beginning next quarter.
At the highest level, you know, we would expect the Q4 bump to be the highest kind of quarter-over-quarter bump of the year. As you know, ARR, it should be a pretty stable, you know, indicator of the predictability of the business as we move that steadily upward throughout the course of the year.
Operator (participant)
Our next question will come from Terry Tillman with Truist. You may now go ahead.
Terry Tillman (Managing Director)
Yeah, thanks for taking my question and follow-up. Maybe Dave, for you, in terms of the Risk Center migrations, it sounds like that was kind of a newer kind of play or strategy that was unfolding and may have benefited 4Q. Could you give us a sense on just the size and scope of that opportunity as we progress through 2023? And is that gonna be something that lingers in a positive way into 2024? Just a little bit more on how the Risk Center migrations could help some of the KPIs still in 2023.
David Wagner (President and CEO)
Yeah, that's a good question, Terry. We talked about that last quarter, the total population, you know, entering last quarter was 175 target customers. We successfully migrated about 10 of them last quarter. That's the pace we expect for the next couple quarters. As we are digging into those customers, there's a little more reticence to move from on-prem to the cloud than we had expected. We're gonna focus on moving that cohort, you know, with retention goal number one, growth goal number one, and, you know, cost savings of getting them gone as objective number three.
I expect that to be a pretty steady, you know, opportunity to move customers and drive ARR growth as those moves that through the course of 2023. I also do expect it to linger into 2024.
Terry Tillman (Managing Director)
Okay. Got it. Patrick, you know, maybe this is something I missed, and it's a really simple question, simple answer. In terms of the total mix of business that's perpetual license, what's the assumption for 2023 as opposed to what happened in 2022? Thank you.
Patrick Brickley (EVP and CFO)
Yeah. Hey, Terry. Right now, we're anticipating about flat in 2023 relative to 2022. You know, 2022 was up about 20% from 2021. It was the delivery of non-recurring licenses, as well as a lot of our services, which are non-recurring. We had record amounts in 2022, specifically in Q4. We don't anticipate, you know, setting new records as we enter 2023.
Terry Tillman (Managing Director)
Okay. Thank you.
Patrick Brickley (EVP and CFO)
Yeah.
Operator (participant)
Our next question will come from Ryan MacWilliams with Barclays. You may now go ahead.
Ryan MacWilliams (Software Equity Research Analyst)
Thanks for the question. Good to see strong wins in CEM and larger customers, along with the sequential improvement in ARR. Patrick, how should we think about the year-over-year growth in ARR for 2023 as it relates to the revenue guide?
Patrick Brickley (EVP and CFO)
Hey, Ryan, we don't guide to ARR, but we are, as we continue to focus the business, on, as we mentioned at our Investor Day, on Critical Event Management, and on our sort of BHAG of getting 1,000 customers to $250 ARR or greater, and working with their existing base, to move them up the CEM stack. We wanna see ARR growth in double digits. As we work through, you know, headwinds in terms of lapping the non-recurring revenue, you know, we anticipate that that'll translate into similar pace of revenue growth, but that's gonna take a number of quarters as we work through all of that.
Ryan MacWilliams (Software Equity Research Analyst)
Excellent. Just on the free cash flow side, anything to think about as we move past the workforce restructuring or maybe, just any differences of how the free cash flow line could play out in 2023 versus 2022?
Patrick Brickley (EVP and CFO)
Yep. Yeah, no major differences. The timing in 2022 was a little unique in that in Q3, we had a lot more operating cash flow than we usually do in Q3, and we some things happened in Q3 that would typically happen in Q4. In terms of the full year, you know, the results was what we had anticipated, and 2023 will be higher. The restructuring cash outflow will be almost entirely wrapped up in the first half of 2023. And we'll continue to call that out so that you have clear line of sight to it. Beyond that, as our adjusted EBITDA grows, our operating cash flow will grow, and our free cash flow will grow.
You know, the major differences between operating and free cash flow will continue to be the capitalized software development. That's something that will remain relatively static in 23 compared to 22.
Ryan MacWilliams (Software Equity Research Analyst)
Appreciate the color. Thanks, guys.
Operator (participant)
Our next question will come from Parker Lane with Stifel. You may now go ahead.
Matthew Kikkert (Equity Research Associate)
Hi, this is Matthew Kikkertl on for Parker. Thanks for taking my questions. To start, you mentioned record gross retention rates despite reducing headcount. I'm just wondering kind of what led to that combination of outcomes, and you know, not seeing a decline in that rate. Do you expect that to continue into 2023?
David Wagner (President and CEO)
Yeah, that's a great question, Matthew. Thank you. It was, you know, not an all-time record but highest in two full years. You know, I really point the primary piece to the, you know, the board's decision to pause material M&A, and then our execution of the leadership team of really getting our arms around, you know, every customer renewal, whether it, you know, is legacy Everbridge or, and, you know, newly acquired. I do expect. I think that's the third important piece is that the customers are using our solution, you know, liking it and retaining it.
I think, there were just a couple of, maybe 100 basis points of execution improvement the team was able to gather and as they paused material M&A and got the acquired cohorts really, you know, in command in the customer success motions that the company has used for years around its core cohorts. We had some then some real specific great execution by the team that I'm pleased about, but I do expect us to be off the lows we saw mid last year. I don't expect us to be going back there.
I leave the Q4 number, you know, extremely pleased with that and expecting, you know, improvement from where we were, you know, obviously Q2 and Q3 last year to continue.
Matthew Kikkert (Equity Research Associate)
Got it. Secondly, is there any specific product in the portfolio you wanna call out that kinda led to your growth in the quarter, or was it just general excitement in the CEM portfolio?
David Wagner (President and CEO)
You know, the one that bubbled up and when I gave those top five existing and top five new, the digital resilience had, you know, a strong performance, you know, in the quarter. I was pleased by that. You know, the overall CEM portfolio and that broader need of our customers to, you know, to digitize enterprise resilience, you know, that's the core driver. You know, inside the portfolio, I was pleased with the digital resilience, especially on the new win side in the quarter.
Matthew Kikkert (Equity Research Associate)
Terrific. Thank you very much.
Operator (participant)
Our next question will come from Michael Latimore with Northland Capital Markets. You may now go ahead.
Michael Latimore (Managing Director and Equity Analyst of Artificial Intelligence)
All right. Great. Thanks. Yeah. In terms of the CEM deals, I think you may have given this, but how many came from new versus existing customers? You know, what does the pipeline look like for CEM, kind of new versus existing?
David Wagner (President and CEO)
We don't break it, new versus existing. I did give a kind of a little, you know, lean back towards Terry's question on, you know, the 10 that moved from, you know, RC9 to CEM to those migrations. We're being real intentional. If you remember the wheel from Investor Day, that second quadrant, we now have the 307 existing, which is great, and then that next cohort being those migrations. But still down on that lower left-hand side, new customers are important. We had two of our top five sized wins in the quarter were CEM wins. I think that's good. Obviously, the perpetual deals are going to tend to be, you know, the bigger deals that we'll be calling out in the top five.
We had some nice large new customer wins, and of course, that momentum in the 100K deal range was also a contributor. You know, over time at a, at a big average, again, if you remember the Investor Day going around that wheel, you know, we would be expecting, you know, 2/3 to 80% of the CEMs to be growth of existing, you know, with the remainder coming in through the new customer acquisition. You know, that will, again, vary quarter-over-quarter, but that's the high level five-year pattern that we're expecting.
Michael Latimore (Managing Director and Equity Analyst of Artificial Intelligence)
Yep. These record CEM deals, you know, presumably they get the full reflection in revenue in the first quarter. Does that suggest maybe first quarter ARR growth, you know, sequentially could be as good as what you saw in the fourth quarter?
David Wagner (President and CEO)
I wanna make sure I have that. The CEM deals, they do get deployed relatively quickly. They do go into the ARR snowball and do begin to amortize out, you know, relatively quickly. It's those perpetual deals that, you know, can have, you know... The Norway one was a really strong example where we closed in September and had it fully implemented by December. That's probably more, you know, that's kind of the exception, not the rule. It's more 180 days on those perpetuals. Yeah, the, you know, you guys have all been around SaaS businesses a long time. You know, the CEM ones are gonna go into ARR, and the ARR is gonna come out into revenue, you know, with very little, with very little delay.
Michael Latimore (Managing Director and Equity Analyst of Artificial Intelligence)
Okay. Just last, you talked about, maybe a fewer of the $500,000 deals as a reflection of the macro perhaps. What about just sales cycles generally? Any change in sales cycles?
David Wagner (President and CEO)
No. Like I said, the velocity was strong, I look at that, both the CEM number and the over $100K number as indicators of the underlying velocity. In this one quarter, we were down, just it's one quarter and it's not a huge number, but we were down from five deals over $100K in the quarter a year ago to four. Oh, I'm sorry, over $500K, from five deals down to four. That, I'm just putting all that in the shaker.
Michael Latimore (Managing Director and Equity Analyst of Artificial Intelligence)
Okay.
David Wagner (President and CEO)
Really good gross retention, still good, you know, very good velocity in the mid-size larger deals. In, again, in this quarter, a little lower on the large deals.
Michael Latimore (Managing Director and Equity Analyst of Artificial Intelligence)
Okay. Great. Thanks.
Operator (participant)
Our next question will come from Koji Ikeda with Bank of America. You may now go ahead.
Koji Ikeda (Director of Enterprise Software Equity Research)
Hey, guys. Hey, David. Hey, Patrick. Thanks for taking the questions. I wanted to ask you a question or a follow-up on the sales capacity commentary earlier, you know, just taking into mind the reduction in capacity last year affecting growth this year. It sounds like the demand in CEM and sales execution was pretty strong. I guess the question is, you know, what are you looking for from a demand perspective this year where you may accelerate the pace of expanding sales capacity from here?
David Wagner (President and CEO)
Yeah, so that's yeah, that is a really good question. You're I think you're asking it the exact way that we're thinking about it as a leadership team and a go-to-market team. You know, we took out quota-bearing reps with, you know, I guess, with intentionality and with caution. The subtractions were largely in the reps who are focused on the smaller, you know, on the smaller deal sizes, you know, which would potentially impact, you know, N number of new customers, you know, especially as we, you know, sales-generated pipeline for those reps, comes out quarter-over-quarter.
The real opportunity here in the first half is, you know, arresting the departures and improving rep retention, you know, which, you know, where we are now, six weeks into the quarter, as well as from beginning July last year, we're making really good progress on that rep retention. That's thing one to address, and that provides, you know, all of the expansion of capacity that we'd be planning for. As we look forward, we want to grow that capacity. We want to be back into hiring quota-bearing reps as we turn the page later this year into next. We're gonna be evaluating those decisions carefully based on how our sales efficiency progresses throughout, you know, Q1, Q2, and into Q3.
Koji Ikeda (Director of Enterprise Software Equity Research)
Got it. Thanks, David. Just one follow-up here. Looking at the 1Q revenue guide, you know, it is down sequentially. You mentioned gross retention back to the highest in two years. Also mentioned a couple of planned divestitures, so understand all of that. Maybe help us understand any additional puts and takes beyond that that would cause, you know, 1Q revenue to be down sequentially. Anything particular call out from.
David Wagner (President and CEO)
Yeah.
Koji Ikeda (Director of Enterprise Software Equity Research)
FX perspective?
David Wagner (President and CEO)
I'll let-
Koji Ikeda (Director of Enterprise Software Equity Research)
Yeah, yeah.
David Wagner (President and CEO)
Yeah.
Koji Ikeda (Director of Enterprise Software Equity Research)
Thank you.
David Wagner (President and CEO)
Well, I'll let Patrick take the details. You know, we've been disclosing, I think beginning at Q3, the split between revenue in the quarter, you know, rounded to the nearest $1 million between recurring and perpetual. When you look at that stacked bar chart, we had a really strong Q4 and a pretty strong Q3. You know, that combined with the lower perpetual Q4, that's the biggest difference. You're going to see steady growth in our recurring revenues and seasonality in the perpetuals.
Patrick Brickley (EVP and CFO)
Yeah. Hey, Koji, it's Patrick. In the 117, there was well over $16 million of one-time revenue in Q4. Q1's just not gonna have anywhere near that amount. You see with the ARR growth that the subscription, the recurring business is, you know, continuing to grow. That one time set of revenues is very lumpy. You'll see in the Form 10-K that we anticipate filing by the end of this week that in 2022, that one-time revenue amounted to over $35 million. It's, you know, on the one hand, 35 out of 432, it's not a huge %, but it is lumpy and it creates, it can create some noise.
Just as you saw in the transition from Q4 2021 to Q1 2022, a lot of times those one-time deliveries, they land in Q4, and they don't land in Q1. We had a sequential decrease coming into 2022, and we'll have another one coming into 2023.
Koji Ikeda (Director of Enterprise Software Equity Research)
Got it. Thanks, guys. That's super helpful. Thank you so much.
Patrick Brickley (EVP and CFO)
Yeah.
Operator (participant)
Again, if you have a question, please press Star then One. Our next question will come from Kash Rangan with Goldman Sachs. You may now go ahead.
Kash Rangan (Managing Director)
Hello, thank you very much, David and Patrick. David, question for you. It's been probably, what, seven, eight months since you joined as CEO. That's been enough time to conduct an extensive review, and congrats on the quarter, by the way. I'm curious to get your take on what elements of the old strategy were actually working that you expect to harness and invest in, and what are the elements of the new strategy that you hope to implement that will get the path to the $1 billion in revenue that you have clearly outlined? That's good stuff.
David Wagner (President and CEO)
Yeah.
Kash Rangan (Managing Director)
Thank you so much.
David Wagner (President and CEO)
Yeah. Thank you, Kash. I mean, yeah, hopefully it's coming through, you know, really loud and clear that it's building out this recurring revenue and focused on the value creation that comes from that, you know, is, you know, is the difference, or, you know, is really, to me, the key strategic shift that we've made. I remain really bullish. I say that, and I remain really bullish on our Public Warning, public safety, and Smart Security products. Those have, you know, really fantastic value. There's definitely synergy with the rest of the portfolio. You know, thing one is focusing on that recurring revenue and make sure that's the focus.
Thing two is strategically bringing together, you know, in, you know, in the right way, the full suite of our products. You know, to me, the good thing, well, you know, the bad thing about what the company has done is just a lot of M&A, you know, relatively close together. The good thing is that, you know, everything, you know, hangs together, the customer demand, the customer, you know, synergies.
I'm seeing how we're going to be able to bring this together, retaining our leadership position with the broadest set of solutions in the CEM space, with this modest divestitures that we've talked about, the $4 million-$8 million, which should drop to $0-$4.5 million or so, with this divest run under LOI that we pulled out. Anyway, to me, it's that big billion-dollar ARR wheel and growing those customers through cross-sell migrations and new customer adds and just staying really focused on that.
Kash Rangan (Managing Director)
Got it. Really well-balanced business model. Thank you so much.
Operator (participant)
This concludes your question and answer session. I would like to turn the calls back over to David Wagner for any closing remarks.
David Wagner (President and CEO)
Well, again, I thank you all for participating with us today, and I look forward to, you know, speaking with many of you throughout the course of the quarter and updating you again after Q1 is complete. Thank you all very much. Have a great day.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.