N-able, Inc. (NYSE:NABL) Q3 2023 Earnings Call Transcript

N-able, Inc. (NYSE:NABL) Q3 2023 Earnings Call Transcript November 13, 2023

N-able, Inc. reports earnings inline with expectations. Reported EPS is $0.09 EPS, expectations were $0.09.

Operator: Hello, and welcome to the N-able Third Quarter 2023 Earnings Call. My name is Alex, and I will be coordinating the call today. [Operator Instructions]. I’d now hand over to your host, Griffin Gyr, Investor Relations Manager. Please go ahead.

Griffin Gyr: Thanks, operator and welcome everyone to N-able’s third quarter 2023 earnings call. With me today are John Pagliuca, N-able’s President and CEO; and Tim O’Brien, EVP and CFO. Following our prepared remarks, we will open the line for a question-and-answer session. This call is being simultaneously webcast on our Investor Relations website at investors.n-able.com. There, you can also find our earnings press release, which is intended to supplement our prepared remarks during today’s call. Certain statements made during this call are forward-looking statements, including those concerning our financial outlook, our market opportunities, and the impact of the global economic environment on our business. These statements are based on currently available information and assumptions, and we undertake no duty to update this information except as required by law.

These statements are also subject to a number of risks and uncertainties, including those highlighted in today’s earnings release and our filings with the SEC. Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today’s earnings release and in our filings with the SEC. Copies are available from the SEC or on our Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures on today’s call. Unless otherwise specified, when we refer to financial measures, we will be referring to non-GAAP financial measures. A reconciliation of certain GAAP to non-GAAP financial measures discussed on today’s call is available in our earnings press release at our Investor Relations website.

And now I will turn the call over to John.

John Pagliuca: Thank you, Griffin. Welcome everyone and thank you for joining us today. As the age of the managed service provider advances the IT outsourcing market remains strong. There are a few key factors for this. IT is getting more complex and expensive as organizations look to realize the benefit of digital operations, modernize their legacy systems, and meet growing regulatory requirements. This trifecta of challenges distracts organizations from their core operations and can push them to outsource and augment their IT needs to MSPs. N-able was formed with this in mind. Our unwavering mission to empower MSPs with purpose built technology positions us favorably with the expanding small and medium enterprise IT ecosystem by helping partners meet these challenges head on.

We believe our third quarter results highlight the strength of our market and cement our standings as a leading software provider to MSPs. Despite an uncertain macro environment, we exceeded top and bottom line guidance with revenue of $107.6 million, growing 15% year-over-year or 13% on constant currency basis. And adjusted EBITDA of $36.6 million representing an adjusted EBITDA margin of 34%, our highest margin ever as a standalone public company. And as Tim will elaborate, we were maintaining our full year 2023 constant currency revenue guide of 13% and raising the midpoint of our full year 2023 adjusted EBITDA guide from $136.3 million to $139.5 million. We accomplished all of this while laying the ground work for future success. Our team has advanced important strategic initiatives and we are particularly excited to announce that we are entering into a new product category, bringing N-able Managed Detection and Response to market this month.

Our relentless determination to bring value to the MSP community requires adapting to fast changing technology needs through focused product innovation. With our approximately 25,000 MSPs ranging in size from sole proprietors to global publicly traded technology service providers, we believe we have a unique line of sight into the dynamic market landscape and I want to discuss three prominent trends influencing our product development, focus, and strategy. First, consolidation and modernization. Second, the movement up market. And third, increasing security standards. First, we see technology consolidation in modernization driving customer behavior. In an uncertain economic environment MSPs have an eye on operational efficiency and solutions with proven ROI.

Our integrated platform and leading technology solutions align with MSP needs helping to reduce tool straw and unlock their growth. We believe our text suite of top tier RMM, data protection, and security solutions coupled with our multi tentative platform and external integrations strongly positions us to satisfy MSPs desires to consolidate and modernize their tech stack. A second trend is MSPs going up market. Large enterprises face many of the same IT challenges as SMBs and are increasingly turning to MSPs to augment or run their IT or security operations. We believe this means a larger, addressable market for both MSPs and N-able. And our product and go to market investments aim to enable MSPs to realize this opportunity. The scalability, automation and efficiency of our solutions appeal to upmarket focused MSPs and we continue to raise the bar to position N-able as a leader in this evolving market segment.

A great byproduct of the MSP up market trend is the capabilities we develop to help win MSPs win up market, also better position our teams to land mid-size in large IT departments directly. While our core focus is our MSP partners, we continue to pursue direct IT sales opportunistically and are seeing positive momentum in this part of our business. Now turning to our third trend, increasing security standards. The significant business impact of a successful cyberattack has long placed security as a top IT priority. In addition to MSPs buying security solutions to protect from MSPs assets [ph] they also face growing global compliance requirements that serve as a tailwind to security demand. Here the message is clear, security is shifting from an option to a requirement.

With our robust and recently expanded suite of security options spanning endpoint protection, mail protection, content filtering, and more we provide a layered security approach that is built to fulfill regulatory requirements and safeguard the modern digital enterprise. We made exciting progress in the last quarter to advance our product suite to capitalize on these trends and I want to share these updates and the encouraging market feedback we received. Starting with Cove, we have invested considerably in developing our technology to further Cove’s ability to scale into larger domains and help further Cove’s ability to scale into larger domains and help MSPs move up market. A third quarter deal involving the displacement of a known upmarket competitor and representing our largest initial Cove land ever at over 500,000 of ARR at scale speaks to our success here.

Another excellent example of Cove’s market traction comes from a recent MSP customer with 11 legacy data protection solutions. Understanding the risks and headaches of a multi-vendor approach, they decided to consolidate on Cove. The MSP thoroughly evaluated each product and specifically commented on Cove’s strong technical performance, intuitive technician-friendly interface, and ability to meet data sovereignty requirements with Cove data centers located worldwide. With sophisticated attacks often going beyond an organization’s core network, and now targeting data storage copies, the distinction between data protection and security is increasingly blurry. Modern data protection solutions can’t just restore data, they must keep data safe, and Cove was built with this in mind.

Because of our cloud-first approach, customers’ data copies are not exposed to a local network, which reduces the attack surface and gives our customers peace of mind. The market is responding to Cove’s innovation. Our 2023 new customer cohort is the best ever, and our Cove Microsoft 365 backup solution is now protecting over 1.8 million users growing at approximately 48% year-over-year. Cove is also receiving industry recognition and we are delighted to share that Canalys, a global technology research firm, recently named Cove a champion in their managed backup and recovery leadership matrix. On the RMM front, we remain laser focused on meeting MSPs where it’s messiest. We simplify the complexity of hybrid environments, users, and devices, going beyond the confines of traditional RMMs. This means delivering a modern, end-to-end, unified IT management platform.

We made significant progress on this vision in the third quarter. We released a refreshed user interface, unveiling a new asset inventory view, which comes on the heels of the analytics feature and enhanced Apple management capabilities we released earlier this year. These advancements give technicians deeper insight into their IT environment and enable them to manage their IT stacks better. This can translate to tangible business impact. Our powerful capabilities bolster MSP’s ability to go upmarket and service large organizations with disparate operating systems while realizing the benefit of consolidation. Our approach is resonating with customers and we are seeing steady demand in this segment. Turning to security, we continue to advance our security suite and are particularly excited about our entry into managed detection and response.

MDR is a unique marriage in the security industry, combining cutting edge technology with human oversight and expertise to give organizations advanced protection. This combination solves a deep pain point for our customers because threats are increasing, but organizations cannot manage those threats alone. Alert fatigue, staying ahead of the involving threat environment, and staffing challenges mean organizations need help. In a recent poll we conducted with thousands of our MSPs, they expressed a strong desire for MDR from N-able. Industry research firms also validate the MDR market, with Canalys recently stating that the cybersecurity services opportunity for partners will be larger than selling cybersecurity technology this year. MDR is much more than managed EDR, because MDR goes beyond the endpoint, providing broad security visibility and response across the customer’s entire IT ecosystem, including their users, cloud applications, and network.

This is powerful. Adding MDR broadens our appeal as a one-stop shop for security solutions and services. And we have the backing of a strategic partner in this space, born from the front lines of national cyber defense with multi-tenanted cloud-native modern architecture. We believe this is a significant opportunity, and perhaps most telling. Since commercializing this technology, customer engagement has met our high expectations. In addition to delivering more solutions, we are focused on a superior customer experience. To this end, we recently enhanced our integration framework, improving functionality across our security offerings. This enhanced framework also expands our ecosystem breadth, facilitating faster time to market with vendors that want to expand their go-to-market reach through an enabled partnership.

Across the security spectrum, from MDR to mail, security remains mission critical, and we are committed to helping propel our customer security journey forward. With these trends powering demand, we are investing and operating for the long-term and are focused on delivering great technology that positions N-able to advance the age of the MSP. Our operational efforts and strategic goals are all focused within the framework of our sell-to and sell-through business model. We refer to our MSP customers as partners as we leverage the reach of our approximately 25,000 MSPs to gain access and sell our solutions to over 500,000 small and medium-sized businesses. This partnership enables a multi-pronged growth algorithm which allows us to reach the SME at healthy profit margins.

When we land an MSP, we grow. When an MSP lands a customer, we grow. And when an MSP customer adds an employee, we grow. And when we bring a new service to market, we unlock the potential to grow across that MSP and SME base. These elements of our model form the building blocks of our growth algorithm, which are MSP retention, cross-selling of new services to existing MSPs, MSP device growth, and lastly, N-able adding new MSPs. And I want to discuss operational updates in the third quarter regarding each of these components. Starting with N-able adding new MSPs, our new customer engine continues to be strong. While we’re only three quarters through the year, the 2023 customer cohort dollars are the best ever since we became a public company.

We are reaching new customers who are choosing to partner with N-able. This success, despite an uncertain macro environment reflects the strength of our compelling value proposition and is a testament to the efforts of our go-to-market teams. Education leads to adoption, and the N-able — was out in force in the market, connecting with customers. In the third quarter alone, we hosted seven roadshows across North America, sponsored 11 global industry events, and hosted over 50 head nerd boot camps, reaching thousands of partners and prospects. In addition to helping land new MSPs, our efforts to educate our partners on the value of our offerings help drive their expansion. And we saw steady cross-sell in the quarter. With our solution set spanning RMM, data protection, and security, enabled MSPs have a low friction path to expansion.

Our average revenue per partner is growing as customers buy more of our solution. And there’s steady penetration and uptake across our product set. We see a rich opportunity for further penetration with multi-billion dollar cross-sell potential in our existing base. While cross-sell and NCA are healthy, the uncertain macro environment is weighing on partner device growth and retention. We are seeing tighter IT budgets and slower device growth. We believe tighter budgets have led to rationalization and optimization of existing spend. That said, there are numerous bright spots in our operational effort to retain and expand customers. Our partner success organization scored their highest ever customer satisfaction score on technical support. We see continued demand for our N-able head nerds who are partner evangelists and subject matter experts.

And as part of our ongoing mission to constantly improve every aspect of the customer experience, we launched a new partner success center, N-ableMe, and have already engaged with nearly 13,000 partners through the center. We invest in these elements of our business because we grow as our partners grow. With the MSPs acting as an extension of our sales force, we efficiently access SME IT spend, and our third quarter adjusted EBITDA margin was the highest in our public history, which serves as a strong testament to the effectiveness of our strategy. Great technology and superior operational execution are the lifeblood of our business, but our people and culture are the oxygen. One key focus area is our continued diversity, equality, and belonging journey.

As one recent example, we hosted a global, cross-functional women leadership summit to help drive cultural transformation and execution excellence, and further develop our women leaders. We were also honored to be recognized by Comparably, a leading workplace, culture, and corporate brand reputation platform, with three awards in the quarter. With that, I would like to turn the call over to Tim to discuss our financial results and outlook, then I will circle back to some closing remarks. Tim?

Tim O’Brien: Thank you, John and thank you all for joining us today. Our third quarter results were strong, exceeding guidance on both the top and bottom lines. Steady demand for our platform, solutions, and strong cost management highlighted by our highest ever adjusted EBITDA margin as a public company, helped drive our outperformance. Looking ahead, we believe our market remains durable, and while we are mindful of the macro environment, our business model, with multiple growth vectors and a clear strategic focus remains well-positioned to capitalize on the growing demand for MSPs. For our third quarter results, total revenue was $107.6 million, representing approximately 15% year-over-year growth or approximately 13% on a constant currency basis.

Subscription revenue was $105.2 million, representing approximately 15% year-over-year growth or approximately 13% on a constant currency basis. Other revenue, which consists primarily of revenue from the sale of maintenance services associated with the historical sales of perpetual licenses and revenue from professional services was $2.4 million up approximately 2% year-over-year. We ended the quarter with 2,134 partners that contribute $50,000 or more of ARR, which is up approximately 19% year-over-year. Partners with over $50,000 of ARR now represent approximately 55% of our total ARR, up from approximately 50% a year ago. Looking at net retention for the third quarter, dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was approximately 108% or 110% on a constant currency basis.

Turning to profit and margins, note that unless otherwise stated, all references to profit measures and expenses are calculated on a non-GAAP basis and exclude the items outlined in the GAAP to non-GAAP reconciliations provided in today’s press release. Third quarter gross margin was 84.6% compared to 84.8% in the same period in 2022. Third quarter adjusted EBITDA was $36.6 million, up approximately 27% year-over-year, representing approximately 34% adjusted EBITDA margin. Unleveraged free cash flow was $30.2 million in the third quarter, and CAPEX, inclusive of $2 million of capitalized software development costs was $5.5 million, or 5.1% of revenue. Non-GAAP earnings per share was $0.09 in the quarter, based on 186 million weighted average diluted shares.

We ended the quarter with approximately $127 million of cash and an outstanding loan principal balance of approximately $343 million, representing net leverage of approximately 1.6 times. Approximately 46% of our revenue was outside of North America in the quarter. Turning to our financial outlook, as John discussed, we see tailwinds in our market and believe in the long-term opportunity for N-able. As we look to the near term, we see macro uncertainty creating caution in SME IT budgets, with organizations seeking to optimize spend in a tighter budgetary environment, which we have reflected in our guidance. And while our R&D engine continues to bring critical, robust solutions to MSPs, our growth expectations are reflective of the time to market for these new products which we continue to work to accelerate.

With that in mind, for the fourth quarter of 2023 we expect total revenue in the range of $106.5 million to $107 million representing approximately 11% to 12% year-over-year growth, or approximately 10% to 11% on a constant currency basis. We expect fourth quarter adjusted EBITDA in the range of $35 million to $35.5 million, representing an adjusted EBITDA margin of approximately 33%. For the full year 2023, we now expect total revenue of $420 million to $420.5 million, maintaining the midpoint of our prior full-year guidance, representing approximately 13% year-over-year growth on both a reported and constant currency basis. We are raising our adjusted EBITDA outlook, and now expect full year adjusted EBITDA of $139.2 million to $139.7 million, up approximately 22% year-over-year at the midpoint, and representing an approximately 33% adjusted EBITDA margin.

There have been changes to the foreign exchange environment since our last outlook and I want to take a moment to reconcile the impact of these changes on our guidance. In our previous call, we assumed FX rates for the Euro and Pound of 1.07 and 1.25, respectively. Using updated FX rates for the remainder of the year of 1.05 for the Euro, and 1.22 for the Pound, and updating other currencies to reflect the current rate environment translate to a negative impact on revenue of approximately $1.1 million for the fourth quarter. We believe our ability to maintain the midpoint of our full year 2023 revenue guidance and raise full year 2023 adjusted EBITDA guidance despite these FX headwinds, speaks to our operational strength. We reiterate that we expect CAPEX, which includes capitalized software development costs of approximately $8.5 million will be approximately 6% of total revenue for 2023.

We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 65% for the full year. We expect total weighted average diluted shares outstanding of approximately 187 million for the fourth quarter and 186 million for the full year. Finally, we expect our non GAAP tax rate to be approximately 23% in the fourth quarter, and 25% for the full year. In closing, we are pleased with our strong third quarter. Looking forward while we are mindful of the macro uncertainty, we believe we are uniquely positioned to benefit from the robust long-term addressable market opportunity. We have a proven track record of execution. Our customer base is diversified by region and industry and the IT management, security and data protection solutions we provide are high IT priorities.

The addition of our new MDR offering adds another gear to the business model. With our strong adjusted EBITDA margins, free cash flow, and balance sheet, we have considerable capital allocation flexibility to invest strategically to meet the needs of our market. Now, I will turn it over to John for closing remarks.

A – John Pagliuca: Thanks, Tim. We scaled our business to new heights in the third quarter, and made progress on critical strategic initiatives. As we march forward on our quest to advance the age of the MSP, our vision is clear and we believe the opportunity is vast. The SME IT ecosystem we serve is large and growing and our differentiated model, which efficiently cracks the code to the trillion dollar plus SME IP market by providing enterprise grade technology to MSPs delivers both growth and profit. With our clear strategy, and appealing market opportunity providing direction and energy to over 1500 plus N-ableites, our sharp focus is on driving operational excellence and continuing to deliver great technology to MSPs. And with that, we will open up the line for questions. Operator.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question for today comes from Mike Cikos of Needham. Your line is now open. Please go ahead.

Mike Cikos: Hey team, thanks for taking the questions here. Great to see the revenue beat here and then the maintenance of that revenue guide as well as the EBITDA, the beaten race for the full year that we’re seeing here despite some of those FX headwinds that I know that Tim had addressed earlier. I think there’s probably two different angles but both of these questions are kind of getting at the new customer engine that we’re talking to and John, appreciate the comments as well, as far as that growth algorithm. The first question is really tied to the macro. And I know that you guys are saying, hey, the calendar 2023 customer cohort is a choice cohort from a dollar perspective when thinking about those new customers for the company as a publicly traded company since a spin.

I guess in the context of macro, can you help us think about — I know you guys are saying that it’s potentially a more cautionary environment, is that cautionary comments demonstrating even on a quarter-to-quarter basis that things might be more difficult versus where we were 90 days ago? That’s the first question. I do have a follow up beyond the macro.

John Pagliuca: Thanks, Mike and appreciate you following the stock, I’m looking forward to talking to you and your team a little more tomorrow. So on the quarter-on-quarter comment, look we purposely wanted to spell out the growth algorithm just to remind folks that we have this multifaceted approach. As you mentioned, the NCA part of the algorithm was quite strong, it was quite strong in Q3, even compared to Q2. There’s really no major difference in the macro environment that we’re necessarily seeing from Q2 to Q3, like quarter-over-quarter performance. I would say it’s more Mike of like a little bit of a continuation of the same where we’re seeing MSPs looking to hit their targets, both their top line and their bottom line targets and the way that they’re achieving that is more through cross sell of additional services, rather than adding SMEs. And so that’s where we’re seeing a little bit of that moderated device ads coming up.

And so I’d say it’s a continuation of really the moderated device ad, and a little bit more of a focus on where they’re spending their money as it relates to licenses, licensing costs, across their broader portfolio.

Mike Cikos: Got it and thank you for the color there. And then the second question, this one comes back to the new customers, but through the lens of almost competition here. And so I just wanted to see, is there any change on the competitive front, obviously, we are some quarters removed from the Data [ph] acquisition, is there any benefit coming to N-able through that? And then the secondary pieces, obviously, you guys are talking about the MDR offering and what that does for N-able, but I have to imagine in some sense that that elevates you guys at a competitive level. So any feedback that you guys are receiving since the MDR, I know you had some bullish comments in the prepared remarks, but just wanted to see if I can get any incremental color on those two pieces? Thank you.

John Pagliuca: Yeah, on the NCA, I’d say we continue to see a strong uptick in our core data protection offering. So when we spun the business out a couple of years back, we looked at Cove and data protection as a category, there is tremendous opportunity; one, from the category and what we’re seeing as the demand from the MSP base, but two, we have a differentiated offering from a technology and from a TCO, total cost of ownership. So we decided a couple of years back to invest in the new brand, bring back up to the front, as we called it internally, and really started pushing the COVID initiative and suite as more of an NCA, new customer offering as opposed to just a cross sell offering. And really, we’re starting to see the fruit of all that hard work from our go to market teams and the brand and our product leadership continuing to differentiate that offering.

So overall, across the geos I would say we’re pretty consistent. But if I had to point to one headline, or bright spot, it’s really that Cove’s data protection offering having success in new customers. On the MDR front, yeah, we are bullish. This is an offering that we’ve been studying in the market, that we’ve been studying for quite some time and wanted to make sure that we found an offering that could, by itself, differentiate N-able compared to all the competitive landscape. And we think this will help Mike, both on our cross sell. As you know, we have a large security offering and so MSPs look to N-able, and they trust N-able with the security offerings. So we expect them to continue to trust N-able with the MDR offering. But also this will help us with NCA, new customer acquisition.

And even some of our early conversations with some of the MSPs in the market, if they’re not in the market for data protection offering or an RMM offering we’re having now a conversation with them on MDR. And so we’re quite excited as to what this offering brings both in terms of cross sell, but also new customer acquisition. So look for further updates as we get into 2024 there.

Mike Cikos: That’s great to hear. Thank you.

Operator: Thank you. Our next question comes from Jason Ader of William Blair. Your line is now open. Please go ahead.

Jason Ader: Yeah, thank you. Good morning, guys. I just wanted to ask about the RMM business drill down on that a little bit. Just for modeling purposes, can you just remind us what you’ve said publicly about how big RMM is as percentage of your revenue?