Everbridge Inc (EVBG) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Everbridge Q3 earnings conference call. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kenneth Goldman. Sir, you may begin.

Thank you. Good afternoon and welcome to Everbridge's earnings conference call for the third quarter of 2016. This is Ken Goldman, Senior Vice President and Chief Financial Officer of Everbridge. With me on the call today is Jaime Ellertson, CEO and Chairman.

After the market close today, we issued a press release with details regarding our third-quarter performance, which can be accessed on the investor relations section of our website at ir.everbridge.com. This call is being recorded and a replay will be available on our IR website following the conclusion of the call.

During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views as of today and should not be considered representative of our views on any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to those contained in our final prospectus, which is on file with the SEC.

Also, during the course of today's call we will refer to certain non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our press release. Finally, at times in our prepared comments or responses to your questions we may offer metrics that are incremental to our usual presentation to provide greater insight into the dynamics of our business on a quarterly basis. Please be advised that we may or may not continue to provide this additional detail in the future.

With that, let me turn the call over to Jaime for his prepared remarks.

Thanks, Ken, and welcome to all of you joining us on our first earnings call as a public company. We were very pleased with the Company's execution during the third quarter, which was highlighted by revenue of $19.9 million, an increase of 31% over the same period a year ago, and positive adjusted EBITDA of about $300,000.

We have always focused on the generating strong top-line growth, but doing so in a responsible manner that balances growth and profitability in order to grow shareholder value. Our third-quarter results reflect the success of our strategy and we are fueled by strong demand for our expanding suite of SaaS-based applications focused on critical communications and enterprise safety.

Because this is our first call as a public company, I wanted to take a couple of minutes to provide you with some background on Everbridge, the solutions we are bringing to market, as well as the multibillion-dollar market opportunity we are addressing.

Everbridge provides enterprise software that enables over 3,000 customers across the globe to help keep people safe and businesses running. Our SaaS-based applications automate critical communication processes -- assessment, location identification, automation, and communication -- to ensure that the right information reaches the right people in the right location at the right time and the right device. By using our software, our customers are able to respond more quickly and more reliably and lower the risk of human life and the cost to business operations from natural disasters, IT outages and cyber attacks, active shooter situations, or terrorist attacks.

Our first application in the mass certification space delivers time-sensitive alerts during natural or man-made disasters, where getting the right message to the right person is literally a matter of life and death. Just last month in Florida and throughout the Southeastern United States, over 900 counties, cities, businesses, transportation authorities, and hospitals used Everbridge's mass notification and our CE solution to send millions of tailored messages to impacted individuals before, during, and after the first major hurricane to make landfall in the US in several years, Hurricane Matthew.

In addition to keeping people safe, Everbridge also helped to keep many businesses running. For example, Loomis Armored services used Everbridge to deliver critical alerts to employees across Florida, Georgia, South Carolina, and North Carolina to ensure their safety as well as to inform their customers with up-to-the-minute service interruption advisories throughout the course of the storm.

The Loomis Armored use case is a great example of how we deliver a combination of both employee safety, a historically common use of our solutions, as well as real operational value to the business; customer communication to enable operations to our largest and fastest-growing customer base by vertical, the corporate market. Since launching our mass certification applications we have leveraged our experience and core platform to deliver a comprehensive suite of enterprise applications focused on critical communications and enterprise safety including our incident management application, IT alerting, secure messaging, community engagement applications, and our safety connection and Internet of Things applications. Seven total applications on one common platform.

In September, the value of our community engagement solutions was front and center as it was used by local law enforcement agencies in New Jersey to engage their local communities and assist them in identifying the location of the Chelsea bombing suspect. Less than two hours after an Everbridge Nixle alert highlighted the suspected bomber's picture was distributed to police and residents in London, New Jersey, the suspect was located and ultimately arrested.

The [London] use of Everbridge is a strong example of how our existing state and local government customers can expand their use of the Everbridge platform with our new community engagement solution to leverage their citizen populations in concert with their safety and law enforcement agencies to successfully engage a community and often resolve major events.

Most recently, we have further expanded our value proposition as we have begun to disrupt the physical safety and security markets, delivering a complete solution to address the increasingly mobile employee workforce. That would be our Safety Connection solution. Underlying our suite of seven applications is a highly-differentiated platform that scales to deliver rapidly millions of communications across virtually any device type to over 200 different countries and regions throughout the world with extraordinary reliability.

To put this in context, over the last 12 months our SaaS-based platform has delivered over 1.4 billion tailored messages. Our platform can deliver millions of messages in seconds to disparate populations in the path of a massive regional event like a hurricane or earthquake or provide the ability to locate and confirm a specific technical resource that was available to repair an IT system failure and restore normal business operations or enable communications of specific instructions, such as evacuate or shelter in place, given the exact location of an active shooter on a corporate campus.

There are three major forces driving the strong demand for our solutions. First is increasing pace, severity, and cost of critical events, both man-made and natural. Unfortunately, these events are happening all too frequently and we are in a world where up-to-the-minute information can make all the difference. The impact is not just a threat to harm people or the damage to corporate infrastructure, but these events also have a significant economic cost: over $500 billion in 2015.

The second major market for us is the increasing reliance on IT by companies in order to run their businesses. More than half of the Fortune 500 experience significant IT outages each week, costing hundreds of thousands of dollars of lost productivity. At the same time, the Internet of Things is projected to extend IT operations to some 20 billion to 30 billion additional devices and intelligent sensors by the year 2020.

Organizations are increasingly awash in data that can point out the degrading performance of everything from gas turbine to an irregular heartbeat. The challenge is to organize and communicate the relevant information to the right people so they can take action.

And the third major market force is the rapid transition of workforces going mobile. International Data Corporation estimates that by the 2020 over 70% of all employees will be mobile. Protecting employees solely with physical security and video surveillance provides limited value when the majority of people are not actually based in buildings. Companies need a new approach to providing safety and security for an increasingly mobile and dispersed workforce.

To address these three major market forces, organizations need to be able to do three things which are very difficult to do simultaneously: first, they have to be able to respond with speed; second, they must be able to handle massive scale; and third, they need to be able to respond with precision. The Everbridge platform was designed with all these requirements in mind in order to serve a large and growing target market. We estimate based on data from leading research firms Frost & Sullivan and [Marketer Markets] that the total available market for our mass notification IT alerting and Internet of Things solution will grow from $6 billion last year to over $17 billion by the year 2020.

Our newest product, Safety Connection, targets the physical and safety security market, which industry research firms and markets projects will reach $15 billion by the year 2020. This new category alone nearly doubles the size of our overall addressable market.

Safety Connection disrupts the physical safety and security market by fully leveraging and assesses, automates, and communicates capabilities of our core platform with location awareness contact data. Early adopters of Safety Connection have told us they are moving investments from physical security devices, like access control and video, to Everbridge's Safety Connection in order to create a single real-time operating picture of the risk to their employees and assets. Companies need to better understand where all their employees actually are when an incident occurs and not just their static location or address and Safety Connection fits in perfectly with this strategic priority.

All together we estimate these markets will represent the greater than $30 billion market opportunity in the coming years to Everbridge.

Our success across these markets is illustrated by Everbridge's penetration amongst important verticals. For example, eight of the 10 largest US investment banks use Everbridge solutions, as well as six of the largest 10 global automakers, as well as every one of the big four global accounting firms. And for citizens, we're utilized in eight of the 10 largest US cities, as well as 24 of the 25 busiest airports in North America in the transportation market and in operation centers. This strong customer base is a great asset for us in reference selling.

Now allow me to turn to the longer term. As we look forward there's several important drivers to our long-term growth.

New customers represent significant opportunities. There will be a level of quarter-to-quarter variability, but we have been adding around 150 gross new customers in recent quarters, including the third quarter, and our pipeline of new logos continues to expand. With a broad suite of applications, many new relationships begin as a multiproduct deal and in the third quarter we signed more multiproduct deals than in any previous quarter.

Secondly, selling more of our existing suite of applications to customers represents an additional growth opportunity for us. Our platform includes a unified contact and event database, business rules and preferences, and common location and notification engines that once implemented enable our customers to easily add new applications which leverage the same underlying platform. We intend to continue to develop and launch new apps that will target new use cases, allow us to continue to expand our existing customers, as well as increase the size of our addressable market.

We have a proven track record of launching new solutions that effectively address customer pain points on the platform. As evidence, our suite of applications, other than our core mass notification and incident management application, have grown from 6% of trailing 12-month new business in the first quarter of 2015 to 28% of new sales on the same basis in the third quarter of 2016. That is tremendous progress in a relatively short period of time, particularly considering the continued solid growth of our mass notification solution in Q3.

The international market remains a significant and underpenetrated market for Everbridge and it is an area that we are investing in. We believe our recently signed partnership with International SOS will facilitate our expansion in these markets, given their broad geographic reach and substantial presence among the Fortune Global 2000.

And last, while our growth this year has been entirely organic, we have successfully completed three small acquisitions in prior years and we plan to continue to thoughtfully acquire new technology and customer relationships when a buy decision makes more sense than a build or partner decision.

With that backdrop, allow me to provide a little color on our third-quarter performance. After a period of aggressive hiring and investment, we are now focused on capitalizing on our expanded salesforce and extended product suite in order to scale our business over the long term.

As I mentioned, we added more than 150 gross new customers in the quarter, bringing our quarter-end customer base to 3,076 enterprise customers. This is up from 2,514 customers in the same period one year ago and represents a net increase of 100 customers compared to the end of last quarter. The expansion in our customer base reflects strong new additions, combined with best-in-class customer retention of over 90%, which we believe is one of the factors that supports the strategic value we deliver to customers.

New wins during the quarter included customers choosing our mass notification and incident communication applications in the state and local markets at the County of Santa Clara, California, the 16th most populous county in California, and Wake County, the largest county in North Carolina, as well as large cities like Phoenix, Arizona. We also continue to rollout our statewide contract in Florida, the third-largest state in the US, which we believe is the largest statewide contract in our entire space.

On the corporate side, we closed new accounts that included leading businesses like Lowe's Home Improvement, Rackspace, Canon USA, Citrix, and Shutterfly. In the higher education space we added new customers such as DeVry University, an educational Corp; UCLA, the largest university in the West; and the University of Texas in Austin, the seventh most populous college campus in the entire US.

In the healthcare space, we signed new multiproduct contracts with Walter Reed Medical Center, Doctors Hospital, and Penn State Hershey Medical Center, the latter having chosen four of our products covering both emergency and operational use cases. And for our new products -- IT Alerting, secure messaging, Community Engagement, and Safety Connection -- we continue to demonstrate momentum with new wins for our newest applications.

In the Safety Connection space, we recorded wins at one of the largest automobile manufacturers, a top 10 investment bank, a big four accounting firm, and one of the top three cloud infrastructure vendors, just to name a few. For our IT Alerting solution, new customers included a top Fortune 100 retailer that purchased Everbridge over a competing incumbent SaaS solution based on a head-to-head evaluation because of our overall platform and superior IT alerting features and functionality.

The third quarter also saw new Everbridge IT Alerting wins in the transportation sector with companies like Kansas City Southern, in the healthcare space with organizations like WellSpan, and in the international markets, with new wins at ThyssenKrupp, a leader in the people mobility space.

For our Nixle and Community Engagement business, new customer win profiles included in the state and local space, wins like the San Bernardino Sheriff's Department; in healthcare, we closed new customers like Walter Reed Medical; and in the corporate vertical, we won new accounts like Clark Construction. All focused on better engaging their varied communities.

In addition to these new product wins, we continued in Q3 to see success with our Expand component of our land-and-expand overall strategy. During the third quarter, key customer expansions -- specifically, I'm speaking about expanding usage and broader deployment of existing applications within existing implementations. For that area examples in Q3 would be major projects at Dallas-Fort Worth and LAX airports, both top 10 US airports, and significant geographic expansions at leading financial service players like HSBC, as well as significant roll-out expansion at corporations like twitter and Sony.

In summary, we had a strong third quarter and we are optimistic about our outlook. Our objective is to continue to scale our organization in order to capitalize on significant market opportunity in front of us and to continue to effectively balance growth and profitability. We believe the strength of our platform, continued innovation, and our marquee customer list positions us to expand our leadership role and deliver against these long-term goals.

Now I'd like to turn it back over to Ken for details on our financial performance during the quarter and our outlook. Ken?

Thanks, Jaime. We are excited to report revenue of $19.9 million for the third quarter, representing growth of 31% from the third quarter of 2015. Before diving into the financial details of the quarter, I wanted to provide context on our financial model to assist you in interpreting our results since this is our first call as a public company.

We derive our revenue from our customer subscriptions to our platform, whereby we recognize revenue over the life of the contract. Our contracts are generally multiyear, paid annually in advance, and many have auto renewal features.

The combination of these factors provides us with a high level of revenue visibility. During the third quarter, best-in-class customer retention and our ability to expand our footprint with existing customers led to a dollar-based net retention rate of 115%. This is consistent with our recent performance of above 110% and shows that roughly half of our growth in the period came from our existing customer base.

Now I would like to turn to the rest of the P&L. Unless otherwise indicated, I will be discussing income statement metrics on a non-GAAP basis. A reconciliation of GAAP to non-GAAP measures has been provided in the earnings release that we issued earlier today.

Gross margins in the third quarter were 72.1%, representing an improvement of 170 basis points from a year ago. Going forward, we expect able to drive continued gradual improvements in gross margins as our business continues to scale, although it may fluctuate from quarter to quarter due to period-specific expenses.

Total operating expenses were $15.3 million in the quarter, an increase of 18% from a year ago and well below our revenue growth rate, reflecting leverage in our operating model.

Adjusted EBITDA for the quarter was positive $300,000, a meaningful improvement from negative $1.4 million for the third quarter of 2015, and it represented the second quarter in a row of positive adjusted EBITDA combined with strong top-line growth. As I will detail in our guidance, we expect to achieve positive adjusted EBITDA for the third consecutive quarter in the fourth quarter of 2016, though still modestly above breakeven level.

As such, seasonality of employee-related expenses at the beginning of the year could lead to an adjusted EBITDA loss in the first part of 2017, although we expect to generate positive adjusted EBITDA for the full-year 2017 that represents an improvement from our 2016 performance. We have been and will remain focused on driving strong top-line growth with a responsible view on bottom-line performance as we believe this is the right way to grow shareholder value.

Net loss in the third quarter was $1.1 million compared to a loss of $2.2 million in the year-ago quarter. Based on 14.8 million basic and diluted weighted average shares outstanding, net loss was negative $0.07 per share for the third quarter.

Turning to our balance sheet, we ended the quarter with $62.3 million in cash and equivalents. This includes the impact of net proceeds of $69.8 million from our initial public offering in September after underwriter's fees, offset by $10.8 million in cash used to retire all previously outstanding debt.

Total deferred revenue was $48.7 million at the end of the third quarter, which was up 36% compared to the end of the prior year's third quarter and up 12% from the end of the second quarter. This represented the highest growth in deferred revenue during 2016, but it's worth noting that quarter-to-quarter increases in deferred revenue can vary due to timing factors. As such, even though we have predominately annual payment terms, deferred revenue is not always a meaningful indicator of the underlying momentum in our business from a short-term perspective. However, we believe it is directionally relevant over the long term.

Operating cash flow in the quarter was $8.2 million. Free cash flow, which we define as operating cash flow less capital expenditures and capitalized software developed costs was $6.6 million for the quarter. On a year-to-date basis, we generated $1.5 million in free cash flow compared to an outflow of $1.9 million in the comparable year-ago period.

Now let me turn to outlook. Note that as a public company we plan to provide guidance on revenue, adjusted EBITDA, and net income on both a quarterly and full-year basis.

For the fourth quarter of 2016, we expect revenue to be between $20.5 million and $20.7 million, representing growth of 27% to 28% from the fourth quarter of 2015. We anticipate an adjusted EBITDA between breakeven and $200,000. This adjusted EBITDA guidance assumes estimated stock-based compensation expense of approximately $800,000 for the fourth quarter.

We are anticipating a non-GAAP net loss of between $1.3 million and $1.1 million, or between negative $0.05 and negative $0.04 per share, based on 27.2 million basic weighted average outstanding shares. Therefore, for the full year 2016, we expect revenue to be between $76.1 million and $76.3 million, representing growth of approximately 30% from 2015 and we are anticipating an adjusted EBITDA loss of between $400,000 and $200,000. This adjusted EBITDA guidance assumes estimated stock-based compensation expense of approximately $2.9 million for the year.

We are expecting a non-GAAP net loss of between $5.3 million and $5.1 million, or between negative $0.32 and negative $0.31 per share, based on 16.7 million basic weighted average outstanding shares.

In summary, we are excited to have delivered strong results in our first quarter as a public company. We believe our results reflect growing demand for our leading software platform for critical communications and enterprise safety and that we are well-positioned to capitalize on a large multibillion dollar market opportunity.

With that, operator, can we now open the call to questions?

(Operator Instructions) Michael Nemeroff, Credit Suisse.

Thanks for taking my questions and congratulations on a really strong start as a public company. Jaime, one for you and the maybe one for Ken.

Jaime, it's really good to see that the non-mass notification percentage of the business is increasing pretty sharply. Which one of the non-mass notification products or how many of them or which of them do you think represent the greatest near-term business opportunity?

As we've said in the past, we were pretty pleased that the MN performance was strong during the quarter. And even with a strong MN performance and further rollout of Florida, we were able to have the strongest level of new product sales ever recorded in Q3. It's spread across a number of products so it's really tough to say any one.

For Nixle, we saw everything from San Bernardino County Sheriff's Department, which obviously recently had a major event happen in their backyard. But everything from Santa Clara, City of Long Beach, Cape Canaveral, and then multiple corporate buyers of that product for very interesting use cases. On IT Alerting we had some six-figure deals and multiple deals across multiple segments, as I mentioned: international, transportation, corporate space. And then Safety Connection.

Now Safety Connection, we are seeing pretty strong demand and that product is off to the fastest start we've seen for a net new product. I'm not sure that translates into exactly -- I would put that at the front of the pack, but it has been a strong start and maybe one piece of color that will help you guys understand that product. It's certainly sold into a new buyer for us, often security risk manager or the emergency planner, but more often the chief security officer, risk manager type of position.

And in Q3, one of the leading cloud infrastructure providers reached out to us and said they had a problem identifying individuals after recent fire drills and were afraid in a similar situation, like an active shooter, they would have no ability to determine in their multiple buildings who was where and who would be affected. And so they actually told us that they put a hold on spend on physical access control. They were in the process of implementing some new priorities around video and access control and they actually put that on hold.

Within the same quarter they contacted us and moved forward -- this was the director of physical safety and security at one of the largest cloud infrastructure providers -- to purchase and fast track Safety Connection. That customer, by the way, also had one or two of our partners involved. I think they were using them on the physical access control side and International SOS.

So I can answer you that Safety Connection appears to be off to a very rapid start only being introduced one quarter ago and it is certainly meeting or exceeding our expectations. But all the new products continue to do well and it's hard this early -- in most cases we are one year in to their history -- to claim there is going to be a winner there. We would hope to see multiple winners for new products and that's the power of the platform.

That's helpful color, Jaime. And then for Ken, if I may. Just how should we think about the Company's attitude towards giving investors growth and profits both in the near term and in the long run? And where do you think in the long run the profitability should peak at some point, Ken?

Okay, so with regard to where our focus -- our focus will always be on growth, but one of the stories that we told on the IPO roadshow was that we felt that as a responsible management team, being able to grow the Company and be profitable demonstrated the experience that we brought to bear. And that from our standpoint, we want to be able to do responsible growth, meaning growth with some focus on profitability.

As you know, Michael, one of the challenges is that you can always grow faster if you are willing to sacrifice profitability; you can grow slower and put more to the bottom line. In our case, I think near term our focus will continue to be on growth because that's what the market is focused on. If the market says that profitability becomes more important, we can always spend less on future growth and focus more on short-term profitability.

Long term, we are not ready to deliver the long-term model, other than to say that we believe that there is a large addressable market in front of us and that we can continue to grow for many, many years and bring this to not only adjusted EBITDA positive, but positive net income in a reasonable timeframe and get the Company to deliver best-in-class metrics in terms of both gross margin and net income.

Brad Sills, Bank of America Merrill Lynch.

Thanks for taking my question. I wondered if you could comment a little bit about some of the activity with the states. State of Florida, state of Connecticut are two existing customers. Maybe if you could comment a little bit on some of the pull through you might've seen during the quarter of other -- of law enforcement within those states, as well as corporates. Any kind of pull-through effect you might be seeing there.

And then any commentary on some of the pipeline for some new state deals would also be helpful, please.

Brad, I think on the state side the quarter was overshadowed a little bit by a major storm, Hurricane Matthew, coming in. That's what the state funds -- in our case, funds -- our engagement through is a hurricane fund. And I'm happy to tell you that we had a big success there with delivering millions and millions of messages to the state of Florida. Everything from our Community Engagement product, which they used ahead with a keyword of Florida Prepares, through all the way to Florida Recovers, a different set of keywords, to issue updates and provide them.

If you signed up for that, during the storm you got active updates. You didn't have to go to a news channel. You could be in a shelter or thinking about leaving because you were in southern Florida, which ended up missing the brunt of the storm.

But if you ended up in the Jacksonville and some of those waterfront areas, you were decimated. They were, in some cases, obliterated as the state of Florida talks about it and are in severe stress and will have to go through recovery.

So that always helps us because that's the third most populous state. It sets an example of not only the ability to sell and deliver an infrastructure, but in a major event shine. Governor Scott was, literally, on the airwaves every day leading up to that storm, multiple times a day pounding on the table saying sign up for the mass notification system.

We had hundreds of thousands of new sign-ups daily in the day before and right after the storm. And nothing like a good mass geographically-dispersed emergency to get people to sign up and be involved with the system. So that was a big success.

We have, as we've mentioned, multiple statewide projects, sales projects going on and no one can demonstrate the success at the scale that we can here with the Florida win and in the recent history. So that's very positive.

On the Community Engagement side the keyword opt-in that is going very well. On the Nixle product I mentioned some of the wins, but some of the ones you guys probably don't realize that that keyword, not just hurricane but big events like the Super Bowl -- we signed really interesting community engagement applications, everything from Rocky Mountain National Park, who has over 1 million visitors a year.

Now when you enter the park, you sign up. You type in a keyword for the park, Park Updates, and they can figure out and provide you updates throughout your stay in the park. And should there be an emergency, the rangers can finally communicate with you. Never an existing capability previously and there are multiple national parks throughout the US and areas like that.

Walter Reed Medical Center. Hundreds of thousands of doctors, clinical staff, patients, vendors; no way to communicate to them because many of them are transient. They go on and off or patients that are going in and out of the hospital. But now when you enter, they ask you to sign into a keyword and then they communicate and update you.

And major organizations like, on the corporate side, Clark Construction, which -- builder of DFW Airport. You can imagine on a project like that you have, literally, hundreds of thousands of workers over the course of a year or two. And every time someone goes on to the jobsite, in most cases there's transient contractors or day workers, this gives them ability to communicate and update those people on where there are danger areas, when they are going to be doing blasting during the day, and all sorts of vendor updates.

So the state and local business is focused on large wins, major cities like Santa Clara -- those are not small dollar wins -- but also on these big state projects. I would just caution you that the Community Engagement product, although it's doing extremely well, having a record year in the state and local space, we are now seeing some great corporate customer wins and too many different types of use cases to count. And we expect that to continue in the coming quarters.

Great. Thanks, Jaime. One follow-up, if I may, please.

It sounds like you had a great quarter on cross-selling some of these other applications outside of the core EMNS mass notification. Could you comment specifically, please, on IT Alerting and secure messaging, given that those are new departments outside of the core sales audience? How those track during the quarter would be helpful, please. Thank you.

On the IT Alerting side, I think we've given you a little bit of color, but everything from Lowe's, which was a major new win for us, and then transportation companies. I think I gave you Kansas City Southern. Internationally, ThyssenKrupp, which is the big elevator manufacturer. So across the board everything from international to US, everything from corporate to transportation and retail; all those ended up on the IT Alerting side and that product continues to grow at a very rapid pace.

We are not breaking down individual products until they get to $10 million, so there's not much other than the additional color that the product --. We signed everything from small IT Alerting projects to very large IT Alerting products in the quarter and certainly met our expectations.

On the secure messaging side, we had some new hospital-wide and system-wide rollouts for our secure messaging product and that continues to go well. We have stated in the past we will continue to integrate that product further, because the opportunity there isn't just selling a new product. It's making that one of our core channels that you can communicate through and that gives us even a better cross-sell and upsell.

We did accomplish where we've been historically, 115% type of net retention, which means our growth engine is really working and continues to work. And as we grow larger that's a tougher and tougher number to manage, but we again delivered that in Q3. So across the board, the new products and our ability to cross-sell them into both existing customers as well as land new customers is what powered the results.

Tom Roderick, Stifel.

Thanks for taking my questions. Jaime, let me throw the first one at you, maybe piggybacking on the last question just around this 115% net retention number you've offered up here.

I guess what I'm trying to understand a little bit better is if you look at the hires that you've made in sales and the investments you've made in the platform, can you just go into a little bit more detail how the salesforce is set up and structured? In other words, what sales reps are sort of aimed at what markets and how do you have those set up so as to handle the bucket of new products?

Do you have sales reps focused on only the new products? Just talk a little bit more about how you've structured it so far and how you want to invest in it going forward.

It's a consistent message. Fortunately, nothing has changed radically here. As I mentioned, we went through a year in 2015 where we spent a little bit of time and considerable money getting ready and prepared for the expense of going public and, in fact, absorbed some of that expense.

We also expanded the salesforce. And as you know, when you expand a salesforce and add a whole bunch of people, and we did that late 2015 and into early 2016, they do not show up and immediately understand your core market and are experts in your core space. Even if they had a related area, like if they were in the ITSM space historically and we brought them into help us sell our IT Alerting product.

So there is a time period to ramp those sales individuals. And as I said in my prepared remarks, I am particularly pleased that we started to see success with those guys hitting numbers and delivering deals. We certainly showed a consistency in delivery of growth overall at 31%, so we are starting to get production, even at large numbers, at scale from those teams.

Our team is broken up, as it was last quarter and will be next quarter, principally into account executives, which are challenged with going out and taking and finding net new customers and lending them for any of our products. There are some vertical market sales guys we have in areas like healthcare, corporate, state and local government, transportation, and they are experts within that vertical. They sell all of our product, but they understand the use case and the specifics around a customer need there.

That's how you land, say, 24 of the 25 top airports. That is not a coincidence; we have a very strong individual in that space. Or state and local and corporate we have really strong sales guys that really understand that, sales professionals that historically have been selling in that area.

Matching that team of net new hunters, we have our account managers which we don't really consider farmers, but certainly that -- manage an account relationship. And their job is not only make sure that renewal comes in at historic 90%-plus renewal rates so we don't have to replace customers, but keep them happy, but then cross-sell and upsell.

And they are broken into the same rough set of verticals. You have some in corporate, some in state and local, and some in healthcare, which are our three largest markets, and then a smattering of other specialists, including our international teams which are broken up.

The only other group we really have is we have an increasingly growing -- it will grow this year and next year -- strategic set of account executives that have a very limited number of named accounts and they handle some of our biggest customers, customers like the state of Florida or customers like big corporate names or healthcare organizations, where we want real focus either on the account management side, so they are major account managers instead of just account managers, or on the account executive side; they are strategic account executives.

We would balance all that, as you know, with our channels team which had a strong quarter; it's best quarter ever. And certainly we continue to believe that that channel expansion is an opportunity for us with not only International SOS and other partners like Federal Signal, but new partners and growth opportunities both in the US and international for alternate distribution, i.e., not our account executives or account managers.

Perfect, that's great detail. Ken, quick follow-up for you, just thinking about the gross margin trajectory here. Can you go into a little bit more detail just in terms of what some of the puts and takes are as we model gross margins? Not just this next quarter, but the trendline over the next year or two; how you would generally sort of encourage us to think about it?

And maybe more specifically, if you can provide some encouragement as to how to think about new products layering in and state projects versus what the underlying core gross margins are doing that would be really helpful. Thank you.

Remember that included in our gross margin are three things: it's the cost of internally-developed software, it's the cost of operating our platform, and it's the cost of the people who operate the platform. And one of the nice things about our business is that with scale those costs come down as a percentage of revenue.

Very simply, we don't have a huge cost of goods sold that is lockstep with revenue because of the fact that we have seen and we have demonstrated historically that that cost of goods sold goes down as revenue goes up. Again, I'm going to take the line tonight that we are not giving guidance beyond the end of this year and we will start to provide and detail more of the future. But for right now that's not a metric we are going to provide just yet, other than to say anecdotally it has historically shown signs of improvement.

We want to be able to strike, as with both the adjusted gross margin and adjusted EBITDA, the right balance between investing and growing. So we are going to show improvement over time. As I said during my part of the earnings call that you may see some periods where it may not always go up from the prior period just because of some period-specific expenses, but in general, directionally over the course of time you should see it moving up and to the right.

Perfect. Thank you, guys. Appreciate it, nice job.

Terry Tillman, Raymond James.

Good afternoon, gentlemen. The obligatory nice job on the quarter, your first quarter out of the gate.

I guess Tom's questions; one of the answers you provided was about the channel and International SOS. Could you actually be more specific in terms of what they bring to bear? And where are they in terms of getting educated and starting to be productive and actually going out there and being a channel for you all?

Sure. International SOS is a leading provider of emergency travel and health-related and travel risk-related information and services. I think at this point they are over $1 billion and have a good portion, I think we've quoted numbers of two-thirds of the global 2000. So a lot of presence, fairly large presence in that Fortune 1000 or Global 2000 market, with substantial international presence and that's important to us.

They came to us several years ago and we started a dialogue and this past year early in 2016 we came to an agreement to replace all their communication capability. So as they support a traveling executive -- let's pick a major bank that has hundreds of traveling executives, but they have them heading everywhere from Japan to Kenya in Africa. They need to provide updates on what to expect in that area and if there are risks.

And then when a traveler get sick, ill, or has some sort of malady that affects them in those areas, it's not as though you walk to the corner drugstore and get a prescription or you see a local doctor. That could be a risky proposition. They manage all that, but they need to communicate before they can manage anything.

And so we have replaced their communication engine and now for the, literally, millions of communications they send to executives, the senior-most typically executives in the Global 2000, those messages are all delivered with a tagline Delivered by Everbridge and we get paid to do that across the board. That relationship is going slightly better than expected.

We are ahead of our targets at the initial six-month milepost, but we have only rolled out initial integration. Later this month we will roll out the full integration with Everbridge so we can get from International SOS where traveler is, update our Safety Connection product in combination with all the resident employees or personnel -- so in buildings in a campus, for instance, plus your traveling population -- so that in a security operation center or a general operations center you can see the totality of your employees. And when an event occurs, you understand whom is affected and where people are in relationship to an event.

We believe that with International SOS's over 400-person salesforce, many of which are in areas outside of the US, over 100-plus in Europe and over 100-plus in Asia, where we now have offices and personnel to support them but don't have as large a direct salesforce, that provides upside opportunity. And we are tracking a number of significant opportunities with them and we will try to give you some color by next quarter on wins in Q4 with International SOS.

Suffice it to say, it's a very significant partnership for us, the largest we've signed to date. It carries guaranteed revenue streams from the embedded product that we supply them.

But the upside is even more interesting to us, which is their salesforce referring in and recommending us and the combination of our mass notification or Safety Connection product in their accounts through their sales team is something that we are just starting, literally, this quarter. A few months last quarter, but primarily this quarter. We will expect to be able to give you color on that and let you know how that's going with commentary after Q4.

Got it. Ken, I'm going to actually let you have a hall pass this first quarter and my second question is going to be for Jaime again in terms of, as we were talking to investors about the story, some folks are curious about mass notification and how far along that market is saturated. I know you sign about 150 customers a quarter, but maybe, Jamie, you could just give us any kind of quantification or perspective on how you see the vitality of the mass notification market.

Obviously, these other markets are higher growth, but just still having growth opportunities in mass notification. Thank you.

So all I would tell you on that is mass notification had our biggest quarter in the history of the Company. It actually -- we would've shown even higher new product growth had we not had such a strong mass notification showing. And actually we see no weakness whatsoever in the mass notification business, partially because we have new channel partners, partially because we are continuing to expand internationally, and then partly because overall our sales team, that's the first product so that's the first one they got and it's moving forward.

And so I would tell you that we don't see this year a slowing of the mass notification product. What we do see is a continued growth of the new products and you'll see that in the quarterly totals we report for you.

Brett Graceland, Pacific Crest Securities.

This is Trevor Upton on for Brent. Thanks so much for taking my questions.

In your prepared remarks, Jaime, you mentioned the head-to-head win. I was wondering could you remind us what percentage of deals are head-to-head versus more greenfield.

That was ITA specifically, so I would guess it somewhere in the neighborhood of 50%. I am absolutely ballparking that. We track that, but I don't have that detail in front of me.

I know in the ITA space it's probably in the 50% area and I would guess it's in that range for most other products, with the exception of Safety Connection, which is -- literally, we are going and they -- we've had people with inbound calls saying never seen anything like this; can't wait to get you in here. So we are not competing against anyone.

We are displacing spend on physical access control security, like badge systems and video systems and alarms systems, in the corporate world. Those are 100% net new. We are disruptive in that market. ITA it's probably 50/50 and the most competitive space is our core mass notification space because it's been out there the longest.

Okay, that's helpful.

You might see that as 60/40, 60% are competitive and only 40% are greenfield or 30% are greenfield, because that's definitely the most mature market we have.

Got it, that makes sense. And then internationally, I think the recent earthquake in Italy, is that driving increased demand?

Ours is a perverse business, and we say this only half jokingly; it's a cultural thing for us. We are very proud to be able to do things that really make a difference for people, but when bad things happen, business is good. It drives demand.

Nothing -- as I said, we had more sign ups and more people come on the Everbridge system the week of the earthquake than in probably the previous month. So it's consolidates focus. It gets people thinking about communication in critical events and drives people to our system.

Fortunately, there's no slowdown whatsoever in the number of major events that affect us because the news, the Internet cycle, everything puts them in a higher priority and points them out better and there just are more of them. It's a complex global environment we play in now. So for traveling executives for major corporations, with terrorism, for corporate and government and citizen populations, all those things drive our business and continue to do so.

More events, you will see some -- you see more volume in our system and, like we said, millions and millions during Hurricane Matthew alone over a few days, but equally with any other event worldwide -- an earthquake there or a typhoon in Asia.

So those sign-ups; are those local in Europe or is it the global -- increased global awareness?

Increases global awareness and obviously local. We get phone calls, literally, after any type of event like that; what can we do? And it starts new sales opportunities. They don't always close immediately, but it absolutely is a generator of new opportunities for us.

That makes sense. And just a quick one for Ken. What was the ending share count?

It's in the press release.

Sorry, I missed it. Not the diluted, but the end of period?

Hold on one second; I don't know if I have that handy. I'll circle back to you.

I can follow-up. Thank you, that's all I have.

Dmitry Netis, William Blair.

Thanks for squeezing me in, guys. Congrats again on the quarter, your first as a public company.

A couple of questions. One, I want to clarify to the point Jamie was just making as far as the adverse weather events and earthquakes, like Hurricane Matthew, others out there. When you have a spike in usage, does that go straight to your revenue line? It doesn't defer, right? So I would assume that goes straight to the revenue line, you have that contribution from those events in the quarter.

Then -- so the clarification of that part and then, secondly, on the booking side, you did do quite well there as far as this net change in deferred revenue from last quarter to this one, so I assume you've signed a fair amount of new contracts here. And your growth I think from deferred you mentioned was 38% year over year, but the billings calculation, I guess it was 51% year over year.

So I'm just thinking, as far as the seasonality goes and the usage fees which cannot be predicted, and I get that, but I look at last year's ramp up in your billings number. It's nice through the end of the year and then it fell off in March and then it's sort of building up again this year in a similar trajectory.

So as far as the seasonality, Ken, and the expectations of Q1 being weaker and then Q4 potentially being as strong as December quarter, anything you could comment on that front would be really helpful on the billing side.

Thank you, Dmitry, for the comments. So on the usage, look, you can't always correlate usage with revenue. That's an impossibility, because in some markets we absolutely do have customers in the state and local space that, because of budget reasons, they buy unlimited contracts.

In Florida, we do not bill them by usage or number of calls. And we've reached such scale with billions of messages going out that an incremental additional 10 million messages we don't even see the blip in our cost side of the equation. It costs certainly more than none, but it's not impacting our costs and you see that in the increased profitability that we are able to drive.

So I think it drives new business overall, which is a longer-term phenomenon because it takes us between three and nine months to close new business, depending on the segment. State and local is a longer sales cycle than corporate. But I would not try to equate, even though there is -- with volume there will be some users, especially corporate users and especially with unique messaging or communication costs like international messaging, that will have to buy more usage and are usage-oriented.

But the volume of our customers over the broad base, that is the more activity, as I said -- more terrorist events, more severe weather events -- they drive new customers and overall new contracts, not necessarily huge balloons within a quarter on messaging count. Nor do they necessarily cost us that much more because Florida is clearly -- the hurricane was clearly the biggest event we have had and we turned in our best quarter in a while in terms of profitability. So it doesn't really impact either one. It drives long-term new business wins.

And to the seasonality, I will turn it over to Ken.

The reality is, as we've discussed with you and others on the roadshow, there is going to be some seasonality both from the standpoint of deals getting closed and in terms of some of the expenses. Although that's why we focus not on things like bookings or billings, but on revenue, which does a reasonably good job of taking the seasonality out of the equation.

And as I said on expenses, expenses are pretty consistent throughout the year. Growing over time, but as we said, in this quarter we saw expenses grow by 18% and we saw revenue grow significantly above that.

Just a follow-up, I appreciate, Jaime, that insight and a chance for the explanation on the billing side. But what normally would we expect -- would we expect March to be down on the billings side or the revenue side? Is that something we should expect here going forward, strong end of the year and then (technical difficulty) Q1?

At this point we are not giving specifics on how 2017 is going to lay out. But, realistically, there isn't a lot of seasonality but there is some, just based on the fact that our customers' buying cycles. But I'm going to defer until we get to the 2017 guidance at this point.

I think, Dmitry, you saw the progress we made in the positive results and I think you will see -- you will get some of those answers in our guidance which will come next quarter. Because that is a quarter that is out there a little ways, we can safely tell you before you get there you will get some guidance from the Company.

Great, great. Then just the last one from me then. You guys mentioned that you signed up these multiproduct deals and as many this quarter as any other quarter you have had in the Company's history. So I was just wondering is there a way to quantify that. What is, for example, a percentage of the total deals were multiproduct deals in the quarter (technical difficulty)?

There really isn't right now. As we said in our prepared remarks, and we will be a little bit of a broken record being I think responsible here with the metrics, but we've got a number of metrics we are going to provide you. We will be providing the growth of the new products, so 28% dramatically up over where it was a little over a year ago. And more than likely -- well, you will get that metric every quarter, so you will be able to tell the growth as it compares to mass notification or core historic product set and the bulk of our revenue.

What we don't want to do is get into each individual product or growth rates of individual products over others, because they can vary seasonally. And on the multiproduct front, we would just tell you we did give some clarity in that this was, by far, the best quarter we've ever had with multiproduct sales, including more than just two, some three and four products.

But that salesforce was only hired in mid-2015, late 2015 and only came on board this year, so they are just starting to reach their rhythm. That was something we have said repeatedly. We spent time hiring them and getting them ramped and now we are seeing some of that success.

But given it is the law of small numbers, we don't want to give you a percentage that misleads you or give you we had these 12 or 25 deals, whatever the number was, and then not be able to sustain that and have you think that that this is negative. Because it's not just the number of multiproduct deals, it's the total dollars involved in the deals and the products that we are talking about. So there's just too many variables right now.

What we will stick with is overall aggregate new products as compared to the core and that will give you a good barometer. And we will quote and try to give you color on how we did with multiproduct deals with specific color, so you can understand that they are customers that are looking for us to buy a platform instead of a sole product, which is a big part of our strategy long term.

All right, understood. Thank you for that and keep up [the good work.]

Operator, we have time for one more question.

I am showing no further questions at this time. I would now like to turn the call back over to Mr. Jaime Ellertson for closing remarks.

All right. Well, thanks, everyone, for joining our first earnings call as a public company. We believe our strong results reflect our leadership and momentum in the market that is growing in size and importance. And the need to protect people and businesses is acute out there.

We believe that we are better positioned than anyone else to serve this market and that doing so will enable us to scale as we build a large, profitable organization for the long term. Thanks again for attending. We look forward to seeing you guys in the market. Goodbye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.