(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited consolidated financial statements and the related notes and management's discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on March 1, 2019. This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" or the negative or plural of these words or similar expressions or variations. Such forward-looking statements include, but are not limited to, statements with respect to our outlook; the impact of new accounting standards; our ability to service our debt; our business strategy, including with respect to potential acquisitions; plans and objectives of future operations; and our future financial and business performance. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors", set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
Everbridge is a global software company that provides enterprise software applications that automate and accelerate organizations' operational response to critical events in order to keep people safe and businesses running. During public safety threats such as active shooter situations, terrorist attacks or severe weather conditions, as well as critical business events including IT outages, cyber-attacks or other incidents such as product recalls or supply-chain interruptions, over 4,600 global customers rely on the company's Critical Event Management Platform to quickly and reliably aggregate and assess threat data, locate people at risk and responders able to assist, automate the execution of pre-defined communications processes through the secure delivery to over 100 different communication devices, and track progress on executing response plans. Our customers use our platform to identify and assess hundreds of different types of threats to their organizations, people, assets or brand. Our solutions enable organizations to deliver intelligent, contextual messages to, and receive verification of delivery from, hundreds of millions of recipients, across multiple communications modalities such as voice, SMS and e-mail, in over 200 countries and territories, in 22 languages and dialects - all simultaneously. Our Critical Event Management platform is comprised of a comprehensive set of software applications that address the full spectrum of tasks an organization has to perform to manage a critical event, including Mass Notification, Incident Management, Safety Connection, IT Alerting, Visual Command Center, Public Warning, Crisis Management, Community Engagement and Secure Messaging. We believe that our broad suite of integrated, enterprise applications delivered via a single global platform is a significant competitive advantage in the market for Critical Event Management solutions, which we refer to generally as CEM.
Our customer base has grown from 867 customers at the end of 2011 to more than 4,600 customers as of June 30, 2019. As of June 30, 2019, our customers were based in 50 countries and included 9 of the 10 largest U.S. cities, 8 of the 10 largest U.S.-based investment banks, 46 of the 50 busiest North American airports, 6 of the 10 largest global consulting firms, 6 of the 10 largest global automakers, all 4 of the largest global accounting firms, 9 of the 10 largest U.S.-based health care providers and 5 of the 10 largest U.S.-based health insurers. We provide our applications to customers of varying sizes, including enterprises, small businesses, non-profit organizations, educational institutions and governmental agencies. Our customers span a wide variety of industries including technology, energy, financial services, healthcare and life sciences, manufacturing, media and entertainment, retail, higher education and professional services.
We sell all of our critical communications applications on a subscription basis. We generally enter into contracts that range from one to three years in length, with an average contract duration of 2.3 years as of June 30, 2019, and generally bill and collect payment annually in advance. We derive most of our revenue from subscriptions to applications. Over 90% of the revenue that we recognized in each of the eight most recently completed quarters was generated from contracts entered into in prior quarters or renewals of those contracts; the balance of the revenue that we recognized in each such quarter was generated from contracts entered into with new customers or new contracts, other than renewals, entered into with existing customers in such quarter. Historically, we derived more than 64% of our revenue in each of the last three fiscal years from sales of our Mass Notification application. Our pricing model is based on the number of applications subscribed to and, per application, the number of people, locations and things connected to our platform as well as the volume of communications. We also offer premium services including data feeds for social media, threat intelligence and weather. We generate additional revenue by expanding the number of applications that our customers subscribe to and the number of contacts and devices connected to our platform.
We generated revenue of $48.4 million and $35.8 million for the three months ended June 30, 2019 and 2018, respectively, representing a period-over-period increase of 35%. We generated revenue of $91.2 million and $66.3 million for the six months ended June 30, 2019 and 2018, respectively, representing a period-over-period increase of 38%. We had net losses of $12.1 million and $16.9 million for the three months ended June 30, 2019 and 2018, respectively. We had net losses of $26.2 million and $29.3 million for the six months ended June 30, 2019 and 2018, respectively. Our adjusted EBITDA, which is a measure that is not calculated and presented in accordance with generally accepted accounting principles in the United States, or GAAP, was $0.4 million and $(1.8) million for the three months ended June 30, 2019 and 2018, respectively. Adjusted EBITDA was $(1.5) million and $(3.6) million for the six months ended June 30, 2019 and 2018, respectively. See "Other Metrics" below for a discussion of the limitations of adjusted EBITDA and a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP.
As of June 30, 2019 and 2018, 29% and 28% of our customers, respectively, were located outside of the United States and these customers generated 24% and 13% of our total revenue for the three months ended June 30, 2019 and 2018, respectively. These customers generated 23% and 16% of our total revenue for the six months ended June 30, 2019 and 2018, respectively.
We have focused on rapidly growing our business and believe that the future growth of our business is dependent on many factors, including our ability to increase the functionality of our platform and applications, expand our customer base, accelerate adoption of our applications beyond Mass Notification within our existing customer base and expand our international presence. Our future growth will also depend on the growth in the market for critical communications solutions and our ability to effectively compete. In order to further penetrate the market for critical communications solutions and capitalize on what we believe to be a significant opportunity, we intend to continue to invest in research and development, build-out our data center infrastructure and services capabilities and hire additional sales representatives, both domestically and internationally, to drive sales to new customers and incremental sales of new applications to existing customers. Nevertheless, we expect to continue to incur losses in the near term and, if we are unable to achieve our growth objectives, we may not be able to achieve profitability.
In April 2019, we acquired Mission Mode Solutions, Inc., or Mission Mode, pursuant to which we purchased all of the issued and outstanding shares of stock of Mission Mode for base consideration of $6.8 million. There is also a potential contingent payment of up to $1.0 million that can be earned in addition to the base consideration by the sellers based on successfully converting the Mission Mode's customers to our product. Our acquisition of Mission Mode was made primarily to expand the Company's customer base and to a lesser extent to complement some of the existing facets of its business with the Company's existing customers.
In August 2019, we entered into a Membership Interest Purchase Agreement, or the Purchase Agreement, with NC4 Inc., NC4 Public Sector LLC, and Celerium Group Inc., pursuant to which we purchased all of the issued and outstanding membership interest of NC4 Inc. and NC4 Public Sector LLC for total consideration of $83.0 million. We paid approximately $51.7 million in cash at closing and paid the remaining purchase price with 320,998 newly issued shares of our common stock. On the closing date of this acquisition, the closing price of our common stock on the Nasdaq Global Market was $101.32 per share. Our acquisition of NC4 Inc. and NC4 Public Sector LLC was made primarily to expand the Company's customer base and to a lesser extent to complement some of the existing facets of its business with the Company's existing customers.
Presentation of Financial Statements
Our consolidated financial statements include the accounts of our wholly-owned subsidiaries. Business acquisitions are included in our consolidated financial statements from the date of the acquisition. Our purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates. All intercompany balances and transactions have been eliminated in consolidation.
We report our financial results as one operating segment. Our operating results are regularly reviewed on a consolidated basis by our chief executive officer, who is our chief operating decision maker, principally to make strategic decisions regarding how we allocate our resources and to assess our consolidated operating performance.
Components of Results of Operations
We derive substantially all of our revenue from the sale of subscriptions to our critical event management and enterprise safety applications.
We generally bill and collect payment for our subscriptions annually in advance. All revenue billed in advance of services being delivered is recorded in deferred revenue. The initial subscription period typically ranges from one to three years. We offer varying levels of customer support based on customer needs and the complexity of their businesses, including the level of usage by a customer in terms of minutes or the amount of data used to transmit the notifications. Our pricing model is based on the number of applications subscribed to and, per application, the number of people, locations and things connected to our platform as well as the volume of communications. We also offer premium services including data feeds for social media, threat intelligence and weather. We generate additional revenue by expanding the number of premium features and applications that our customers subscribe to and the number of contacts connected to our platform.
We also sell professional services which primarily consist of fees for deployment and optimization services, as well as training. In addition, on occasion we may sell our software for on premise usage. These sales have been to a limited number of customers and is not a significant revenue stream for the Company.
Cost of Revenue
Cost of revenue includes expenses related to the fulfillment of our subscription services, consisting primarily of employee-related expenses for data center operations and customer support, including salaries, bonuses, benefits and stock-based compensation expense. Cost of revenue also includes hosting costs, messaging costs and depreciation and amortization. As we add data center capacity and support personnel in advance of anticipated growth, our cost of revenue will increase and, if anticipated revenue growth does not occur, our gross profit will be adversely affected.
Operating expenses consist of sales and marketing, research and development and general and administrative expenses. Salaries, bonuses, stock-based compensation expense and other personnel costs are the most significant components of each of these expense categories. We include stock-based compensation expense incurred in connection with the grant of stock options within the applicable operating expense category based on the equity award recipient's functional area.
Sales and Marketing
Sales and marketing expense primarily consists of employee-related expenses for sales, marketing and public relations employees, including salaries, bonuses, commissions, benefits and stock-based compensation expense. Sales and marketing expense also includes trade show, market research, advertising and other related external marketing expense as well as office and software related costs to support sales. We defer certain sales commissions related to acquiring new customers and amortize these expenses ratably over the period of benefit that we have determined to be four years. We plan to continue to expand our sales and marketing functions to grow our customer base and increase sales to existing customers. This growth will include adding sales personnel and expanding our marketing activities to continue to generate additional leads and build brand awareness. In the near term, we expect our sales and marketing expense to increase on an absolute dollar basis as we hire new sales representatives in the United States and worldwide and grow our marketing staff.
Research and Development
Research and development expense primarily consists of employee-related expenses for research and development staff, including salaries, bonuses, benefits and stock-based compensation expense. Research and development expense also includes the cost of certain third-party services, office related costs to support research and development activities, software subscriptions and hosting costs. We capitalize certain software development costs that are attributable to developing new applications and adding incremental functionality to our platform and amortize these costs over the estimated life of the new application or incremental functionality, which is generally three years. We focus our research and development efforts on improving our applications, developing new applications and delivering new functionality. In the near term, we expect our research and development expense to increase on an absolute dollar basis as we continue to increase the functionality of our platform and applications.
General and Administrative
General and administrative expense primarily consists of employee-related expenses for administrative, legal, finance and human resource personnel, including salaries, bonuses, benefits and stock-based compensation expense. General and administrative expense also includes professional fees, insurance premiums, corporate expenses, transaction-related costs, office-related expenses, facility costs, depreciation and amortization and software license costs. In the near term, we expect our general and administrative expense to increase on an absolute dollar basis as we incur the costs associated with being a publicly traded company.
Interest and Investment Income
Interest income consists of interest earned on our cash balances held at financial institutions. Investment income consist of interest earned on our short term investments which consist of U.S. treasuries, U.S. government agency obligations and money market funds.
Interest expense consists of interest on our outstanding debt obligations.
Other Income and Expense, Net
Other expense, net consists primarily of realized foreign currency gains and losses.
Results of Operations The following tables set forth our results of operations for the periods presented and as a percentage of our total revenue for those periods. The period-to-period comparison of our historical results is not necessarily indicative of the results that may be expected in the future. Three Months Ended Six Months Ended June 30, June 30, 2019 2018 2019 2018 (in thousands) Revenue $ 48,405 $ 35,822 $ 91,224 $ 66,341 Cost of revenue(1) (2) 14,739 11,532 28,720 21,192 Gross profit 33,666 24,290 62,504 45,149 Operating expenses: Sales and marketing(1)(2) $ 22,015 $ 19,179 $ 42,086 $ 34,955 Research and development(1) (2) 12,802 12,027 24,287 20,198 General and administrative(1) (2) 10,464 8,635 21,022 16,479 Total operating expenses 45,281 39,841 87,395 71,632 Operating loss (11,615 ) (15,551 ) (24,891 ) (26,483 ) Other income (expenses), net (310 ) (1,178 ) (874 ) (2,492 ) Loss before income taxes (11,925 ) (16,729 ) (25,765 ) (28,975 ) Provision for income taxes (138 ) (189 ) (432 ) (285 ) Net loss attributable to common stockholders $ (12,063 ) $ (16,918 ) $ (26,197 ) $ (29,260 )
(1) Includes stock-based compensation expense as follows:
Three Months Ended Six Months Ended June 30, June 30, 2019 2018 2019 2018 (in thousands) Cost of revenue $ 412 $ 940 $ 847 $ 1,565 Sales and marketing 2,547 3,532 4,915 5,967 Research and development 2,418 3,205 3,828 4,515 General and administrative 2,631 2,345 6,203 4,669 Total $ 8,008 $ 10,022 $ 15,793 $ 16,716
(2) Includes depreciation and amortization of acquired intangible assets as follows:
Three Months Ended Six Months Ended June 30, June 30, 2019 2018 2019 2018 (in thousands) Cost of revenue $ 2,248 $ 1,992 $ 4,261 $ 3,822 Sales and marketing 194 78 341 159 Research and development 133 69 241 136 General and administrative 1,420 1,551 2,857 2,211 Total $ 3,995 $ 3,690 $ 7,700 $ 6,328 Three Months Ended Six Months Ended June 30, June 30, 2019 2018 2019 2018 Consolidated Statements of Operations, as a percentage of revenue(1) Revenue 100 % 100 % 100 % 100 % Cost of revenue 30 % 32 % 31 % 32 % Gross profit 70 % 68 % 69 % 68 % Operating expenses: Sales and marketing 45 % 54 % 46 % 53 % Research and development 26 % 34 % 27 % 30 % General and administrative 22 % 24 % 23 % 25 % Total operating expenses 94 % 111 % 96 % 108 % Operating loss (24 )% (43 )% (27 )% (40 )% Other income (expenses), net (1 )% (3 )% (1 )% (4 )% Loss before income taxes (25 )% (47 )% (28 )% (44 )% (Provision for) benefit from income taxes * * * * Net loss attributable to common stockholders (25 )% (47 )% (28 )% (44 )%
(1) Columns may not add up to 100% due to rounding.
* Represents less than 0.5% of revenue.
Comparison of the Three Months Ended June 30, 2019 and 2018 Revenue Three Months Ended June 30, Change 2019 2018 $ % (dollars in thousands)
Revenue $ 48,405 $ 35,822 $ 12,583 35.1 %
Revenue increased by $12.6 million for the three months ended June 30, 2019 compared to the same period in 2018. The increase was due to a $12.6 million increase in sales of our historical solutions driven by expansion of our customer base from 4,158 customers as of June 30, 2018 to 4,667 customers as of June 30, 2019, including increased sales to larger organizations with greater numbers of contacts and locations.
Cost of Revenue Three Months Ended June 30, Change 2019 2018 $ % (dollars in thousands)
Cost of revenue increased by $3.2 million for the three months ended June 30, 2019 compared to the same period in 2018. The increase was due to a $0.3 million increase in employee-related costs associated with our increased headcount from 163 employees as of June 30, 2018 to 180 employees as of June 30, 2019. In addition, $2.6 million of the increase was attributed to an increase in hosting, software and messaging costs, $0.2 million increase in depreciation and amortization expense attributed to our fixed assets, acquired intangibles and capitalized software and $0.1 million attributed to an increase in office related expenses to support revenue generating activities.
Gross margin percentage increased due to revenue growth outpacing the increase in cost along with a reduction of stock compensation expense.
Operating Expenses Sales and Marketing Expense Three Months Ended June 30, Change 2019 2018 $ % (dollars in thousands)
Sales and marketing expense increased by $2.8 million for the three months ended June 30, 2019 compared to the same period in 2018. The increase was primarily due to a $2.1 million increase in stock compensation and employee-related costs associated with our increased headcount from 284 employees as of June 30, 2018 to 328 employees as of June 30, 2019. The remaining increase was principally the result of a $0.3 million increase in advertising related cost and trade show expense and a $0.4 million increase in office related expenses to support the sales team.
Research and Development Expense Three Months Ended June 30, Change 2019 2018 $ % (dollars in thousands)
Research and development expense increased by $0.8 million for the three months ended June 30, 2019 compared to the same period in 2018. The increase was primarily due to a $0.4 million increase in employee-related costs associated with our increased headcount from 237 employees as of June 30, 2018 to 243 employees as of June 30, 2019. The remaining increase was principally the result of a $0.1 million increase in office related expenses and support fees. A total of $2.2 million of internally developed software costs during the three months ended June 30, 2018 and $1.9 million of internally developed software costs during the three months ended June 30, 2019 were capitalized, resulting in an increase of the expense by $0.3 million in the second quarter of 2019.
General and Administrative Expense Three Months Ended June 30, Change 2019 2018 $ % (dollars in thousands)
General and administrative expense increased by $1.8 million for the three . . .
Aug 09, 2019
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