Everbridge Inc

NASDAQ:EVBG

Good afternoon. Welcome to the Everbridge Third Quarter 2023 Earnings Conference Call. My name is Jason, and I'll be your operator today. [Operator Instructions]. I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company's website. Now I would like to turn the call over to Vice President of Investor Relations, Nandan Amladi. Sir, please proceed.

Thank you, Jason, and good afternoon, everyone. Welcome to Everbridge's Earnings Call for the third quarter of 2023. With me on today's call are Everbridge's President and CEO, David Wagner; and Executive Vice President and CFO, Patrick Brickley. After the market closed, we issued our earnings release and supplementary materials, which can be accessed on the IR page at ir.everbridge.com. This call is being recorded, and a replay of the teleconference will be available on our Investor Relations website at the conclusion of today's event. During today's call, we will make forward-looking statements regarding future events or the financial performance of the company that involve certain risks and uncertainties. The company's actual results may differ materially from the projections described in such statements. Factors that might cause such differences include, but are not limited to, those discussed in our forms 10-Q and 10-K as well as other subsequent filings with the SEC. Information provided on this call reflects our perspective only as of today and should not be considered representative of our views as of any subsequent date. We explicitly disclaim any obligation to update any forward-looking statements or our outlook. Also during today's call will refer to certain non-GAAP financial measures. A reconciliation of our GAAP to non-GAAP financial measures, to the extent reasonably available is included in our earnings press release, which you can find on our Investor Relations website. Our earnings press release includes highlights from our third quarter of 2023 in addition to our financial results and outlook. After we review our business and financial highlights, we will open the call for questions. With that, let me turn the call over to Dave. Dave?

Thanks, Nandan, and good afternoon, everyone. We delivered solid Q3 results, including revenue of $114.2 million, an increase of 3% year-over-year, adjusted EBITDA of $23.7 million an increase of approximately $9 million and 56% from a year ago and annual recurring revenue of $399 million, up $4 million quarter-over-quarter and 8% year-over-year. These results align with our strategy of enhancing shareholder value by prioritizing increasing ARR to more valuable recurring part of our business, and growing efficiently and profitably to achieve our goal of reaching the Rule of 40 by 2027 and enhancing our go-to-market approach evidenced by the Q3 improvements. In this context, subscription revenues of $104.3 million grew 8% in the third quarter. However, revenues from professional services, perpetual software licenses and onetime services were down $4.7 million or 32%, bringing total revenue growth to 3%. The decline in onetime revenues is due to prioritizing recurring revenues and the changes in the macro environment affecting large steel opportunities. Efficiency wise, we improved adjusted EBITDA by 56% year-over-year or $8.5 million, while also absorbing the $4.7 million decrease in professional services and onetime revenues. Our efforts to enhance efficiency are allowing us to reduce costs while continuing to enhance our product portfolio. improvements we are seeing in our third quarter results that we believe demonstrate the progress we are making to increase our ARR growth rate in 2024 are as follows: one, Q3 was our highest bookings quarter of the year, both for recurring and onetime bookings; two, our sales productivity improved 11% quarter-over-quarter and 16% year-over-year; three, our average transaction size increased again quarter-over-quarter to the highest level of the year; four, our total number of transactions remains consistent with last year; and five, our total pipeline is continuing to build. During Q3, we supported our customers through a range of critical events, including heat waves, wildfires, hurricanes and geopolitical unrest. We supported states and countries around the world with life-saving alerts in the face of unprecedented heat ways and wild buyers this summer. We delivered millions of messages to Floridians leading up to, during and after Hurricane Idalia to support their life safety and recovery goals. And more recently, as a result of the conflict in the Middle East and the result of geopolitical unrest, we're assisting multinational businesses with critical situational awareness and risk intelligence to keep their employees and travelers safe and to keep their businesses running efficiently. The value of the Everbridge platform has never been more apparent. We also just published our inaugural sustainability report that is posted on our IR page. I'm delighted with the progress Everbridge is making in this area showing our commitment to developing new policies and processes to align our strategy and operations with key sustainability principles. Again, I am pleased with our progress, especially improved bookings traction we demonstrated in the third quarter. Now I'll turn the call over to our CFO, Patrick Brickley, to provide further details on our financial results and outlook. Patrick?

Thanks, Dave. During the quarter, we saw a healthy year-over-year increase in our profitability metrics. This increase reflects the substantial ongoing improvements that we are making to operational efficiency across all areas of our business, work that we intend to continue as we drive towards profitable growth and Rule of 40 by 2027. I will now discuss our results for the quarter in more detail. For the third quarter, ARR increased to $399 million, up 8% year-over-year. Revenue was $114.2 million, up 3% from a year ago. Subscription revenue was $104.3 million, up 8% from a year ago, while nonsubscription revenue of $9.8 million was down 32% from a year ago. Our gross revenue retention rate was consistent year-over-year. However, it dipped slightly relative to the first half of 2023, primarily due to a bit more renewal contraction than we've seen in recent quarters. We signed 44 deals over $100,000, down from 75 a year ago. That said, as Dave mentioned, in Q3, our average deal size rebounded relative to what we saw in the first half of 2023. GAAP gross margin was $81 million or 71% margin compared to the year-ago period's result of $76 million or 68% margin. Adjusted gross margin was 74% compared to 73% a year ago. GAAP net income was nearly $2 million or a negative $0.23 of diluted earnings per share compared to the year ago period in which we generated a net loss of $22 million or a negative $0.56 of earnings per share. GAAP net income in the third quarter benefited from a nearly $13 million gain from retiring debt early and at a discount. This gain was partially offset by an $8 million charge related to our legal dispute with certain former shareholders of Anvil. Non-GAAP net income was $20 million or $0.46 of diluted earnings per share compared to the year ago period net income of $12 million or $0.27 of diluted earnings per share. Our adjusted EBITDA of $23.7 million represents a 21% margin compared to the year-ago period's result of $15.2 million or 14% margin. Cash flow from operations was an inflow of $17 million compared to the year ago period of $18 million and adjusted free cash flow was an inflow of $15.5 million compared to the year ago period of $15.4 million. Our liquidity remains in a healthy position. We ended Q3 with $100.5 million in cash, cash equivalents and restricted cash down from $201.6 million at the end of 2022. In the third quarter, we used roughly $130 million of cash to repurchase $145 million of outstanding convertible debt. In doing so, we locked in a desirable yield to maturity, and we reduced our net debt to $263 million down 22% from a year ago. Our debt repurchase reflects our confidence in our increasing ability to drive positive cash flow. For example, year-to-date, adjusted free cash flow has increased nearly 300% year-over-year, and we will continue to see further year-over-year improvements in our cash flow in the quarters ahead. We will have more than enough cash to retire the $63 million of debt that will mature in December 2024 to address any potential outflows related to the Anvil legal dispute and to continue to fund investments in growth. Moving to guidance. We are revising our guidance for the remainder of 2023. A reconciliation of our updated guidance to the guidance which we gave last quarter is provided on Slides 26 and 27 of the quarterly earnings Investor Relations presentation which you can find on our Investor Relations website. For the fourth quarter, we anticipate results which will reflect the same pattern that we experienced in Q3. The continued year-over-year growth in subscription revenue, continued decrease in nonsubscription revenues and continued improvement in profitability. As I describe our revenue outlook for the fourth quarter, I will talk separately about subscription and nonsubscription revenue. We anticipate subscription revenue of between $104.6 million and $105 million, up 3% year-over-year. The year-ago period included roughly $3 million of subscription revenue from entities that we have since divested and subscription amounts that were recognized on an annual basis during the year ago period, but will not have the same timing this year. This bridge is illustrated on Slide 27 of our quarterly Investor Relations presentation. This outlook for Q4 subscription revenue reflects sequential growth of between $0.3 million and $0.7 million. Our subscription revenue in the third quarter included roughly $1 million of subscription revenue that is recognized on an annual basis, and no such subscription revenue is included in our outlook for the fourth quarter. This bridge is also illustrated on Slide 27 of our quarterly Investor Relations presentation. We anticipate nonsubscription revenue of between $9.4 million and $10.5 million, down from nearly $16 million in the year ago period. This Q4 decrease of nonsubscription revenue is larger than what is reflected in the outlook that we provided in August. In particular, owing to macroeconomic factors, there are a few on-premise sales opportunities, which we now expect to deliver in 2024 rather than our recent projection of fourth quarter 2023. Therefore, in summary, we anticipate total revenue for the fourth quarter to range between $114 million and $115.5 million, which reflects a year-over-year decrease of between 3% and 1%. We anticipate a GAAP net loss of between $6.3 million and $5.1 million and non-GAAP net income of between $21.5 million and $23 million or diluted earnings per share of $0.48 to $0.52. We expect adjusted EBITDA to be between $25.6 million and $27.1 million, a margin of 23%. We remain well on track with our plan to generate continuous year-over-year improvement in quarterly adjusted EBITDA and adjusted EBITDA margin despite the pressure that's created by our revised outlook for non-subscription revenue. Moving to full year guidance. For 2023, we now anticipate total revenue in the range of $447 million to $448.5 million, representing year-over-year growth of 4%. Within that, we anticipate subscription revenue of between $409.5 million to $409.9 million representing year-over-year growth of 7%, and we anticipate nonsubscription revenue of between $37.5 million and $38.6 million representing a year-over-year decline of 18% to 21%. We expect a GAAP net loss of between $34.3 million and $33.1 million and non-GAAP net income of between $66 million and $67.5 million or between $1.48 and $1.52 of diluted earnings per share. We expect to deliver adjusted EBITDA in the range of $83.5 million to $85 million, representing an adjusted EBITDA margin of 19% at the midpoint. In summary, we continue to make progress towards our goal of increasing ARR more profitably. Taking an early look ahead to 2024, we are committed to expanding our profitability. And although too soon for forecasting GAAP profitability, we expect to grow our full year adjusted EBITDA by roughly 25%. We remain confident that we can deliver the targets laid out at our December 2022 Investor Day, making disciplined growth first investments that will drive steady progress towards the Rule of 40 by 2027. I will now turn the call back over to Dave.

Thanks, Patrick. In Q3, we delivered our best bookings performance of the year. while still down compared to last year, the recent recovery underscores the ongoing improvements we've made to our sales productivity. Furthermore, our pipeline and especially a long field pipeline has continued to expand as the year has progressed. Notably, in Q3, we successfully closed 4 deals over $500,000, which was 3 more than last quarter and we closed one deal over $1 million, also marking a sequential improvement. Our largest new client in the quarter was a smart security deal for a shipping port in the Middle East. Among the remaining top 5 deals, 3 were new CEM customers, including a general government department, an Australian bank and a large international charitable organization. A bit significant new client with an enterprise Mass Notification win. Regarding growth deals, our 2 largest deals were government add-ons, one at state level emergency notification win and the other in the U.S. federal space. We also had a large smart security cross-sell into a CEM account. 2 CEM extensions round out the top 5 ad-on deals. In total, we added 32 new CEM customers in Q3, bringing our total CEM customer tap to 405. While average deal sizes are smaller this year, we are maintaining a healthy mix of new and growth CEM customer wins. In terms of retention, gross retention was slightly lower than the past few quarters and was consistent with the same period last year. A slight sequential increase in churn was due primarily to increased renewal contraction as Patrick noted. We're pleased with the progress we've made executing our go-to-market strategy. The underlying metrics affirm our growth path. Our sales [ represented productivity ] is rising. Our forward pipeline indicators show traction. We're successfully adding a balanced mix of new and growth CEM customers. And we're also reinforcing our strong market position. Customer feedback assures that we're on the right track and our high customer satisfaction, solid renewal rates and positive response to our product enhancements are all strong indicators. As the market improves, we are anticipating a corresponding of growth in bookings in 2024. In the current environment, our execution is improving and Everbridge remains the market leader. In summary, the third quarter demonstrated another step-up in profitability of $9 million or 56% year-over-year. We delivered a stronger bookings score sequentially as a result of increase in deal size and improved sales productivity. We're confident that we are well positioned to deliver year-over-year time bookings growth in 2024 which will contribute to increasing ARR growth rates later in 2004, and we are also confident that we can grow our adjusted EBITDA by a further 25% in 2024. In closing, I want to emphasize our steadfast commitment to assisting our customers in achieving resilience. We are living in uncertain times when organizations and governments are prioritizing the safety of their people and the continuity of their operations. Our Everbridge team is innovating our organizations monitor risk more comprehensively in [indiscernible] and to combine that situational awareness with a market-leading platform for managing critical events to empower a more resilient world. I will now turn the call over to the operator to facilitate the question-and-answer period. Jason.

[Operator Instructions]. Our first question comes from Alex Sklar from Raymond James.

Dave, just on your confidence on an improved bookings outlook, I realize there's still some important weeks -- had this quarter. But historically, Q4 is your largest bookings quarter in terms of kind of sequential ARR growth. Can you just talk about your level of confidence or visibility that's going to continue again this year. And then just a little bit more color on your confidence at the end of the prepared remarks in terms of an improved bookings activity next year, assuming no macro improvements.

Yes. Good question. As I pointed out, our pipeline has been improving. So productivity is improving. The average deal size is improving. Q4 is sequentially our strongest quarter, and those are the kinds of things that give us confidence as we head into Q4 and think about year-over-year ARR improvement, we're still cognizant that Q4 last year was a strong quarter, particularly a strong quarter for ARR growth. So we're not expecting the same kind of strength we saw last year, but we are expecting a good quarter. As we look forward into 2024, that's where the comparables and the sequential improvements give us confidence that we'll continue those sequential improvements into 2024 when we hit those copper compares, which again with ARR [indiscernible], of course, it takes a couple of quarters to the ARR growth rate is moving up rather than down. So that's [ what we ] alluded to in the remarks, and thank you for the follow-up question.

All right. Great color there. And then I don't know if Dave or Patrick, in terms of the comments on the higher renewal contraction, can you just elaborate on what's driving that? Is that macro related? Is it competition? And did that continue through kind of October? Or was that kind of isolate into the third quarter?

I'd say it was [indiscernible] the third quarter have been really consistently [indiscernible] contractions with band a couple of hundred thousand -- within a band of a couple of hundred thousand up and down quarter-over-quarter. It was a huge increase, but there was an increase in the third quarter. We reviewed that -- and we think it's largely constrained to the third quarter. It was largely a calidated, but there were some customers contracted services. So I think it's also a bit indicative of some of the budget pressures we've seen in our clients throughout the year.

Our next question comes from Arjun Bathia from William Blair.

This is Chris on Arjun. I want to circle back to sales productivity. It's great to hear about some of the improvements there. What would you point to as kind of some of the key strategies that are the most [indiscernible] delivering these improvements.

Well, it's a team effort when that happens. One of the key things that's happened, we talked about last quarter with the sale of tenure improving. And so we continue to have great retention of our sales force and that's one of the strongest statistically correlated evidences we have. And so I think that is being one. The marketing team has really gotten in a much tighter groove swing in the last couple of quarters. And so we're seeing a lot more efficiently generation I think it's also supporting those sales team members as they've onboard. And then sales execution is a journey, and we're journeying through it, but just give John a lot of credit in his second full quarter getting [indiscernible] aligned.

Our next question comes from Brian Colley from Stephens.

On the updated guidance, was the reduction in sales, 100% from the onetime revenue? Or was there any change in the subscription outlook there?

Brian, this is Patrick. We -- at the midpoint, we basically brought it down by about $3 million, and you could think of that as $2 million from nonsubscription and $1 million from subscription and the story over the years has really been the non-subscription. But when you look at subscription, we began the year roughly with guidance, call it, around $411 million, which is up 7% year-over-year. And then our ASPs continue to come down early in the year, which was a headwind, but we were able to offset that with improved retention year-over-year. And just now as you sort of pull all that together and we're exiting the year, we're looking at $410 million rather than $411 million, still 7% year-over-year, but it is down by $1 million.

Okay. Perfect. That's super helpful. And then, Dave, 1 for you. I'm curious kind of where you stand today in terms of completing some of the product integration work that you've talked about kind of needed to upsell or convert those 150-plus customers from an Anvil over to the CEM platform. And then any progress update that you've made converting some of your Mass Notification customers within the G2K over to CEM as well?

Those are both great questions. Thanks for asking. So on the RC 9, the momentum is picking up, as you remember, from a year ago at this call, we talked about that cohort [indiscernible] customers and then by Q1, [indiscernible] and half. But we had good migrations this quarter. It was the highest leveraged fourth quarter of the year-to-date. The road map for them for the migration is finishing up. The product work to actually go to market with the end of life, which will drive the remaining customers with more force will be coming up around the end of the year. So that program continues to make good progress. We did slow down to focus on retention that has worked for us to date. So I'm pleased with where that's going. The feature parity will be done in Q1, and we're doing end of life before then. On the second cohort of the mass notification in the Global 2000, the upgrades. We had another good quarter, a nice mix of new customers. Those 3 new [indiscernible] I talked about are really exciting wins, a U.S. federal government department. We've got a really nice opportunity there is a nice size deal on -- top 5. A really nice Australian bank that we think is an anchor account from that region, those were new accounts. On the upgrade side, it was also -- just real balance on the upgrade side. So I think we had a few more CEM customers the last quarter, CEM customer as we think down a little bit year-over-year if we continue to see a real good mix of both new customer add-ons and migrations for CEM.

The next question comes from Scott Berg from Needham.

I guess a couple save on the bookings in the quarter, you seem pretty positive on obviously, the improvements that you're seeing there. company did though only had $4 million of ARR, which is not the highest of the year so far, at least to date, is how do we kind of reconcile those 2 commentaries? My guess is probably from some of the downsell pressure that you talked about, but I didn't know if there's anything else that's kind of comprising of making up that gap.

That's exactly it. It's those 2 offsets and that the primary drivers there.

Okay. And then Patrick, for a follow-up, the $1 million of revenue, annual subscription revenue recognized in Q3 but not Q4. I guess I'm a little confused by that is I'm not sure why it's not being recognized this quarter, maybe that's the downsell that you all talked about. But just trying to help understand what that is, that won't be recognized in Q3. And then does it actually convert in Q4? And then does it come back in Q1 for some reason?

Yes. So what that $1 million is ASC 606 has taken something that a service that we provide ratably, but requires us to recognize annually, and it's related to subscription, but we only recognize it primarily onetime a year. In 2022, we recognized it in Q4, that was part of the year-over-year, I was talking about the Q4. And in 2023, we recognized it in Q3. So it's -- so the timing is different year-over-year. There were a couple of other items like that in Q4 of last year that have already been recognized earlier this year in 2023. So it's subscription ASC 606 just treats a couple of million dollars of our subscription revenue a little uniquely. [indiscernible] ongoing customer, et cetera. It will come back around next year in '24.

And probably in Q3 in '24.

Probably in Q3 in '24. Yes.

The next question comes from Michael Berg from Wells Fargo.

I want to kind of take a different angle on this. Your adjusted EBITDA guidance went down by about $1 million. And when I think about perpetual deal to come off, I think of those as very high margin. So maybe you can help just give me some puts and takes on what is driving the lower EBITDA guidance? Is it some strengths in the quarter offset by the lower perpetual primarily? Or help level set there.

Yes. Look, in the back half of 2023, we've removed $10-plus million of non-subscription revenue much of which is very high margin, and particularly [indiscernible] licenses, that's created a lot of pressure on our adjusted EBITDA. But we're making our way through it. It's -- the offset is a continued focus on efficiency and productivity. If you look at a couple of areas like sales and marketing, we've brought that down year-over-year as a percent of revenue from 36% to 29% and yet at the same time, we just delivered our best bookings quarter of the year. And as you heard Dave talk about productivity is up, deal sizes are coming up and a couple of other key metrics that are part of that are improving. Look at R&D as a percent of revenue, that's come down from 19% to 17%. But at the same time, we've improved our productivity. We just delivered Everbridge 360, which is critical to customer adoption renewal expansion. So we are improving our productivity while improving our profitability and that has helped to absorb the impact of the reduction.

Minor point [indiscernible] in addition to that, that and accrual, there's OpEx for that case. And so we're further absorbing the OpEx for that. So when I think about the work that the team did. I'm really proud of what the team has been doing in expense management that Patrick talked about. But in my way of thinking is that last $1 million quarter or just on this quarter, maybe we plan about that amount for next [indiscernible] additional $1.5 million, $2 million of OpEx related to the [indiscernible] bringing the guidance down, we are still targeting that 85%. We're doing everything we can as a management team. Yes. So that's what we've been [indiscernible], and I think we're doing a good job of it.

Got it. So maybe one quick follow-up to that is you just gave the $1 million or $2 million OpEx with the and it sounds like that's part of the non-GAAP or adjusted EBITDA on a normal basis. Could you help us quantify how we could think about the perpetual deals that you took off, how that could flow through the EBITDA. Reason I ask is because I think it would be helpful for the investor community to understand what a more normal EBITDA profile would look like today should things have come across as you had originally expected?

Yes. Well, I think we mentioned that we're -- as we look forward to 2024, we're anticipating that we can increase our adjusted EBITDA by 25% with our existing exiting cost structure and continuing to make gradual optimizations to it. So whereas in Q4, we've got adjusted EBITDA related expenses of around $89 million. That's what we would anticipate continuing to run into next year with. There will seasonality, there will be payroll tax, [indiscernible] seasonality, et cetera. But and then over 90% of our revenue is subscription and the gross margin on that is very high. So yes, the margin on the onetime licenses, software licenses and other is really high. The last year, that was $18 million this year. That's going to be around $12.5 million to $13 million with really high margin. And -- but we originally thought there'd be a lot more than $12.5 million to $13 million. And most of the reduction that we're talking about came out of the back half of the year. So we've had -- unfortunately, we've been able to manage through it.

And Mike, for the first time we put into our guidance, that split between subscription professional services and software, so you have that for the fourth quarter guide. [indiscernible] on the call as well. But it's in the table, the press release so you can get that break out, not just our historical core of the quarter forecasted. And then just on my inter-correction on the Anvil, the $8 million is an accrual for potential damages in addition to that versus the operating expenses to take that thing to trial that are coming in through the P&L in that they're not adjusted out there in the EBITDA expenses just underlying for Q3 and probably just over in -- for Q4.

The next question comes from William Power from Baird.

This is [indiscernible] on for Will Power. So just looking at nonsubscription revenue, how do you think that might shake out next year? Should we expect non-subscription revenue to decline in 2024? Or is there any early framework for how to think about that piece?

We're not in a position to do the guide on those revenues. As Patrick went through the narration of the script and you've seen the guide in the past a couple of quarters and maybe you look again at the investor deck, we gave a quarterly trend of those numbers over a period of time. But we went through a season in the last 2 years, '21, '22 with record public warning deals. This year, we're going through a year where there has not been a public awarding deal awarded globally to date this year. So this, in some ways, this year feels low, but it also contextually, everything we're doing is around growing the recurring revenue. We're working with those products and those customers to make them more subscription. So our intention over time is to drive their subscription revenues [ on]. One thing I think we've demonstrated this year is we're going to be able to manage expenses around those onetime. I don't want to run table will be holding on getting a onetime deal for our business model. So we're building the business model laser-focused on ARR and subscription revenue growth. And in that way, I'm not expecting a tailwind from nonsubscription the way we're trying to do that to run the business.

The next question comes from Terry Tillman from Truist.

This is [indiscernible] on for Terry. Just curious on what changes you've made in the customer success organization to better serve your existing customer base? And enable that cross-sell, upsell opportunity. And then I guess also, what kind of conversations they're having with the existing base around the value of organizational resilience.

Yes. So that's a great question. Customer success is an area we're [ focused on ] some really great account managers and renewal specialists. Now that work with our clients, that is an area that John is spending a lot of attention on. We're expecting to make some changes that the further dry alignment to those 2 teams and support the customers even better. On the customer journey, we're getting really good feedback. The Everbridge 360 doesn't deliver on the ease of use and the integration. [indiscernible] like the geo clinical on RAS and our ability to deliver messages in a really troubled hard environment on delivering messages into our clients' employees and services to get them to state locations. We're deeply engaged with our clients right now. And I'm just -- I'm pleased with the team and how we're able to service them in their time and need.

Next question comes from Ryan MacWilliams from Barclays.

I know it's early, but any early comments on next year and how should we think about your priorities for your focus on a return to growth or continue the cash flow improvement? What is your color there?

Yes. Ryan, that's a good follow-up question of a little more detail and the most pointed thing that Patrick and I mentioned was we're early but looking ahead with a focus on growing EBITDA at 25% year-over-year. So we think we can continue to deliver operating improvements as we continue to grow. When you look at the ARR growth, it has come down quarter-over-quarter. We had some real strong quarters. At this time last year, we had a really much bigger team this time last year, and that's why I think the improvements in sales productivity, pipeline build, deal sizes are so important as we look forward into next year, where we expect to be delivering year-over-year improvement beginning in Q1 on our recurring bookings for full performance, which with our strong renewal rates will start to drive ARR growth rates later next year because we're still lapping some stronger compares with a lot more salespeople through this quarter.

Okay. And then Patrick, glad to see the convertible debt retirement. [indiscernible] the past few quarters. The slides were helpful there. I guess just for investors, how should we think about the path ahead for average capital structure, what you plan to accomplish over the next few years?

Sure. As we mentioned, we've got enough cash to get through the debt that matures in December 2024. We have another $300 million or so that will mature in March 2026. Between now and then, we will continue to generate more and more cash flow to be able to pay that down. And as we mentioned at our Investor Day in 2022 -- December '22, we anticipate that if we're not able to satisfy that obligation in march '26 entirely out of our own pockets, that by then, we will be driving enough profitability that we could -- we'll have a number of options, including [indiscernible] bank debt that we're exiting this year with adjusted EBITDA to leverage of roughly 3 to 1. We're going to get that down to 2:1. And by then, maybe -- around 1:1. So we don't know what debt markets will look like in late 2025 or late 2026, but we're confident that we're -- you're going to be able to have a lot of different options that are not dilutive to be able to satisfy that remaining obligation.

[Operator Instructions] And the next question comes from Koji Ikeda from Bank of America.

I had a question on renewals and specifically on the contraction in the downsells. And I was wondering if you could talk a little bit about what's driving that? Is it seats? Is it pricing? Is it a certain type of product? Any sort of color there to help understand the contraction would be great.

Yes. It's primarily [indiscernible]. Of course, we're dealing with over 6,000 customers and lots and lots of renewals. So the aggregate in the [indiscernible] the quarter-over-quarter decline in retention, but retention remains where it was this quarter last year. So it's in a good spot, not a better spot that we want to in the contractions in the quarter, head count reductions are certainly part of it. It's anecdotal, but if there's a concentration there was a lot -- there was some consolidation, which customers being purchased and a little bit maybe more in our digital operations than our core CEM business. But just generally it added up to the 8 to 10 basis points increase churn in the quarter.

Got it. Okay. That's helpful. And then just one follow-up here. When I look at the deck and it's a slide -- what is slide is this. It looks like 26, the reconciliation of the guidance, kind of the previous cash is the guide that is today. I noticed that there's a reduction in the license and PS due to delays in large [ on-prem ] deals. It was $8 million and then an additional $2 million added on to the updated guidance. The question here is what gives you the confidence that these deals, these push deals will eventually close?

Well, the ones that are at the bottom of the pipeline, I can tell you that we've got confidence we can -- we know that the national programs where they're working, and they -- they take time to close and it's hard to control all the governments closing time line, but we know that they're nationally approved projects. So that's what gives us confidence. In terms of larger top of all pipeline where the direction goes next year and the year after that's what we're putting out position yet to be guiding on the onetime for next year at this time.

The next question comes from Kash Rangan from Goldman Sachs.

This is Jacob on for Kash. A lot of good questions ahead of me. So just a couple of simple ones for me. The $2 million sequential adds for the CEM customers. Can you provide a split on how many of those were net new customers and how many of those were existing customers that adopted CEM? And then additionally, I noticed that stock-based comp was down 700 bps, I think. Yes, it was 8% of total revenue versus 15% last quarter and 12% in Q1. So how should we think about that on a go-forward basis?

I don't have a split on the CEM, but I gave in the top 5. We had 3 new CBMs to upsells in the top 5. I think it is roughly 50-50, we can follow up with you on that nonmarket follow-up review. On stock-based comps, you're seeing -- beginning to see a real intentional focus on the management team and the comp committee. Yes, [indiscernible] on stock-based comp, the number shared with others is pretty clear way our Evergreen program works, it's 3%. And so we've got real specific budgets that we're working towards that 3% to 4% net in gross equity burn for the next 3 years. So 2023 becomes kind of in my way of thinking kind of new normal for Everbridge going forward from a dilution perspective. And 2022 was high for several, I think, good reasons. But as that moves through, we'll be moving down to the closer to the 4% range.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Wagner for his closing remarks.

Well, thank you, everybody, for participating. I [indiscernible] good questions on the onetime endear we remain focused on profitable growth and driving the recurring revenue and recurring part of our business. forward. Over the next few weeks, we're going to be on the road with investors at several conferences, including the Needham Virtual Tech Conference on November 16, the UBS Global Tech Conference on November 28, the Wells Fargo TMT Summit on November 29, the Raymond James, TMT and Consumer Conference on December 4 and the Barclays Tac Conference on December 7. We look forward to speaking with many of you at those events and we'll speak with the rest of you again soon. Thank you for your supporting our mission and confidence in our ability to achieve it. Jason?

Thank you for joining us today for the Everbridge Third Quarter 2023 Earnings Conference Call. You may now disconnect.