N-able, Inc. (NYSE:NABL) Q4 2023 Earnings Call Transcript

N-able, Inc. (NYSE:NABL) Q4 2023 Earnings Call Transcript February 22, 2024

N-able, Inc. beats earnings expectations. Reported EPS is $0.11, expectations were $0.09. NABL isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to the N-able Fourth Quarter and Full Year 2023 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Griffin Gyr, Investor Relations Manager. The floor is yours. Please go ahead.

Griffin Gyr: Thanks, operator. And welcome, everyone to N-able's fourth 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 on our Investor Relations website.

And now I will turn the call over to John.

John Pagliuca: Thank you, Griffin, and welcome to everyone joining us on the call. Today, I want to discuss our 2023 result, N-able's strategy for meeting the evolving needs of the MSP market we serve, and key components of our 2024 operating plan. Let's start with our results. We delivered strong performance in the fourth quarter and fiscal year '23. Fourth quarter revenue grew in constant currency, 11% year-over-year. And full year 2023 revenue grew 14% in constant currency. Our adjusted EBITDA in the fourth quarter was $39.2 million, reflecting a 36% margin and $143.4 million for the full year, reflecting a 34% margin. Year-over-year, we expanded our annual adjusted EBITDA margin by over 300 basis points and unlevered free cash flow margin by over 400 basis points.

We are driving profitable growth. We also made solid progress on initiatives across the company, laying the groundwork for what we believe will be a transformative 2024. And now I'll share some highlights from 2023. On the product front, we increased the depth and breadth of our offerings. The launch of N-able MDR in late Q4 and widened the cybersecurity services market to both N-able and our customers. This paves the way for our partners to augment their teams and provide a differentiated level of security service. In RMM we delivered analytics, Apple management, AI-generated script automation and other critical functional upgrades, empowering IT technicians to better manage a broader scope of IT assets. We also delivered a host of enhancements to Cove, our cutting-edge data protection offering, adding teams coverage to our M365 backup and expanding our draft capabilities, including enhancing standby image.

Standby image helps our partners recover faster and more predictably, so they can offer higher service levels to their customers, further differentiating Cove in the market. As a validation point, Cove was recently crowned a champion in the Canalys Managed Backup and Disaster Recovery Leadership Matrix, heralding a change of guard in this space. Legacy vendors of the past, Cove is the future. Collectively, these efforts drove a sharp expansion in our cross-sell opportunity in the second half of '23. Across our product portfolio, N-able's average monthly per device revenue opportunity is currently over $30, up from the low 20s in the beginning of 2022. With over 8 million devices under management, the cross-sell opportunity now sits at well over $2 billion.

We believe growing and filling our storefront with increasingly robust, purpose-built products is a winning strategy. In 2023, we delivered on this mission. And in 2024, we will begin to realize the opportunity this white space creates. Product innovation added fuel to our powerful go-to-market and partner success engines. In 2023, we hosted our main customer event Empower and dozens of global events, including road shows, business transformation sessions, payer groups and Head Nerd office hours. In total, we engaged thousands of our partners at these live events, enabling them to fully maximize their investment and achieve their goals. This partnered approach within the MSP community is crucial to our fabric and sets us apart from our competitors.

A customer win in the fourth quarter drives home how these touch points translate to customer value. Through active relationship management, an account executive uncovered an existing MSPs desire to grow the security operations center business. This MSP attended one of our business transformation events focused on building security service. And even though the MSP had an existing MDR solution in place, the customer signed a multi-SKU multiyear deal with us, including MDR, for approximately $240,000 of ARR. Our product enhancements and brand momentum also had a real impact on prospective customers. Our 2023 new customer revenue cohort was the highest in six years. And given the snowball nature of our growth model, we believe this bodes well for future expansion opportunities.

Despite an uncertain macro environment in 2023, MSPs chose to start and expand their relationship with N-able. To recap an exciting year, we expanded our white space opportunity, enhanced our product capabilities and deepened our presence in the MSP community, all while driving profitable growth. Let's now switch gears and look at the MSP market as it stands today. Our plans for the future and our strategy for helping our MSP partners meet evolving SME needs. I'll start with key insights from our MSP Horizons Report, a future-focused piece of research we conducted with Canalys, a leading channel analyst firm. Packed with learnings from hundreds of MSPs across the globe, one highlight from the MSP Horizon is the durability of the MSP market.

97% of MSP surveyed believe they will grow their managed services revenue this year, with roughly two-thirds expecting double-digit growth in 2024. Persistent tailwinds drive these forecasts. Rising IT costs, increasing security threats, intensifying compliance standards, staffing headaches and staying ahead of the fast-changing technology landscape create considerable challenges for SMEs, who are trying to manage their IT operations. MSPs provide the help and critical expertise SMEs need. With these durable forces powering demand, we steadfastly believe and enable strategic positioning as a provider of purpose-built software to MSPs. There is an abundance of opportunity. While the market is strong, MSPs also face challenges. Their SME customers continue to operate tight budgets.

This tighter environment heightens MSP's need for proven solutions that grow their top line and protect their bottom line. N-able empowers both. Our security, data protection and RMM solutions are integral components of MSP's offerings, driving the top line revenue. Our software solutions are also scalable unlike labor. And our platform approach drives consolidation of disparate point solutions. This improves technician efficiency and profitability, helping MSPs protect and grow their bottom line. We enable MSPs to play both offense and defense. The MSP's Horizons Report also showed the areas in which MSPs are looking to differentiate their offerings to accelerate growth. Cloud infrastructure management and managed security ranked as top priorities.

I'll now double-click into each. MSP's desire for cloud management reflects a simple reality. Businesses are running their operations in hybrid environments, with 63% of SME workloads anticipated to be run in the public cloud in 2024. So MSPs need tools that can operate in the cloud as well as physical networks, servers and devices. N-able has excellent answers for this hybrid world. Our security solutions are industry-leading and delivered seamlessly through the cloud. Cove, our data protection solution, is also delivered in the cloud and protects both on-prem and cloud environments. And critically, in monitoring and management, we recently introduced market-leading innovation with the launch of Cloud Commander. Cloud Commander solves the simple problem statement for MSPs. Navigating the cloud is a headache.

The current paradigm forces MSPs to operate disjointed administrative portals across multiple Microsoft clouds. This is time consuming, manually intensive and the stake prone. Cloud Commander leapfrogs this approach, allowing MSPs to navigate the cloud through a single console. Our solution empowers IT technicians to manage workloads, onboard and offboard users and apply access and security policies to users and devices with point-and-click ease. This is a clear win for the MSP. Eliminating dashboard sprawl generates better technician efficiency. Cloud and on-premise capabilities expand MSP's service capacity. And we believe combining Cloud Commanders, cloud management capabilities with our historic strength in device management is a leap forward for N-able and the MSPs we serve.

Security is also top of mind, increased attack velocity, the pace of innovation by threat adversaries and growing compliance standards have elevated the security discussion from the IT department to the C-suite. The intensifying threat landscape has also eroded the line between SecOps and IT ops. Small and medium businesses do not want silos. They want protection. We've listened to the needs of the market, and our product suite expansion in 2023 was concentrated in the security category, highlighted by MDR. So zooming out momentarily, we feel great about our positioning. We play in a large growing market with durable secular tailwinds. Our offerings align with the business priorities of our customers, and we are bringing products to market that align with market demand.

This brings us to 2024. We have an ambitious plan guided by the following objectives. First, empowering MSPs with leading security and data protection solutions that give themselves and their SME clients, the peace of mind they deserve. Second, driving rapid innovation into our RMM platforms, enabling MSPs to better manage hybrid digital environments at scale. And third, doubling down on our customer engagement model, delivering a differentiated level of service to the MSP community. Let's start with our customer engagement. Today, we realized approximately $4 per device per month of our $30-plus white space opportunity. In 2024, we are focused on driving that number higher. With this in mind, our go-to-market teams are employing more sophisticated tiering and bespoke customer pathways, while engaging with our customers at in-market events, where we have seen high ROI.

We have also seen continued opportunities to facilitate engagement and positive customer outcomes through our recently launched customer platform, which over 20,000 IT technicians have used since its inception last year. Bundled multi-SKU offerings and longer-term contracts are another area of opportunity. This flexibility holds mutual benefit for both N-able and our MSPs. Driving the success of our Deep Security suite is another 2024 focus point. We believe MDR is key to this initiative. The rising threat environment elevates the need for higher protection levels and adding MDR to our stack, firmly cements N-able as a vendor of choice in security, unlocking a new growth avenue. In the past, we generally landed customers on RMM and our proverbial snowball would grow over time as MSPs added SKUs and rolled out our software across their SME customers.

A technician remotely monitoring and managing a server in a secure data center.
A technician remotely monitoring and managing a server in a secure data center.

MDR fundamentally changed this equation. It is a powerful solution, offering a new entry way to N-able, bolstering our new customer acquisition engine. It also significantly expands our cross-sell opportunity with a per device price point several times higher than with RMM. In short, MDR creates more snowballs at larger sizes. Our optimism is underscored by the deep pain point MDR meets. Specifically, SME demand for enhanced security services is considerable. But providing these services generally requires the substantial staffing. This leads to unfavorable unit economics, particularly for smaller MSPs. Our recent $30,000 ARR deal illustrates how N-able can solve this problem. At MSP told us he was seeing strong client demand for security services.

But as the only person running his business, he didn't have the time or resources to deliver the intensive protection services requested. By utilizing external security personnel through N-able MDR, the MSP was able to deliver the security outcomes as clients desired, while also achieving profitable growth for its own business. We believe we can profitably replicate the success at scale and provide a tech-enabled staff augmentation pathway for MSPs, which will allow them to land additional customers, expand their scope of service and sleep easier at night. We see a particularly strong opportunity to expand our LTV at the low end of the market, where MDR tends to be a more of a greenfield opportunity for MSPs. Cove also aligns with companies that need to be secure.

Implementing mechanisms to stop the breach is critical, but not sufficient. Cove acted as stalworth fail safe, ready to quickly restore data in case of a breach. In 2024, we are energized by the prospect of continuing to take market share in this fast-growing space. Our ambitious roadmap aims to enhance Cove's ease of use through improved integrations with popular PSA systems, broaden the scope of IT environments where Cove can restore data and further ensure backup copies are clean and safe. Cove also enjoys up to 60% of the total cost of ownership compared to well-known competitors. And we continue to develop Cove with an eye on maintaining our pricing advantage. Over half of our MSPs use Cove, supporting our view that great economics and strong capabilities are a winning value proposition.

When an MSP needs to protect data, Cove is the answer. Lastly, in 2024, we plan to take additional steps to modernize our RMM platforms, provide MSPs the ability to connect to third-party software in a more secure and automated wave via APIs and bring innovation to MSPs in the form of Cloud Commander and other hybrid focused solutions. With hybrid devices, operating systems, cloud environments and workforce pliability, making SME environment even messier, we believe our roadmap and solutions will resonate and enable our MSPs to manage the increasingly digital SME. With clear customer use cases and a path to value in sight, we are relentlessly focused on continuing the modernization of our RMM platforms. We've covered a lot of ground today. And while Tim will go into more detail, I want to outline what all this means for our '24 financials.

Looking ahead to 2024, our assessment of the demand environment reflects strong growth from a resilient market. tempered by a tight operating environment for SMEs and MSPs. We expect full year gross retention in line with fourth quarter results near 86%, continued healthy contribution from new customers and accelerated cross-selling of our growing product suite. However, we also expect that SME budgetary constraints will lead to slower device additions, which will have a moderating impact on our overall growth this year. Net-net, we expect to operate in line with broader MSP market growth of low double digits in 2024, while investing and executing with rigor, position ourselves for growth acceleration in the mid- to long term. And with that, I will turn the call over to our CFO, Tim O'Brien, to discuss our financial results and outlook, and then I'll circle back for some closing remarks.


Tim O'Brien: Thank you, John, and thank you all for joining us today. Our strong fourth quarter and full year results are a testament to our compelling value proposition, business model and resilient market. We advanced our product roadmaps, expanded our cross-sell opportunity and drove profitable growth, expanding our annual adjusted EBITDA margin by over 300 basis points year-over-year. 2023 was an excellent step forward on our goal of driving a sustained Rule of 50 company substantiating the power of our model. The progress we made in 2023 is a solid foundation for us to build on in 2024 and beyond. Now I'll review our fourth quarter and full year 2023 results. Total revenue in the fourth quarter was $108.4 million, representing 13% year-over-year growth or 11% on a constant currency basis.

Subscription revenue was $106.1 million, representing approximately 14% year-over-year growth or 12% on a constant currency basis. Other revenue, which primarily represents maintenance revenue from our discontinued perpetual license model, was $2.3 million, down 1% year-over-year. We ended the quarter with 2,196 partners contributing $50,000 or more of ARR, which is up approximately 16% year-over-year. Partners with over $50,000 of ARR now represent 56% of our total ARR, up from 51% a year ago. Dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was approximately 110% on both a reported and constant currency basis. For the full year, we finished 2023 ahead of our outlook with total revenue of $421.9 million, representing year-over-year growth of 13.5% on both a reported and constant currency basis.

Subscription revenue was $412.1 million, representing approximately 98% of total revenue and growing approximately 14% year-over-year on both a reported and 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. Fourth quarter adjusted EBITDA was $39.2 million, up approximately 26% year-over-year and coming in well ahead of the high end of our outlook, representing a 36.2% adjusted EBITDA margin. Full year 2023 adjusted EBITDA was $143.4 million, up approximately 25% year-over-year, representing an adjusted EBITDA margin of 34%.

Fourth quarter gross margin was 84.5% compared to 85% in the fourth quarter of 2022. Full year 2023 gross margin was 84.6% compared to 85.2% in 2022. Unlevered free cash flow was $102.3 million in 2023 and $34.6 million in the fourth quarter. 2023 unlevered free cash flow grew 37% year-over-year. CapEx was $22.3 million, inclusive of $8.6 million of capitalized software development costs, or 5.3% of revenue for the full year. CapEx was $5.2 million, inclusive of $1.9 million of capitalized software development costs or 4.8% of revenue in the fourth quarter. Non-GAAP earnings per share was $0.11 in the fourth quarter based on 186 million weighted average diluted shares and $0.37 for the full year based on 186 million weighted average diluted shares.

We ended the year with $153 million of cash and equivalents and had an outstanding loan principal balance of $342.1 million, representing net leverage of approximately 1.3x based on trailing 12-month EBITDA. Approximately 46% of our revenue was outside of North America in the quarter and the full year. Before turning to our 2024 outlook, I will give commentary on our fourth quarter and full year results. Fourth quarter revenue came in above the high end of our guidance range and was attributable to continued strong demand for our products, coupled with positive FX impact relative to expectations. Adjusted EBITDA also exceeded expectations. Key drivers of this profit outperformance were the flow-through of the revenue beat to the bottom line and continued strong cost management across the P&L.

This brings us to our first quarter and full year 2024 guidance. There are several points to consider regarding the building blocks of our guidance for the year. First, our guidance assumes FX rate of 1.07 for the euro and 1.25 for the pound for the remainder of 2024. Given that nearly half of our revenue is generated outside of North America, I want to update the guidelines around the impact of FX movements on revenue. As a proxy, every point of the euro is approximately $1.1 million of annual revenue impact, while every point on the pound is about $375,000 of annual revenue impact for 2024. Second, our revenue guidance reflects our assessment of a stable but cost-conscious environment. We see encouraging demand indicators for our software solutions, buoyed by enduring market tailwinds and our expanded product suite.

We are excited about the cross-sell opportunity that exists within our current customer base, inclusive of the new product additions we have brought to market. That said, we expect to continue to observe tightened budgetary conditions at the SME level, which we believe will result in slower growth in the rate of SME device additions. As SME device growth helps feed our model, we expect this component of our growth algorithm to continue to be muted. Third, our revenue guidance reflects our planned 2024 contracts, pricing and packaging changes and the grow-over headwind from our higher than typical changes in 2023, given the inflationary environment. Regarding expenses and profit, our guidance demonstrates a continued balanced approach. We believe it is important to maintain a steady hand and fund initiatives to drive business growth in 2024 and beyond.

We are investing and operating with a growing TAM in mind. These propelling forces are balanced by our desire to align costs with growth. As we've stated consistently, we aim to operate within a Rule of 50 framework. On the whole, we believe our 2024 operating plan positions us to advance initiatives necessary to achieve future growth acceleration, while also delivering profit levels that align with our goal of driving towards a sustainable Rule of 50 profile for the long term. Now I'll provide our financial outlook for the first quarter and full year 2024. First quarter 2024, we expect total revenue in the range of $111 million to $111.5 million, representing approximately 11% to 12% year-over-year growth on both a reported and constant currency basis.

We expect first quarter adjusted EBITDA in the range of $37.5 million to $38 million, representing approximately 34% margin. For the full year 2024, we expect total revenue of $460 million to $465 million, representing 9% to 10% year-over-year growth or 9% to 11% growth on a constant currency basis. We expect full year adjusted EBITDA in the range of $158 million to $162 million, representing an approximately 34% to 35% margin. For the full year 2024, we expect CapEx, which includes capitalized software development costs, to be approximately 5% of revenue and adjusted EBITDA conversion to unlevered free cash flow to be approximately 67%. As a reminder, our debt is floating and currently fixed to SOFR. In 2024, we anticipate approximately $30 million in interest expense for the full year, which assumes an effective interest rate of approximately 8%.

We expect total weighted average diluted shares outstanding of approximately 187 million to 188 million for the first quarter and approximately 188 million to 189 million for the full year. Finally, we expect our non-GAAP tax rate to be approximately 28% to 29% in both the first quarter and the full year. Now I'll hand it back over to John for closing remarks. John?

John Pagliuca: Thanks, Tim. A year ago, we were faced with the rising inflationary market and uncertain economic conditions. In 2023, we believe our model proved to be resilient, increasing net retention and landing the most promising cohort of customers in the past six years, all while increasing profit and cash flow meaningfully. We believe there was significant wind in our sales as we enter 2024 with the clear strategy, focused operating plan and exciting market prospects. Our commitment to delivering critical IT solutions for MSPs and SMEs across the globe is resolute. We look forward to a transformative 2024 and are determined to deliver for our customers and stakeholders. And with that, we will open up the line for questions. Operator?

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