Everbridge (EVBG): LBO Analysis

   (Disclaimer: Excel file attached below the post) 

As I mentioned before in one of my other posts, I am subscribed to almost all of the fathomable applications and websites; and I am bombarded every morning with multitude of notifications and newsletters keeping me abreast of everything happening in the financial and economic stratosphere. One such newsletter is from an organization called Private Equity International (PEI), and I came across Thoma Bravo's bid to take Everbridge private on one its correspondences. Here is a snapshot of the press release:

Being that I am fascinated by IB and PE transactions, I jumped at the opportunity to analyze the deal and see if this could prove to be a lucrative transaction for the sponsors as well as lenders and Everbridge. I started rummaging the company's financials and was fortunate enough to find the latest- released on 02/26- 10K and 8K on the company's investor relations page. I will begin the analysis with an overview of the company's operational history- because I believe it is paramount to understand how the company has faired in the past in order to understand what the future holds- and then move onto the exercise. 

Past Performance

Before we go any further, I believe we should look at the company's operational performance in the public eye and inquire how it circumnavigated the trials and tribulations of the markets. Here is a snapshot of the company's performance over the past five years, which coincidentally is its entire length of trading, and how it weighs when compared to certain indices. 

There are a couple of big notions that instantly stand out when we look at the map. To begin, we can all see the explosive growth in the share price before the pandemic and especially leading to it and during it, which if you understand what the company does, is not at all surprising or riveting. Secondly, we can also take notice of the stock's almost instantaneous tumble, and the fact that it has not been able to recover, which again, you'll understand once we go over the company's business and its model. Looking at simple charts might seem futile if you don't understand the company or its operations and industry, and so to put the above posted chart in more perspective, I think we should try and understand the story behind the company's inception, its customers, and business model as well as its offerings and products. 

Overview

Everbridge is a global software company that uses automation and technology to enable its customers to anticipate, navigate, respond to, and recover from critical events. If we pontificate about the pivotal part of any crisis, it is the frictionless and smooth flow of accurate and reliable information, and that is where Everbridge's platform and services come in. It helps organizations and companies with storing and allocating multiple types of threat and incident data and analyze and determine whether their employees, partners, and suppliers could be adversely impacted, and if they are, what the possible resolutions or workarounds might be to keep them safe and to keep operations running effectively. It also helps with delivering relevant and pertinent information through modern technology that not only enables efficient communication in times of distress but also ensures that the information is tailored and for the intended party. The Covid outbreak has led to a WFH (work from home) environment and has made keeping track of employees and workers increasingly difficult for organizations; and so it has become equally imperative for companies to keep track of employees that are working remote or travelling and assess and communicate with the ones that they think could be impacted by an event. 

Everbridge is primarily a B2B company, that much should have been clear from the description above, and as such, sells its platform and applications "...to customers of varying sizes, including enterprises, small businesses, non-profit organizations, educational institutions and governmental agencies." Given the nature of the company's industry and operations, its customers are from all facets of the business world, from having relations and customers in industries such technology, financial services, and manufacturing to industries such as retail, higher education, and professional services. Some of the key benefits of the company's solutions and competitive strengths include the following:

• Comprehensive, Enterprise-Scale Platform
• The core of the company's offerings is its Critical Event Management platform; it provides multiple layers of redundancy to assure uptime and delivery of communications regardless of volume or throughput requirements. Everbridge's platform is unique in the sense that it is easily scalable, secure, and reliable. 
• Digital Transformation
• Company's services also help organizations and companies in digitizing and automating their operational resilience. Customers use its solutions' situational awareness capabilities to know where their people are, how to reach them, and how to ensure that they are protected during endangering times.  
• Aggregated Threat Data and Analysis
• Company's software gathers information from social media feeds and trends, from weather feeds and from public safety and threat data among others. The data is geo tagged and mapped and threat and incident data can be used to trigger simple or complex workflows. 
• Dynamic Location Awareness
• Company's services allow organizations and companies to get in touch with their employees based on their last known location rather than static locations such as work or home address. This approach quickly enables companies to ascertain which individuals may be affected by a threat and how best to aid and abet them. 
• Multi-Channel Visualization
• There are multitude of ways to get in touch with someone in times of stress, and to be able to use multiple platforms and channels at one time could prove life saving, and so Everbridge's platform allows multi-channel information to be displayed side-by-side so that different facets of a critical event can be monitored simultaneously. 

The above mentioned benefits along with a host of other abilities led to the company's explosive growth from early '20 to the tail-end of '21, due to obvious reasons. The company continuously invests heavily in building its brand name and position as the global provider of resilience solutions with critical event management, communication and safety applications. 

Growth Strategy

Everbridge has been investing, similar to any growth company, private or public, heavily in its growth, and some of the key elements of its growth strategy are as follows:

•  Accelerate Acquisition of New Customers
• One of the obvious avenues of growth is acquiring new customers. Company offers applications and services that have varied uses and could be utilized in both traditional and unorthodox manners and the management is laser focused on utilizing multiple paths of entry into new customers.  
• Further Penetrate Existing Customers
• Another path to growth for the company is further penetration and enhancement of its existing customers. Everbridge offers a software, platform and a host of other applications, and the company is invested in expanding its relations beyond one department to other sections of its customers as well as elongating the average length of contract for its existing customers. 
• Expand Partner Ecosystem
• Everbridge enjoys a healthy relationship with its partners and system integrators and potential expansion of said ecosystem and partnerships also plays a huge part in its growth. 
• Introduce New Platform Improvements and Innovation
• One of the most crucial elements of SaaS or for companies such as EVBG is to continually invest in its existing services and offerings and consistently improve and innovate, and Everbridge has been doing just that. Company is heavily vested in catering its applications and platform to the ever developing and evolving safety and operational challenges. 
• Expand Globally
• Critical or existential events are not bounded by borders or political and ideological affiliations and so one of the avenues of growth is to expand globally to other countries and foreign registered organizations and companies in regions such as the Middle East, Europe, and Asia.
• Opportunistically Pursue Acquisitions
• Another avenue of growth for the company could be opportunistic acquisitions in order to add features and functionalities to its platform in its current condition as well as acquiring new customers and penetrating new markets and geographies. 

Enough with the 10K-ish jargon, I believe we should move towards the crux of this analysis, the numbers. 

Historical Numbers

Before we can move forward to the LBO analysis, I believe that we need to look at the company's historical numbers in order to understand its past growth, its costs, and its cash flows, and in order to do that, here is a snapshot of the company's historical numbers for the past three years.

As mentioned before, even though it is publicly traded, Everbridge is still very much a growth a company and as such, it has been operating in negative territory for pretty much its entire operational history. Just looking at the past three years, we can see that the company's operating margins have been -20%, -19%, and -13% for FY '21, '22, and '23, respectively. We can also see the seismic impact that its costs, both direct and indirect, have on its revenues; company has historically reported costs of revenue margins around ~30% for all of the observed three years as well as 84%, 88%, and 89% of operating expenses margins for FY  '23, '22, and '21, respectively. At first glance, the company is either investing a lot into its operations in terms R&D, sales and marketing and SG&A or the management has not been able to control the costs with growing revenues, I, personally, believe that it is the former rather than the latter. Furthermore, Everbridge reported Net Income of -$47MM (-10% margins), -$61MM (-14% margins), and -$94MM (-25% margins) for FY '23, '22, and '21, respectively. When assessing an LBO transaction, EBITDA is more often than not a crucial metric and so perusing through the company's 8K, we see that Everbridge reported an adjusted EBITDA of ~$71MM for FY '23, yielding EBITDA margins of 16%. 

Some additional thoughts that I had when going through the data entry phase of this exercise are that (i) company's revenue growth is not exponential, in the sense that it has not been consistently growing for the past few years, but rather it is unpredictable; we can see that the company reported a 17% growth for FY '22, but then only witnessed a mediocre growth of 4% for FY '23; (ii) even though the top line growth has been fluctuating for the past few years, the costs (both costs of revenue and operating expenses) have stayed flat with minute oscillation; (iii) Everbridge has had consistently high interest expense ($2.7MM, $5MM, and $36MM for FY '23, '22, and '21, respectively) over the course of the last three years; and (iv) the company reported debt of $359MM and a cash and cash equivalents balance of $125MM for FY '23.

Moving on to its Cash Flow statement, the company reported $72MM, $20MM, and $22MM in cash from operating activities for FY '23, '22, and '21, respectively. Due to the nature of the company's operations, Everbridge reports two different types of capital investments: purchases of property and equipment ($5.2MM for FY '23) and additions to capitalized software costs ($16MM for FY '23). With all said and done, the company reported $125MM, $201MM, and $492MM (high due to debt raised) end of period cash for FY '23, '22, and '21, respectively. With historical numbers out of the way, lets move onto the analysis. 

LBO

As mentioned at the start of this post, Thoma Bravo is paying $28.60 for every share of Everbridge, yielding a $1.5BB cash payment for the transaction. I could not get any more details on the funding and so I will proceed with assuming two separate scenarios: In the first scenario, I will assume that Thoma Bravo is not taking any debt and thus is financing the whole transaction with equity; and in the second scenario, I will assume that Thoma Bravo will decide to take on debt and only put in a small amount of equity, comparatively speaking. Based on what I know about the transaction from the released press correspondence and news article, here is a quick analysis of the transaction.

As you can see, given an offer price per share of $28.60, diluted shares outstanding of 44,390MM, and a net debt of $234MM, we get an entry EBITDA multiple of ~21x, giving us a transactional value of $1.5BB. Below is a snapshot of my assumed sources and uses of funds (with and without debt):

Image1

Image 2

As you can see, if we assume that Thoma Bravo takes on debt for this transaction, then based on my assumptions about the amount/kind of debt raised, TB will have to put in $208MM of equity (image 1), but if we assume that they decide to not take on any debt and instead finance the transaction with their own wallet (image 2) then they will have to pony up ~$1.6BB, including the assumed financing and transaction fees. Moving on from transaction assumptions, I would like to talk about the drivers of this transaction (Base Case).

• Revenue Growth
• Going forward, I expect the company to grow at a moderate pace. Again, lets recap what the company does, it helps organizations and companies with navigating critical events and disruptions; couple that with the fact that COVID is in our rearview, and that the demand for critical event management is not what it was after 9/11 or during COVID, I think the company will grow at a modest pace throughout the next five years, with 8% growth in FY '28. Furthermore, the assumed growth in revenue is based on the assumptions that the new acquirers are able to increase EVBG's customer base, potentially expand its existing portfolio of customers and users, expand globally to other regions, and are successful in continually improving and innovating its offerings and platform. 
• Cost Reduction
• As mentioned before, costs (both costs of revenue and various operating expenses) have been consistent in the past, and going forward, I believe that as Thoma Bravo strives to increase EVBG's revenues, they will simultaneously be able to reduce the associated costs. This reduction of costs could come from downsizing, lower capex and investment spending, and better asset and platform utilization. I also believe that as the company grows and creates and cultivates new and existing relationships with its customers, and attains some semblance of competitive advantage, its sales and marketing expense should decrease over the next five years with positive (lower) impacts on other expenses such as R&D and SG&A. 
• EBITDA Expansion
• As mentioned in the quick analysis of this transaction, the entry EBITDA multiple- given EVBG's adjusted EBITDA of ~$71MM- is 21x, and I am of the belief that over the course of the next 5 years, Thoma Bravo should be able to expand the adjusted EBITDA margins to 27% in FY '28 from 15% in FY '23. This EBITDA multiple expansion will be driven from increased revenues and reduced costs as the company continues to operate under Thoma Bravo's platform. 
• Debt Amortization
• If we assume that Thoma Bravo will take on debt for this transaction, the calculated debt amortization would be $53MM for the next five years, with no cash flows available for cash sweeps or additional payments. This of course is assuming debt, if they finance the transaction with their own wallet, then there is no debt amortization or interest expense for the proposed holding period. 

With all of this under our belt, here is the going forward income statement (both with and without debt).

Income Statement with debt

Income Statement without debt

As you can see, if we assume debt, we get an interest expense of ~$100MM in FY '24 and its gradual decline to ~$92MM in FY '28, and with it, the negative net income for the all of the next five years, and if you remember, this is assuming all of the growth in revenue and reduction in costs mentioned above, giving us an adjusted EBITDA of $166MM by the end of FY '28. On the other hand, if we assume no debt raised,  we can see that the company starts to turn profitable somewhere in FY '27, as well as yielding positive NI by the end of FY '26, giving us an adjusted EBITDA of $166MM, if you are wondering why it is the same as the one with debt, well that is because the deal related amortization is offset by the growth in revenue and vice versa. Moving on to our going forward cash flow statement:

Going forward CF statement with debt

Going forward CF statement without debt

I think the impact of raising or not raising debt is most evident on the going forward cash flow statement. If we assume that the acquirers opt in to raise debt for the transaction (top image), EVBG does not have enough free cash flows to support the necessary debt amortization; on top of the debt raised for the transaction, the new entity might even have to utilize the revolver and then endeavor to pay down the revolver as it moves forward, yielding essentially $0 for cash sweeps or additional discretionary debt payments. But, if we assume no debt, therefore a higher net income due to no interest expense, the numbers are entirely different. We can see (below image) that the new entity could potentially have positive cash flows for the entire projected period, also yielding a higher interest income. With all of the projections and assumptions in place, lets look at the returns, and see what the IRR and MOIC might be for the parties involved. 

Returns Analysis

Below we look at what the exit might look like with debt assumed for the transaction. 

Exit analysis with debt

Returns analysis with debt

As you can see, if we assume debt, then at our exit, which I have assumed in five years and at 21x EBITDA multiple (same as the entry multiple), we get an equity value of $2.1BB, which when compared to our initial equity of $208MM, gives us an IRR of 59% and MOIC of 10.1X; returns to other providers of capital can be seen in the image above. The lower half the second image gives us an idea as to how much the sponsors can afford to offer at various hurdle rates; and as you can see, if Thoma Bravo's hurdle rate is 30%, they can afford to offer $36.65 for every share of EVBG, yielding an astounding premium of 67.6%. Now lets compare this to the returns without debt.

Exit analysis without debt

 

Returns analysis without debt

At first glance, transaction without debt might seem lucrative, but don't fall prey to that notion; look at the returns analysis down below. Even though the equity value of $4BB is higher than the equity value ($2.1BB) with debt, the returns are lower, much lower, and that is because sponsors have had to put in a lot at the offset of the transaction which, going with logic, translates to lower returns in the future. Again, taking the exit in five years and 21x EBITDA multiple, we get an IRR of 21% and MOIC of 2.6x without debt, and now compare those numbers to IRR of 59% and MOIC of 10.1x with debt, the difference is staggering to say the least. 

Conclusion

What do I think about the transaction after this excruciatingly long analysis? I think that if they choose to take on debt for the transaction, therefore having to put in a smaller amount, the deal could prove lucrative for Thoma Bravo, depending on their internal hurdle rate and expectations for the company and its future. The downside with raising debt is that EVBG does not generate enough free cash flows to support any substantial debt and its associated interest expense and amortization. On the other hand, if they choose to put in only their own cash balance and not raise any debt, they might end up with healthy NI and cash flows but much lower IRR and MOIC.  

Links:

Everbridge LBO 

2023 10K

2023 8K