CS Disco (LAW) and Everbridge (EVBG) Report
CS Disco (LAW) reported Q4 results after the close yesterday that surpassed expectations and show the business continuing to gain momentum in the legal software space. Revenue was up 76% to $73.8 million (easily beating consensus of $28.5 million) while adjusted EPS of -$0.10 beat by $0.07. Guidance for 2022 calls for 28% - 32% revenue growth ($146.8 - $150.8 million) versus consensus near $140 million. Adjusted EBITDA loss is seen in the range of -$51.5 to -$43.5 million. Revenue guidance is likely very conservative while the EBITDA guidance shows a bigger loss than analysts expected. The reason is CS Disco is accelerating investments in growth (sales, marketing, etc.) to capture the opportunity in front of them right now. This is the right call longer term as the company is growing well above expectations (and will likely continue to do so). However, in the current environment investors might be looking for more bottom-line performance too.
Moving on to other metrics, net dollar retention at the end of the year was 146%, well above the 122% rate from three quarters ago. This is very impressive. New customers in 2021 grew by 36.5% to 1,126 versus 30% in 2020.
In a more growth-friendly market this is a great quarter that would drive shares of LAW higher. In the current market it’s perfectly adequate but isn’t likely to have much of a short-term impact on LAW’s share price. I suspect investors that are interested in a big secular growth story will come to view LAW as one of the potential winners and this will ultimately drive shares higher over time, so we’ll stick with it. That said I’ll also be closely watching the 27 level (January’s low, which also coincide with lockup expiration). LAW is at 31.5 this morning.BUY
Everbridge (EVBG) reported last night and as expected there was a lot to unpack. Bottom line is we’re walking away from our remaining one-quarter position. Revenue results in the fourth quarter were roughly in line with expectations (up 36% to $102.8 million) while adjusted EPS loss of -$0.05 beat by $0.15. More importantly we learned what’s going on. It has become harder for the company to keep up their growth rate without sacrificing profitability and without completing M&A. It sounds like the pursuit of growth through M&A now means Everbridge has a bunch of non-core solutions that don’t fit its strategic roadmap and which haven’t been fully integrated. To address this the company is going to pause M&A in 2022 and work to better integrate the disparate products that make sense. Some solutions will be let go. There will be a 2022 revenue impact of roughly $17 million as a result.At the same time, management says the pricing environment for public alerting solutions overseas has, in some cases, become too competitive. While Everbridge wants to win deals (especially strategic ones where it can sell additional products down the road) it doesn’t want to get tied into bad deals with countries that aren’t willing (or don’t have the budget) to pay for what the company offers. Apparently, a lot of small companies have been offering very basic solutions at bare-bones pricing. The expected 2022 revenue impact from not pursuing some of these deals is estimated at $15 million.
Together, the strategic decisions being made on M&A and public alerting are expected to have a roughly $32 million revenue impact in 2022 as compared to what we previously thought. This means updated 2022 revenue guidance is $426 - $432 million (+15% - 17%). The upside to these decisions is that Everbridge will prioritize cash flow and profitability in 2022. Whereas analysts had expected an adjusted EPS loss of around -$0.10 this year revised guidance calls for positive EPS of $0.22 - $0.26.
The bottom line to all this is Everbridge is going to be in the penalty box for a while. At least until they’ve made real progress turning the ship and delivering consistent profitability. At that point EVBG’s profile fits what we’d typically see as a private equity takeover candidate. But if that happens, and at what price, are total unknowns. Not worth sitting around and waiting for. We’ll take the profit we have on our remaining one-quarter position now and move on. SELL LAST QUARTER