Everbridge Inc (EVBG) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Everbridge, Inc. Second Quarter 2018 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 presentation, Mr. Ken Goldman, Senior Vice President and Chief Financial Officer. Sir, please begin.

Good afternoon, and welcome to Everbridge's Earnings Call for the Second Quarter of 2018. This is Ken Goldman, Senior Vice President, Chief Financial Officer of Everbridge. With me on the call today are Jaime Ellertson, CEO and Chairman; Bob Hughes, President, Go-to-Market; and Jim Totton, Executive Vice President of Product Management, Engineering and Operations. After the market closed today, we issued a press release with details regarding our second quarter results, 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 only our views as of today and should not be considered representative of our views as of 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 results are summarized in the press release that we issued today. For further discussion of the material risks and other important factors that could affect our actual results, please refer to our filings with the SEC, including our recent 10-K and 10-Q filings.

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 the times in our prepared remarks 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 or our quarterly results. 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 our second quarter 2018 earnings call. Our second quarter performance reflects our accelerating momentum as we execute against our growth strategies. Q2 revenue of $35.8 million represented at -- growth of over 43% from a year ago, and we again balanced very strong revenue growth with better-than-anticipated profitability, generating an adjusted EBITDA loss of $1.8 million in the second quarter, which was ahead of our guidance.

The broad drivers for our strong beat include above plan new and gross sales for our core Mass Notification solution; continued strong traction with our new products; accelerating market acceptance of our CEM suite; and the continued expansion of our international business both organically and supplemented by the inclusion of our acquired UMS business. Additionally, North American -- America, we significantly increased the size of our opportunity in the government market, having achieved FedRAMP authorization in early June. But more on that achievement a little later.

Overall, we are particularly pleased to have delivered 8 consecutive quarters of better-than-expected results in the time since our IPO in 2016. We believe these results quite simply are proof that our growth strategy is working.

Beginning with our first growth pillar, maximizing our customer retention as well as expanding our products suite to accelerate cross sales and increase our ASP. In the second quarter, we achieved another solid retention quarter with now more than 4,000 enterprise customers, and we saw dramatic success with our efforts to close larger, more strategic enterprise solutions with a record-setting number of 6-figure deals, including a dramatic increase in the number of $200,000-plus deals, up 33% year-over-year. Our multi-product deal volume also continued to grow, achieving a record 82 multi-product transactions in Q2, a 37% increase from last year. In combination, these strong results continue to drive our growing ASP, which, at $45,000 plus, is up 17% year-over-year. In the quarter, we also expanded our product suite by completing the integration of a new risk Data-as-a-Service offering for one of our previously acquired assets. More about this offering later.

Our second quarter results also illustrate our success with our second key growth pillar, ensuring the growth of our core notification business by driving continued success in North America in both our state and local government and corporate markets as well as expanding into new markets and geographies worldwide. Quite frankly, our core Mass Notification business had a very, very strong showing this past quarter. We saw real success with our programs to drive new large city, county and state deals with large new customer wins like the city of Austin, Texas and the 11 surrounding counties for total contract value of over $700,000. Another win in Texas was Harris County, the third largest county in the U.S., in another multi-6-figure deal.

In New York state, we won a 6-figure multi-product deal with Nassau County in a competitive takeaway. And we saw New York Alert go live. Our previously announced multi-year, multi-million-dollar contract with the state of New York continues to be rolled out, and we expect it to be a growing contributor to our SLG revenue as we look forward. Our recent success with New York State and New York City helped us enable our network effect and contributed to our Nassau County win, where multiple Everbridge customers can share critical alerts and information directly between themselves as well as a concentration of users creates strong referential selling opportunities.

Our strong showing in state and local government translated to other related markets like the education space, where we saw new wins at large institutions like Mississippi State, High Point and Eastern New Mexico Universities. On our corporate side, we enjoyed similar success with impressive wins across leading enterprises, including marquee wins at North America's largest company by revenue, selecting our core Mass Notification and Safety Connection solutions for an initial rollout and large tech players like Polycom, Analog Devices and [Cel-Fi] as well as leading financial services organizations like Barrick Gold and First Data, all selecting Everbridge Mass Notification in Q2.

Internationally, we continue to see acceleration in our results as our international revenue grew by over 170% year-over-year to equate to 19% of our overall revenue. From a strong combination of faster organic growth plus nearly a full quarter of contribution from our UMS business, our broad geographic expansion was powered by new wins such as High Speed 2, which chose Safety Connection for Europe's largest infrastructure project that will connect the cities of London, Birmingham, Manchester and Leeds.

In Asia, our team landed new product wins like CLP, the largest utility in Hong Kong, which selected Everbridge Mass Notification and Secure Messaging solutions. Additional notable international wins in the second quarter included DBS Bank in Singapore, Ahold Delhaize in the Netherlands, CGG in France and companies like PokerStars and the government of the Isle of Man in the U.K.

And we made great progress with the UMS business internationally. Upon completion of the UMS acquisition earlier in the quarter, we streamlined our operations, including implementing a more focused go-to-market effort. These actions began to pay dividends in Q2 with several whole country population alerting solution project wins, including a 6-figure deal for a smaller European nation in Europe as well as a better-than-expected UMS core Mass Notification results from the Scandinavian market, including incremental organic growth over previous periods. Our core M&A goals include looking for highly differentiated technology that can expend our platform and/or opportunities that help us gain access in new markets, for examples, new geographies or a new end user market.

In the case of UMS, it looks like, and it's still early, we may achieve both of these M&A goals. Looking forward, the advantage of our unique population alerting solution has -- with large countrywide opportunities combined with synergies our organizations have in the Mass Notification market, paints a very positive outlook for our future international growth.

To further help us ensure we can sustain our international momentum, we expanded our European operations during the past quarter into the Netherlands with new sales, support and office infrastructure in this key continental market. And on the topic of market expansion, in North America, our recent FedRAMP authorization will enable us to more easily serve the large U.S. government market, a market we estimate to be twice the size of our existing state and local government opportunity. Our Everbridge Federal group is open for business with new offices earlier this year and aggressively working to land large new opportunities. More on our federal effort and FedRAMP by Jim Totton, our EVP of Product Management, Engineering and Operations, later in today's comments.

Now onto our third strategic pillar, our Critical Event Management suite experienced continued growth and market acceptance in Q2. We closed a record number of new CEM customers in Q2, up 60% from Q1, with average contract value of over 5x our company-wide ASP. And our CEM success in Q2 was across numerous corporate segments, including oil and gas, retail, high tech, financial services and health care, with most new wins being Fortune 500 companies. These new customers are focused on implementing an enterprise-wide common operating environment that will provide situational awareness, integrated incident and operational response and communications and collaborations to enable them to ensure the safety of their employees and avoid unnecessary business impact during a wide range of critical events that affect their organizations every day.

In Q2, leading health care organizations like Alexion and leading financial institutions like American Family Insurance chose multi-product CEM solutions. One of our most notable new CEM wins was the leading online marketplace, eBay. eBay was already an existing Mass Notification and IT Alerting customer and in Q2, chose our Safety Connection and VCC solutions in a large 6-figure deal. With this win, eBay is now user of 4 of our 5 top application solutions.

On the technology side, our product development teams made progress by introducing our new Risk Data-as-a-Service or RDaaS offering, our first enhanced risk data solution that includes multiple threat, reference and contextual feeds from a variety of public and proprietary sources in a single integrated flexible package. Our RDaaS solution is comprised of our numerous existing risk data sources, including our Nixle local law enforcement events, our multiple weather data providers from national weather data to leading source like WDT and AccuWeather to social media and other government threat data providers.

And last week, we completed the purchase of RiskMap, a provider of machine learning, crowd-sourced intelligence, social media, local and global media coverage and dark web information to identify and track risk events. This combination of data and people allows us to have a broad geographic coverage while efficiently balancing speed, accuracy and completeness of any risk information that is shared with our customers. This efficiency will also allow us to make this offering available to a much broader set of customers and prospects who had otherwise had been priced out of more traditional risk data offerings.

And just after the close of the quarter, we released our VCC product as a complete multi-tenant SaaS at single instance solution. Our VCC SaaS solution was built to leverage both the full capabilities of our global, resilient and scalable multi-tenant SaaS platform as well as integrate with our entire suite of CEM applications like Mass Notification, incident communication and Safety Connection and also adhere to our philosophy of extreme configurability and self-service. This approach enables us to dramatically reduce the time and effort that it takes to deploy the solution and fully onboard customers. This is important because it allows us to make VCC SaaS available to a much broader set of prospects and customers unlike the previous version of VCC, which was mostly targeted to Fortune 5000 customers. In short, VCC SaaS will enable the full suite to be easier to deploy across our entire customer base.

Now allow me to provide a little more detail on the strong Q2 performance and business trends. In Q2, we added 120 net new enterprise customers, not including new customers through our UMS acquisition. In Q2, the 82 multi-product deals that I mentioned earlier helped to raise our trailing 12-month average to 69 multi-product deals per quarter. This increasing number of multi-product deals demonstrates our ability to increase the strategic value we deliver to new and existing customers with our expanding suite of products and in parallel, drive larger ASPs. We also saw a strong contribution from our new products such as Safety Connection and IT Alerting, which together represented 46% of new and gross sales in the quarter.

Now you'll notice that while this is a meaningful increase from the 36% of new and gross sales from a year ago, it represents a slight decline from the 49% in the first quarter from new products for the first time since our IPO due to the very strong Mass Notification performance in the second quarter. Given our continued Mass Notification momentum combined with new market expansion opportunities in the federal market, accelerating international success, where MN is often the first product we sell, we accept to see healthy -- we expect to see healthy growth in both the core MN and new product categories with each category driving roughly between 40% and 50% of new and gross sales for the foreseeable future.

On an individual product basis, new and gross sales of Safety Connection grew by over 85% on a trailing 12-month basis, and ITA sales climbed 35% on a similar trailing 12-month basis. Safety Connection, which is disrupting the physical safety marketplace and addressing needs of increasing mobile workforce worldwide, continues to be our fastest growing product with numerous new wins in our corporate and health care verticals.

Lastly, our revenue mix of 54% for corporate, 31% for state and local government and 15% for health care remain roughly consistent with previous quarters. However, as I previously mentioned, international grew strongly to reach 19% of overall revenue.

In summary, these very strong Q2 results illustrate our ability to engage and penetrate a large and growing addressable market. At a recent Analyst Day, we provided a detailed build of our current $45 billion TAM. And our continuing momentum in our core Mass Notification business, our newly expanded federal market opportunity, continuing success in our international business, including our acquired businesses like UMS, all led by the strong traction of our most strategic solution, CEM, that is generating gives us confidence that we have a blueprint to maintain our growth momentum in the quarters to come.

Now I'd like to turn the call over to Bob Hughes, Everbridge President, Go-to-Market, to discuss specific color on the go-to-market success in Q2. Bob?

Thanks, Jaime. Our go-to-market strategy is focused on expanding Mass Notification deals, cross selling new products, increasing the number of multi-product deals, advancing our CEM vision and growing our international presence. I'd like to highlight some of our successes from the second quarter that demonstrate our strong execution.

Starting with Mass Notification. In the second quarter, we signed a number of large new Mass Notification deals with strong results in the government market. We signed numerous 6-figure deals at the county and state level. Many of these transactions will benefit from a network effect stemming from the relationships we already have in place in given geographies, enabling the sharing of data within a region. For example, in the second quarter, we signed the Florida Department of Transportation in a 6-figure deal as a Mass Notification customer. With more than 120,000 miles of roads, 12,000 bridges and 18 million registered motor vehicles, the Florida DOT clearly has a need for a flexible and redundant incident communication solution.

Last fall, during Hurricane Irma, countless organizations across the state of Florida leveraged Everbridge but what really got the attention of Florida Department of Transportation was the Florida Turnpike's use of Everbridge to manage the largest evacuation in state history, with nearly 7 million people making their way north as the storm approached. In June, coinciding with the start of a new hurricane season, the Florida DOT selected Everbridge for implementation across all districts and assets statewide, providing a single communication platform to both manage daily operations and be prepared for major incidents in the future. Another result of the network effect in Florida is our win this quarter at the Florida Department of Environmental Protection and an additional win at the Florida Agency for State Technology, quickly expanding the number of state agencies that will benefit from Everbridge in Florida. And a final example of our ability to leverage wins across the region is the Tallahassee International Airport, which we also closed in Q2.

Another notable win in the government market is NASA's Michoud Assembly Facility. NASA Michoud represents the third NASA facility to choose Everbridge, along with NASA Goddard Space Center and the Jet Propulsion Laboratory at Caltech. At the Michoud Assembly Facility located in New Orleans, NASA chose Everbridge Mass Notification to communicate with staff during critical events and community engagement to engage with visitors to the facility.

In our corporate market, new substantive MN, Mass Notification, Safety Connection and ITA wins included a significant expansion of our relationships with 1 of the top 4 gaming and resort companies operating over 50 casinos and hotels around the world. This major casino and hotel operator started their relationship with Everbridge by deploying our IT Alerting product. After the Las Vegas shooting in October of last year, they decided to implement an effective way to account for and to communicate with staff in the event of future emergencies. In Q2, they expanded their relationship with Everbridge in a 6-figure deal to add Mass Notification, Safety Connection and incident communication for their 65,000 global employees.

In addition, a multi-billion-dollar women's clothing retailer chose Everbridge IT Alerting in Q2 to displace an incumbent and due to our ability to implement a single platform to also communicate life safety issues for all their employees. They also chose our Mass Notification and incident communication application. This 6-figure deal illustrates the leverage of a broad platform offering that can easily integrate with other tools and provide a comprehensive critical communications infrastructure.

Success in the second quarter also included multi-product wins and expansions as customers and prospects embraced our CEM vision. In addition to the CEM wins Jaime already mentioned, we also entered into a new CEM deal as part of our initial relationship with a Fortune 500 operator with over 45,000 restaurants in 135 countries. This major restaurant chain shows the combination of Visual Command Center, Mass Notification and incident communication to better anticipate and respond to critical events that can disrupt operations. Their initial 6-figure transaction only covers 3% of their employees and 1% of their restaurants, and we believe they will represent a significant expansion opportunity for Everbridge over time.

Moving overseas, I'm excited to discuss our international expansion opportunity since we believe the market opportunity outside the United States may be even larger than the opportunity within the U.S. And while growing fast, we are currently just scratching the surface of the sizable international market. In addition to winning a nationwide deal that -- nationwide deal out of a small country in Europe, as Jaime discussed, we also expanded a countrywide deal in Sweden, enabling an entire population to receive location-based alerts during a crisis.

Also, in the second quarter, the world's largest offshore drilling contractor headquartered in Europe and with offices in 20 countries selected the powerful combination of Everbridge Mass Notification and Visual Command Center in a 6-figure deal to ensure the physical security of its global workforce and the business continuity of its operations, another great initial customer win leveraging both products.

In summary, our second quarter performance reflects continuing momentum in executing on our multiple growth strategies, and we're more excited than ever about the opportunities ahead, including our ability to expand our addressable market. While we have a number of federal agency wins such as those with NASA that I mentioned, leveraging FedRAMP authorization will significantly expand the government opportunity at the federal level. For more details on that, let me pass the call now over to Jim Totton, our EVP of Product Management, Engineering and Operations. Jim?

Thanks, Bob. I was very excited to join Everbridge this February to lead our product teams as Executive Vice President of Product Management and Engineering and Operations. Over the past 2 decades, I have held operational executive leadership roles at Red Hat, Microsoft and Dell, and I'm excited to bring my experience to contribute to Everbridge's growth in the years ahead.

As Jaime mentioned, we recently received the final FedRAMP authorization, further differentiating Everbridge in the federal market. This was a multi-year effort involving thousands of person hours to ensure compliance with 325 controls, demonstrating the security the Everbridge suite delivers, backed by an independent audit and ultimately authorized by the Program Management Office. This is an accomplishment only achieved by a select group of companies and now qualifies us to be officially listed on the FedRAMP Marketplace, the central repository where federal agencies can select technology solutions. Not only is this important in that it will further open up the federal market for us. It also reinforces the security and scale of our platform for other markets, including corporate and other government opportunities. We continue to be optimistic that we will sign our first FedRAMP-enabled federal contracts in the coming quarters, though due to the nature of SaaS revenue recognition, you won't see meaningful revenue impact until 2019.

And second, I would like to share an update on one of our most significant investment areas in our platform, which is internally called [Project Atlas]. As Jaime and Bob discussed, due to the increasingly global nature of our business, we have continued our investments in the scale and automation of the deployment and management of our infrastructure, utilizing techniques such as infrastructure as code. This increases our agility and time to market in scaling our infrastructure globally.

Further, this supports additional ability to scale on demand in markets needing additional capacity at key moments. These projects are key examples of our continued innovation and investment in technology with 85 global patents and counting, along with the most scaled, reliable and global infrastructure in order to continue to support our strong market success.

Now I'll turn the call over to Ken for details on our financial performance and increased guidance for the year. Ken?

Thanks, Jim. I'll provide some more details on our financial performance for the second quarter and then discuss our outlook for the third quarter and full year 2018. Revenue in the second quarter grew 43% from a year ago to $35.8 million and was above the high end of our guidance range due to the strong organic performance with our recently acquired UMS acquisition also performing better than anticipated. Revenue upside in the quarter helped generate adjusted EBITDA that also exceeded our guidance at a loss of $1.8 million compared to an adjusted EBITDA loss of $100,000 a year ago.

Our dollar-based net retention rate remains above 110%, reflecting the significant value and satisfaction that we provide to our customers. In looking at our total customer count metric, with the addition of UMS, we are increasing the threshold of enterprise customers from $100 per month to $200 per month. This has the combined effect of reducing our organic enterprise customer count but also as customers acquired from UMS as well as net new organic customers from the second quarter. On this basis, we ended the second quarter with 4,158 enterprise customers compared to 3,539 at the end of the first quarter.

Now turning to the details of our 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 we issued earlier today.

Non-GAAP gross margin of 71.5% decreased from 72.5% a year ago due to the purchase accounting impact on acquired deferred revenue from recent acquisitions. We expect gross margins to continue to improve as this purchase accounting impact diminishes in the quarters ahead, however, as always, please keep in mind that gross margins can fluctuate from quarter-to-quarter.

Total operating expenses were $29.3 million in this quarter, an increase of 49% from a year ago, reflecting the combination of continued product investments along with the expenses of acquired businesses. In addition, due to recent changes in accounting regulations, we can no longer capitalize expenses related to M&A transactions, and therefore, our second quarter expenses included costs related to our acquisitions that would have previously been capitalized.

As I indicated, adjusted EBITDA loss for the quarter was $1.8 million and better than our guidance range. Net loss in the second quarter was $5.1 million or $0.18 per basic share and was also better than our guidance compared to a loss of $1.5 million or $0.05 per basic share in the year-ago quarter. Note that on a GAAP basis, we had a bigger net loss in the second quarter than our guidance range due to the higher-than-anticipated stock-based compensation expense for the second quarter. As the vesting of these performance stock units is triggered by share price, our stock-based compensation expense in the quarter was considerably higher than anticipated when we provided guidance due to our stock price more than doubling in the last 12 months and increasing more than 30% during the second quarter.

Turning to our balance sheet. We ended the quarter with $106 million in cash, cash equivalents and short-term investments, a decrease from $152.1 million at the end of the first quarter, due primarily to the approximately $35 million in payments to complete our acquisition of UMS and operating cash outflows of $9 million due to timing matters and $2.2 million in capital expenditures and capitalized software development costs.

Total deferred revenue was $82.5 million at the end of the quarter, an increase of 38% from a year ago. As we've noted on prior calls, our deferred revenue balance at the end of any quarter can vary greatly due to a number of factors, including seasonality, in which the first quarter represents our smallest quarter for renewals and the fourth quarter being our largest. As such, even though we have predominantly annual payment terms, deferred revenue is not always a meaningful indicator of the underlying momentum in our business from a quarterly perspective, though we believe it is directly relevant over a longer trended period.

Now let me turn to the outlook. We had a solid first half of 2018 and remain optimistic about the balance of the year. With that backdrop, for the third quarter of 2018, we anticipate revenue of between $37.9 million and $38.2 million, representing growth of 39% to 40%. We anticipate an adjusted EBITDA to be between negative $200,000 and positive $100,000. We anticipate a non-GAAP net loss of between $3.7 million and $3.4 million or a loss of between $0.13 and $0.12 per share based on 29.4 million basic weighted average shares outstanding. Stock-based compensation is expected to be between $3.9 million and $4.1 million for the third quarter.

For the full year 2018, we are raising our revenue guidance to the range of $143.7 million to $144.3 million, an increase of $4.8 million at the midpoint from our prior guidance, representing growth of 38% from a year ago. This increase in guidance reflects our better-than-expected organic results, further supported by raised revenue expectations from UMS from faster-than-anticipated traction in that business and smaller-than-anticipated purchase accounting impact on the acquired deferred revenue. As such, we now expect UMS to contribute between $5 million and $6 million to our 2018 revenue.

From a profitability perspective, we now anticipate full year adjusted EBITDA to be in the range of a loss of $3.4 million to $2.8 million. We expect a non-GAAP net loss of between $17 million and $16.3 million for the full year 2018 or between negative $0.58 and negative $0.56 per share based on 29.3 million basic weighted average shares outstanding. This includes the impact of an estimated $5.1 million in net interest expense related primarily to our convertible notes. This guidance assumes an estimated stock-based compensation expense of approximately $28 million for the year.

In summary, we delivered better-than-expected performance in the second quarter with positive and encouraging results across our business. We are enthusiastic about our ability to drive growth from our core Mass Notification business, newer products, expanding market opportunity within our FedRAMP authorization and accelerating international business as we expand our ability to continue to capture an increasing share of the large opportunity that our Critical Event Management solutions address.

With that, operator, let me turn the call back to Jaime for some additional remarks.

Thanks, Ken. As you can see, our strong second quarter performance, growing market momentum and expanding global opportunities give us confidence in raising our full year revenue expectations. We're more excited than ever about the opportunities ahead of Everbridge, and we're advancing towards our goal in a thoughtful manner. The additions of Bob, Jim and other executives to our team give me great confidence in our ability to execute our strategy and drive continued strong growth as we look ahead.

We've also expanded our Board of Directors with the recent addition of Alison Dean, who is the CFO of iRobot, further enhancing our board with directors who have been instrumental in scaling larger technology businesses. And as we announced in June, we're in the early process of identifying a new CEO, enabling me to transition to the role of Executive Chairman. We'll be evaluating both internal, external candidates and have deliberately set a long timeline for this transition in order to allow for a thoughtfully executed process over the 1.5 years.

In summary, we're very excited about our second quarter performance and believe we've set the stage for continued success in cementing our leadership position in this very large and dynamic market. Now operator, would you please open the call for questions?

(Operator Instructions) Our first question or comment comes from the line of Richard Davis from Canaccord.

So congratulations on navigating the FedRAMP certification process. So 2 questions arise when I think about that because I just don't know the -- that space as well. So one, if you announce a win, do you have to put that contract up for comment from competitive bidders? Because sometimes I've seen that happen with other companies. And then second, are you going after these opportunities mostly on your own? Or there's a lot -- sometimes there's groups of professional services firms that focus on government agencies that can kind of help you navigate through there. And to what extent does that make sense for you to do now or in the future?

Yes. I -- we don't know of -- every contract is different, Richard, so it's tough to create a broad generalization. But the FedRAMP certification is more about getting federal market departments and organizations the comfort that we qualified and meet a level of certification around security and ability to operate at the government specification anything else, and it smooths that ability to bid. More and more, we're seeing the average bid come out saying, we require FedRAMP certification or want to see you're in the process and going to receive it quickly. And we're 1 of only 2 vendors in the market that are up on the website as you can check. So we don't know the process that requires that, but everyone is different. We believe that it's just going to, as we said, open the ability for us to bid on a substantially larger number of standard proposals. Obviously, if there are more than 2 vendors, then they can compete. But there aren't today. There are only 2. And then on the second side, yes, we work with multiple system integrators and partners as well as go direct. So that's a simple answer.

Our next question or comment comes from the line of Brad Zelnick from Crédit Suisse.

I wanted to dig in a little bit more on Critical Event Management. Just given the premium ASP, the strong value proposition, the great momentum you're seeing and the overall market opportunity that, that all represents, I mean, you talked about a massive -- I think it was 45,000 restaurant win globally, and it's just tremendous. But as we think about the forward opportunity, are there specific verticals that you can call out as being more ripe than others? And how do you see this market evolving over time to eventually getting inbound RFPs and live budgeted projects that are showing up at your doorstep?

Yes. I'll make some comments and see if Bob wants to follow up with some specific comments even around situations that we closed this past quarter. In general, we announced our Critical Event Management strategy basically a year ago and have only been in that space for several quarters. So it is new to us. We started with 3 products, announced that, by the end of this year, we'll introduce a fourth critical management -- our crisis management application, which is the ability to manage the full incident and the tasks related in these complex larger incidents. We have seen the ASP grow in almost every quarter and the number of deals. But as Bob pointed out at our Analyst Day and on the last call, we have less than 10% penetration to Fortune 500. I was buoyed by the fact that we saw almost all of our wins this past quarter. I think the majority of them were with Fortune 500, like the large restaurant, eBay and others. And so we think that is a very significant market. We're in the early stages because we invented the space. So are we starting to see people come to us with a blank RFP [us] and just say, "We're not going to fill in the RFP. We're just going to put Everbridge in, and you tell us what the price is." It's not quite that market yet, but it is a very much larger winner or represented properly as a way for a company to get on to a common operating platform for their most significant events that affect their -- either the safety of their employees or their operations. We're the only provider that claims to have that solution. And as we grow in success, no doubt, the market will respond and will come to us more and more with the opportunity. Instead of us building the market, the market will come to us, same thing that happened to Salesforce with CRM, same thing that happened in the ERP space, we believe, ultimately. And we do have a leadership position there. Bob, any comments on individual wins in markets?

Yes, sure. On the -- Just to pick up on the question on the vertical markets. As we talked about at the Analyst Day, we have a growing total addressable market. So we've been in this process of evolving much more towards a vertical go-to-market organization. That journey is very thoughtful evolution. And obviously, we look very closely at wins within verticals and look at that, is that a vertical that we -- or can we replicate that win? How do we leverage the ROI, build a new case study and then with successful build out, a full-blown vertical. We [had] done that with, obviously, state and local government or our public sector, which is a combination of federal state and local government. We have a focus on the high-tech vertical, financial services. An example I cited there in retail, that actually came out of a large win we had -- or I should say, a large use case that evolved during one of the hurricanes, where we saw a retailer leverage our technology to both make sure when a store was adequately staffed, resource, in terms of telling employees to stay home [from another store] that was going to be impacted, load up on both the supplies and the employees to generate revenue and keep their products available in other locations. So we said, "Let's target anyone that looks like that in terms of number -- have a large number of branches or that use case," and we went after this type of customer that I was referring to. I can't use the name. And yes, that resulted in a win. So taking that, we would look at that closely and say, "Okay, how many other companies look and behave like that, what was the specific use case, and does this actually make sense?" So that will be a journey that we're on. We're going to go after it very thoughtfully, but we analyze every transaction that comes in, win or loss.

And Brad, I -- just getting back to your original question. We, in launching CEM, have only targeted our corporate and health care spaces. We haven't gone after any other market. We do not actively sell it in the state and local government today, even though there's a clear need. And former VCC customers exist in that space, very large ones. We have not focused on our international market. We don't sell it right now into markets like transportation, multiple other places where we can go. So we're in the early stage of CEM expansion. It's growing very well. But as we expand, as we presented at our Analyst Day, if we just sold it to the bulk of our existing customer base, it would allow us to grow our business substantially. And so still early days.

If I could just sneak a quick one for Ken on cash flow. Ken, I think, on accrued payroll and employee-related liabilities, we were a little bit off there. Can you just give us a little bit on the puts and takes and timing issues as it relates to cash flow and where we stand for the full year?

Yes. So on a full year basis, we expect cash flow to be roughly neutral. But from quarter-to-quarter, depending on what day the last day of the quarter is, when payroll taxes may be due and in particular, in Q2 because of the stock-based comp charge that we took, there were a lot of payroll taxes due by both employees and by us as employer, and that skewed things a little bit more this quarter than you would normally see.

Our next question or comment comes from the line of Tom Roderick from Stifel.

I wanted to ask a little bit here just about UMS. And if I look at the international contribution quarter-on-quarter, it seems like it more than doubled so fantastic result there. Tying that back to Ken, your comment that you're only expecting $5 million to $6 million for the year on UMS, it tells us that something organically is going really well in international markets as well, not just the acquisition. I was hoping you could talk a little bit more about that. Is this predominantly Mass Notification on the core side that is really starting to make waves? Perhaps you could talk about some of the markets internationally inside and outside of Europe that are generating the results outside of UMS?

Yes. Tom, this is Jaime. Happy to jump on that, and again, Bob may follow up with a comment or 2. But in general, as we said, we had organic results. Remember, I kind of signaled this last quarter. We did almost 60% growth, and in last quarter's prepared remarks, I said our international business grew by more than 60% year-over-year without UMS. So our core business is growing, for the first time, substantially faster than North America, and that's to be expected if we get our act together, have new management, and the product traction is there plus the multi-product traction is there, which are the 2 big drivers. We're starting to see -- as you see the deal color elaborated on in these quarters that, in Asia and Europe, Continental Europe, the reason I gave you 4 different countries with specific examples was it's across the board. We're seeing Mass Notification but not just Mass Notification. Someone's buying Mass Notification and Safety Connection or safety -- Mass Notification and ITA or Secure Messaging and Mass Notification, like the CLP win. So with multi-product traction, that sales force is getting it now like we did in the U.S.. They're a little bit behind us. But as Bob said, that's a market that's equal to our entire North American market, which means -- and we believe it could be larger with the drivers systemic there. So we're seeing that across the board. And then you add to that UMS, and you get this performance of up from last quarter substantially to this quarter and over double.

Fantastic. Tying UMS into that, you've landed a countrywide win in Sweden. Sounds like you landed another smaller European nation so fantastic sort of add into that portfolio. Is there a nice cross-sell opportunity as you go countrywide? Obviously, Mass Notification and related products here in the states have been fantastic on a statewide level and government as well. What's the cross-sell potential as you sort of look countrywide with some of the UMS offerings?

Well -- as we -- as I expounded on it last quarter, you get -- if you win a country, it's pretty hard for anybody else. You kind of suck the oxygen out of the room from everybody else. No one gets traction because who's going to want to buy a secondary solution that's not aligned with the federal government or the primary governmental solution. So we have that same referential network effect of buying patterns from customers we see when we win a country, much easier to sell to large corporate, large health care, large oil and gas or transportation, airlines, airports, things when you've won the national opportunity. It's early days. This last quarter, we actually even had another major capital environment start on a pilot project we passed. So we're seeing a little bit of pickup in the population alerting business. There's no question that leads us to the opportunity to cross sell and up sell our strength, which is the corporate market and general use of Mass Notification that can be aligned and integrated. And long term in our product road map, population alerting integrates with a, say, corporate user of Mass Notification.

Our next question or comment comes from the line of Terry Tillman from SunTrust.

This is Eric Lemus on for Terry. I want to follow up on the FedRAMP authorization, and congrats again on finally reaching that. But if you look at those deals early on, are most of the deals going to be Mass Notification deals? And then if so, how do you see the landscape? Is it more of a rip and replace or greenfield opportunities out there?

Yes. This is Bob. Good question. We see it [as] a large opportunity on both sides. There is a -- there has been -- or there is an established competitor in the space, so some of those contracts will come up for bid occasionally. But they're just scratching the surface as well in terms of the total public sector market. So as Jaime mentioned, having that certification really differentiates us from a lot of other companies in the market, in the public sector but as well in the corporate. It's a great kind of seal of approval. But we believe the opportunity there on the outside of that competitor space is larger than what they have, so we're very excited about it. And as we mentioned, we're just at the beginning, but I'm very optimistic about what's going to -- how that market will produce throughout the remainder of this year.

Our next question or comment comes from the line of Brad Sills from Bank of America.

Just a follow-up on UMS, the success you're seeing there. To what extent would you attribute the upside this quarter to perhaps some positive reception to having UMS now part of the broader Everbridge stack? I mean, is there interest, at least, maybe not in the current signings but in the pipeline to add other components outside of just the core UMS offering?

Yes. I think two general comments to that and see if that [satisfies you]. Please follow on. But on one hand, with UMS, as we said, we just saw better -- we saw great results, we're hoping to get some countrywide wins and continue to work on those. Those are long-term projects, so it's great to see even small countries win their 6-figure deals, so that equates to large counties or cities here. And they are more meaningful when you win them because you then line up the large corporations as we mentioned. So that was positive. I also want to note that the core SaaS business, which is a Mass Notification solution specifically built for the Scandinavian markets, performed better than planned and organically, year-over-year, better than previous years. So that meant they did do better with our -- either with our help or through just coincidence and timing. We'll take it that we were involved a little bit and nurture that along. And so their core business did better than historical, and so we consider that a contribution that Everbridge is making. Then, on your final part, are we seeing some early indication that people like that Everbridge now owns the business, and it gives them more stability? Look, as a small, roughly $10 million public business in Norway, yes, I think the fact that the market leader now is integrated gives them long-term stability. We've had their largest partners soundly endorse the acquisition and work with us. And we believe that we're going to see more and more customers excited about the ultimate migration onto the Everbridge platform. And then with the PAS solution, it being integrated with a more corporate or standard Mass Notification solution. So I think on all those pieces, partially that we have some initial PAS wins, and they're excited about how we can merge our other core products with the Population Alerting Solution, partly that they had a strong SaaS showing throughout Scandinavia. And then partly because we're seeing some support for Everbridge as the person that stands behind it all worked to our benefit in this past quarter.

And then in the past, you guys had given some color around the pipeline for state deals. Could you provide an update on that, please?

Yes. I don't think -- none of that's changed. The pipeline's still strong, as we say. Whether it's now an entire country deal or statewide deal, we have a rhythm that sometimes we go for 2 quarters up, something, and then 1 or 2 pops. They are not as predictable as we'd like. The pipeline has not decreased at all nor has anyone else won one of the big deals that we're focused on, but they do take time. And so as Ken states, when we talk about deferred rev or something else, you have to look at on a long-term basis. On a long-term basis, we see that still healthy, and we still see large city, county and state deals as a principal driver for state and local, although all that business now falls within federal. And a large federal contract could easily be as large as any of our state and local deals, so stay tuned.

Our next question or comment comes from the line of Brian Peterson from Raymond James.

Kevin here on for Brian. You mentioned at the Analyst Day, looking to find the right balance for profitability versus growth going forward. How are you looking at some of your potential investment areas, primarily international UMS and the impact that might have on operating leverage over the next few quarters?

Well, I'll only make one comment, which I did in my prepared remarks. This is Jaime again, and then I'm going to turn it over to Ken for the long-term outlook because he has a -- he's prepublished a set of remarks on this topic. But we did -- the minute the acquisition closed, we did take some strong management action along with the team, in concert, I would say, with the team to focus their results. And in fact, some of that even included some headcount reductions because we wanted to get in line with a long-term sustainable plan. I'm happy to report, as I said in my prepared remarks, that those changes paid dividends this quarter and present us positive opportunity going forward. On the broader picture of how that folds into Everbridge, I'll turn it over to Ken.

Yes. So as we've talked about since going public 8 quarters ago, we run the business at effectively adjusted EBITDA neutral and cash flow neutral to slightly positive. That said, when we do acquisitions, as you know because of acquisition accounting, we take a haircut on the deferred revenue, which causes a drag on adjusted EBITDA and typically happens within the first year after acquisition. So we've been relatively acquisitive over the last couple of years, all to the positive. And so for instance, the acquisitions that were completed over the past year have settled down nicely in terms of meeting our objectives to be neutral to slightly positive on both cash flow and adjusted EBITDA. But we will continue to look to be strategic in doing additional acquisitions. That said, we're still committed to a long-term model that says within roughly 5 years after IPO to get to higher gross margin and higher adjusted EBITDA with the understanding that we'll balance that with the opportunity for continued growth. As you've seen over the last couple of quarters, growth has continued to move in a nice direction as evidenced by this quarter's 40-plus percent growth. And therefore, we hate to say that there are any absolutes. The reason that investors trust us as a management team is to make the right decisions on growth versus profitability. But we think, as a mature management team and as a growing public company, that we have to achieve the right balance. So committed to that balance over time, the time frame we set was 5 years from IPO, which would be 2021, and we're still on track to that with the understanding that we may make a couple of minor mid-course corrections to take advantage of opportunities for continued growth as well.

Our next question or comment comes from the line of Dmitry Netis from William Blair.

Jaime, I want to go back to FedRAMP and ask the question, I think, for the second time since the Analyst Day and that is if you could help us understand the SAM of this market. I mean, we have a lot of questions come in from investors in terms of kind of what the dollar value is for this market. If you don't want to put the exact number, maybe you could identify the bucket that belongs in. Is it $100 million to $200 million? Is it $400 million to $500 million? I know you said it's 2x the size of S&L opportunity. Maybe you can just help us understand what the actual size of the addressable market is. That would be super helpful.

Yes. Unfortunately, there aren't a lot of published numbers when you break it down to individual markets. We don't have that for corporate. We don't have that for health care. We don't have that for the federal government. The only -- the analysis that we do is try to build it from the bottom up and take example wins. So when you think of the only other FedRAMP-certified player, just last quarter, literally, coincidental with our earnings call, winning a $68 million project for one service. That's one customer. And you multiply it times the hundreds of customers. Pick any number you want. You can come up with a $1 billion market at the drop of a hat. So it's not tough to do a bottoms-up expansion and say, "Oh, there are at least, oh, 3 to 4 major service arms," and then major departments that are that large, that could be multi-million-dollar wins, gets you to a very significant federal market. Another way we've said to do it quite honestly is that our current state and local market, as we said in our prepared remarks, roughly 30% of our business. That 30%, if you take to this year's guidance we just gave you, I'm going to round it upwards, but at $150 million would mean that's a $50 million market and that's $100 million in revenue opportunity for us in that market so double the size of our $50 million current state and local. So either way, it's a very significant expansion of revenue or significant expansion of TAM. It's built into our $45 billion right now. It's just we haven't been accessing it effectively because we didn't have the right certification to -- streamline the buying and purchasing process, and we all know that, that's a big part of winning federal business. So those 2 answers kind of a gross bottoms up by what a competitor's winning and the size of their business, and the size of our business in terms of revenue expansion are the 2 ways we can do that for you, Dmitry. And we apologize because there isn't much more that wouldn't be a very detailed buildup, which we're happy to talk about offline or upcoming investment conference, for instance, this next month in Chicago and other cities.

This is super helpful. I think this gives us a good start and good kind of color look into how to size this market opportunity so really appreciate that color. Maybe if I could just slip one more, or it's a 2-part question. One is, as you think about kind of the FirstNet and how it's being built out, there's a big focus right now by AT&T to try to bring this together and expand their base station and so forth and so on. I know it's a separate opportunity from what you do. But do you think the 2 can kind of coexist and as far as kind of create a driving force, potentially in the Mass Notification market opportunity as sort of there's a call to improve reliability of the network or the nationwide alert system, emergency alert system out there? Is FirstNet the big driver, do you think, for you as you

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some uptake in the Mass Notification market?

Well, as we said before, Dmitry, the -- first, that opportunity is for first responders, right? And we are particularly strong in first responders to the applications. It doesn't replace that. It's a new frequency directed for them, and anything that generates a higher sense of awareness for emergency notification and alerting applications helps us drive our business. As we are the largest player in the space and seen as the clear market leader, all of those nationwide programs with particular submarkets help drive our market. And then when you think about us internationally, as the market leader in whole countries, who better to involve, whether it's the U.S., a federal government or internationally, with a market momentum that something like FirstNet creates. But again, let's be clear on what FirstNet is. FirstNet is new bandwidth and frequency created for first responders. Between Nixle and the rest of our business in public safety, we're the market leader with applications there, and so to the extent that more first responders are paying attention to emergency and nationalized alerting, it drives our business. It doesn't hurt us, and it doesn't compete with us. And as we said before, the particular people involved there are also existing partners. So we think net-net, that's an absolute positive and will help us drive market adoption and penetration in the state and local and ultimately, even the federal or the corporate or transportation, a lot of the other submarkets that we play in.

Great. Yes, that's what I meant, more of a pull-through effect. And then if I may, just -- yes, as far as the VictorOps, Splunk acquisition, I wanted to ask you this question also. As far as maybe you've taken this machine learning, data analytics and AI and mashing it up with Incident Management tools, is it something you guys are thinking about as well from DevOps standpoint, API standpoint or maybe just the whole mash up of AI and Incident Management? Is there an effort internally, guys, to kind of create a solution similar to that? Or do you need to play in that market? I mean, how are you thinking about that?

Well -- so we do, we do, do that. So if you -- I think you may have missed the briefing on last quarter, the previous quarter, but we mentioned our Smart Orchestration, and Smart Orchestration does just some of those components. It's not pure machine learning, but it allows you to more rapidly orchestrate and deliver Incident Management to the IT space and notify the right person in the right location about the right failure to reduce meantime to repair in a large IT operation or complex global IT operation. With that, we have told you that we're going to add analytics this next year, and the machine learning is the idea of adding those PAS and those notifications, those incidents and over time, building up a body of knowledge so that you can more rapidly help identify not only the cause but the potential solution, therefore, further reducing meantime to repair. So yes, we're all over that. Our difference between some of the players in the IT Alerting, the AI and the analytics space when it comes to IT operations and ITSM is that, quite frankly, we sit at the enterprise level. So we have a distinct difference, and we believe it's an advantage to our enterprise customers. We already are implemented on a corporate-wide basis. We passed security and contractual obligations. We have a profile on everyone in the company including, by the way, the 10% or 5% or 15% that are in IT ops. So you don't have to build up a separate database and get a separate alerting implementation going just to handle your IT incidents. And we are geared to work at an enterprise level with the scale, reliability and global reach that none of those guys can touch. And so our play is that the enterprise level -- and using the same infrastructure to deliver those same results versus the DevOps play, which is often down at the detail department level. And it means that they have to knit them together and stitch them together. Both opportunities, sides of the market are growing pretty rapidly, as we said, a 35% growth just quarter-over-quarter, and that wasn't our strongest quarter of IT Alerting. And so we think we'll continue to be a leader in that space. We're excited to see someone like Splunk get into that. On the DevOps side. We, again, think that will drive opportunities for us on enterprise as more and more large corporations say we need to be serious about the impact and the operational impact of IT outages and select an IT Alerting solution. When it comes to an enterprise play, we think we've got a chance to win every one of those.

Our next question or comment comes from the line of Mike Latimore from Northland Capital.

This is [Vijay] here for Mike Latimore. Could you talk a little bit about your sales and marketing strategy, maybe touching upon your sales team headcount and channel strategy, the sales cycle? And also, I think you briefly touched upon the pipeline on the federal side but maybe if you can talk a little bit more about the pipeline overall, including your CEM and the split between domestic and international within the pipeline, please.

Sure. So this is Bob. Obviously, the pipeline is constant ongoing work that we do. We made it very closely to those -- there's certain pipeline metrics that we're constantly tracking and trying to improve. In terms of the sales force, our expansion in sales force continues. The (inaudible) vertical continues and the focus there, Jaime mentioned, obviously, you're seeing some of the benefits of that in terms of results in North America as well as international. Started back last Q4, really trying to instrument the entire go-to-market organization and start to measure things like how fast can we hire, how fast can we create them, how fast we [could prove] productive, what does attrition look like, and ultimately, how do we get them more productive? And we're on that journey, and we're pleased with the progress to date and don't see any hiccups in terms of hiring, attrition or that path to increase productivity. So we're headed in a very good direction.

Okay, great. And any comments around the split between domestic growth and international within the pipeline?

No, we don't give specifics on anything in terms of forward looking, but we will continue to see continued international growth but domestic growth as well. So assume that they'll both grow at similar pace.

I'm showing no additional questions in the queue at this time. I would like to turn the conference back over to Mr. Jaime Ellertson for any closing remarks.

Thanks for joining our call today. We're pleased with the strong first half 2018 and as I said, remain pretty optimistic about the remainder of the year. And we look forward to speaking or seeing you at an investment conference in the future. Thanks again for attending the call today. Goodbye.

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