Brian Colley: Got it. Thank you.
Operator: The next question comes from Scott Berg from Needham. Please go ahead.
Scott Berg: Hi everyone. Thanks for taking my questions. I guess a couple purpose state 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 two 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.
David Wagner: That’s exactly it. It’s those two offsets and that the primary drivers there.
Scott Berg: 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?
Patrick Brickley: 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. And its ongoing, yes, just to be clear, ongoing customer, et cetera. It will come back around next year in 2024.
David Wagner: And probably in Q3 in 2024.
Patrick Brickley: Probably in Q3 in 2024. Yes.
Scott Berg: Got it. Very helpful. Thank you.
Operator: The next question comes from Michael Berg from Wells Fargo. Please go ahead.
Michael Berg: Hi, thanks for taking my question. 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? Thank you.
Patrick Brickley: Yes. Look, in the back half of 2023, we’ve removed $10 million plus of non-subscription revenue much of which is very high margin, and particularly those perpetual 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 in the outlook for non-discretion [ph].
David Wagner: If I’m going to just add, it’s a minor point, in addition to that, that Anvil 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 quarter that additional $1.5 million, $2 million of OpEx related to the Anvil matters. Anvil just 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 managing and I think we’re doing a good job of it.
Michael Berg: Got it. So maybe one quick follow-up to that is you just gave the $1 million or $2 million OpEx with the Anvil 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 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?
Patrick Brickley: 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 be seasonality, there will be payroll tax, in fact 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.
David Wagner: 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. Patrick you are 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.
Michael Berg: Got it. Helpful. Thank you.
Operator: The next question comes from William Power from Baird. Please go ahead.
Unidentified Analyst: Hi. This is [indiscernible] on for Will Power. Thanks for taking the question. So just looking at nonsubscription revenue, how do you think that might shake out next year? Should we expect nonsubscription revenue to decline in 2024? Or is there any early framework for how to think about that piece? Thanks.
