N-able, Inc. Q4 FY2022 Earnings Call

Hello, and welcome to the N-able Fourth Quarter and Full-Year 2022 Earnings Call. My name is Elliot, and I'll be coordinating your call today. I’d like to hand over to Griffin Gyr, Investor Relations lead. The floor is yours. Please go ahead.

Thanks, operator, and welcome, everyone, to N-able's fourth quarter and full-year 2022 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.nable.com. There, you can 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, market opportunities, continued expectations following the spin-off of our business from SolarWinds in July 2021, 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 related to the spin-off transaction completed in July 2021. 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 also 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 the 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.

Thank you, Griffin, and thank you all for joining us today. As we close out our first full year as a stand-alone company and welcome in the new year, I want to reflect on our accomplishments and the tremendous progress we've made. We started 2022 with our rally cry, 'earned more fans,' which is a broad-reaching aspiration that goes from our employees, who are the foundation of our success, to our MSP partners, who are the primary focus of our business, to industry stakeholders and investors. Through the solid execution of our strategy, we believe we are successfully delivering on this mission. We achieved strong financial results, executed important initiatives across all product categories, and enhanced our broader platform experience for our partners. We did all of this while laying the groundwork for future success. In the fourth quarter, we delivered strong profits while simultaneously driving revenue growth, another clear proof point of the strength of our model and the robust demand for the mission-critical platforms and services we provide. In Q4, we exceeded the high end of our top and bottom-line guidance ranges, delivering revenue of $95.8 million and adjusted EBITDA of $31.2 million, respectively. This equates to constant currency revenue growth of 13% and an adjusted EBITDA margin of 32.6%. For the full year, we achieved constant currency revenue growth of approximately 13% and an adjusted EBITDA margin of 30.9%. We are pleased to deliver these results amidst an uncertain macroeconomic environment. Our MSP partners and their small and medium enterprise customers continue to deal with industry-specific headwinds of labor scarcity, increasing IT complexity in the move to the cloud, as well as the relentless growth of cybersecurity threats. Here at N-able, we believe we operate a resilient business model that delivers both growth and profit, providing core must-have software and services through an efficient platform experience and a genuinely partner-first approach. Our software is high in the IT priority stack, and customers have generally sought monitoring, data protection, and security solutions regardless of the economic environment. We exist to make our partners more efficient, effective, and secure, or as we have said before, turning industry headwinds into tailwinds for both our MSP partners and for us. Regarding labor scarcity, the IT Trade Group CompTIA reported in December 2022 that the U.S. unemployment rate for technology occupations in all sectors stood at 1.8%, roughly half the national average. The difficulty SMEs have in hiring talent is compounded by the fact that IT is getting more complex and more mission-critical to business operations. SMEs face application and vendor sprawl, network challenges of hybrid work environments, and moving workloads to the cloud. Cybersecurity continues to drive spending as well. An analysis by Mason predicts that SMB security spending via MSPs will grow from $25 billion in 2022 to $48 billion in 2027 at a CAGR of 14%. Together, these dynamics drive spending on managed services and software solutions, and as we are a premier software provider to MSPs, these trends directly fuel our business. Gartner observes these same market trends. In their IT spending worldwide report from December 2022, Gartner predicts that in every industry, IT spending on services will grow more quickly than spending on internal IT capabilities. Our product strategy is focused on creating tools that enable MSPs to solve technology pain points for their SME customers simply and securely. Importantly, in 2022, we executed this mission. Starting with monitoring and management, we listened to the needs of our market and adjusted our strategy to take advantage of the unique segmentation opportunity we found in tiering our offerings. We launched N-sight, which is our all-in-one offering aimed at early growth MSPs that include three major components of our platform. Our cloud-based RMM for monitoring and management, our N-able take control for remote support, and MSP manager for professional services automation, plus our full suite of onboarding, support, and community resources to help them build their businesses. A testament to the success of N-sight is that, on a currency-neutral basis, contributions from new N-sight customers were up approximately 30% in 2022 compared to 2021. We also delivered additional Apple management capabilities to the N-sight platform to align with the growth of Apple devices. To give you an example of the increased customer value of this offering, in the fourth quarter, a European MSP was looking for an RMM platform. Two critical customer criteria were to realize a short time to value, specifically that their technicians could be up and running quickly, and that the RMM tool could integrate cleanly with other software they used. After a competitive bake-off, the customer felt N-sight was the best fit for their needs and signed a $50,000 ARR deal. While N-sight focuses on the smaller end of the market, we have also reinvigorated our push on N-central, our RMM offering aimed at seasoned, larger MSP partners. In 2022, we added features and functionality to N-central, including new Apple management capabilities. We have seen strong proof of the power of N-central's orchestrate at scale, allowing MSPs to take on large workloads to manage devices, users, and assets with minimal labor. We believe we lead the MSP market in enabling MSPs to manage Windows, Linux, and Apple devices from one consolidated dashboard. As a result of our continued investment in growing our market leadership with N-central, our gross retention is up almost 2% year-over-year. Our Cove Data Protection offering, launched in 2022, has also made considerable strides. Cove, which combined our already successful backup solutions with innovations such as our standby image feature, our true Delta technology, and Mac document backup, is no longer the best-kept secret in data protection. As a cloud-first, enterprise-grade and truly SaaS offering, Cove is fast being recognized as a leader with MSPs and is starting to make inroads in the corporate IT space as well. A deal we closed in the fourth quarter of 2022 demonstrates the efficacy of Cove. One partner, who was working with a mid-market enterprise that was about to begin migrating its Microsoft 365 from on-prem to the cloud, decided to move a large portion of their Microsoft 365 estate to Cove. This deal represented a nearly $100,000 ARR deal for N-able. Our data protection as a service approach seems to resonate. On a currency-neutral basis, the contribution from new customer cohorts was up approximately 40% in 2022 compared to 2021. And we now have over 12,000 total partners using Cove Data Protection. In addition, Cove was recently recognized with the SEC Backup and Archive Innovation of the Year Award. Our security offerings also shined in 2022. As our suite of solutions has grown, we now cover a broad spectrum of market needs, ranging from enterprise-grade EDR to traditional antivirus solutions, to password management and email protection. Demand from SMEs grew as they sought security software during uncertain times in 2022, and many MSPs turned to us to meet that demand, allowing them to stack our enterprise-grade, fully integrated tools and grow their wallet share with their customers. We launched DNS filtering earlier in 2022 and just announced the general availability of our managed EDR offering, which we soft-launched in Q4. Managed EDR supplements the N-able EDR solution with dedicated management security services. With continued labor shortages and the typically high cost of building and maintaining a SOC, Managed EDR allows MSPs to affordably reinforce and extend their IT security teams powered by SentinelOne's 24/7 security operations center. This means they can more quickly investigate and resolve threat events for their SME customers, making it an attractive always-on model. A great example of the appeal of our security solutions was a deal we closed in the fourth quarter. A healthcare-focused MSP was having compatibility issues with their antivirus software and sought to upgrade their security posture. Once we showed the MSP the benefits of EDR integrated with N-central and the advantages of our enterprise-grade technology, they signed a deal worth over $100,000 ARR. Our growth strategy continues to focus on providing the right tools to our MSP partners to help them succeed. We understand deeply that when our partners grow, we grow—something I call the snowball effect. We will keep that focus because we believe it is paramount to our mutual success. Now, as I have said before, the focused execution of our strategy by N-able across the organization is the root of our success. To recap 2022 highlights across the business our marketing teams packaged and launched our Cove Data Protection and N-sight platforms. Our fourth quarter total bookings were high for the year and exceeded our Q4 2021 figures. We earned our partner fandom every day, as demonstrated by our increase in dollar-based gross revenue retention across the business by 130 basis points on a constant currency basis. Our R&D and service teams brought six new products and billable services to market, including N-sight, Cove standby image, managed EDR, DNS filtering, cloud user hub, and enhanced services. We opened our Warsaw Poland office, with more than 70 employees currently based there, expanding our presence in Europe. Our business development efforts brought us key strategic capabilities, including the Spinpanel acquisition that we completed in July. We are laser-focused on delivering our mission to empower the success of MSPs across the globe. Thank you to more than 1,400 N-ablelites who tirelessly personify our rally cry, earning more fans every day. Looking ahead into 2023, we are still committed to earning more fans. We believe we are positioned well to take it to another level. This year, we will focus on raising the bar in our quest to become the vendor of choice for MSPs across all sizes and globally. We expect to continue to elevate our go-to-market efforts, earn new partners, and grow our brand presence and awareness. We are also enhancing our commitment to improving our partner success resources and services while driving new product launches and enhancements throughout the year to help our partners win and grow their customer base. The elevating force behind our strategy in 2023 continues to be the industry tailwinds that we believe firmly favor us. Our focus will be on raising the bar in three key areas: The first is what we call 'manage everything.' As our partners look to help their SMEs navigate the ever-changing technology landscape, we are focused on enhancing our solutions to provide the tools needed to become even more mission-critical. In 2023, we will look to augment cloud monitoring and management capabilities, extending into Azure management and broadening our Microsoft 365 management. This will help MSPs bridge the divide between server-based and cloud assets. Additionally, as customers need help with Azure and Microsoft 365, they require assistance managing their Microsoft licenses. The Cloud User Hub, based on Spinpanel technology that we acquired last year, addresses this need. Increasing our capabilities for Apple device management is another important avenue of growth, as Mac market share gains far outpace PCs. The ability to manage and monitor Apple environments adds strong value for our MSP partners. We believe this added functionality will make us the single vendor for end-to-end Apple and Microsoft coverage for monitoring, data protection, and endpoint security. As we move through 2023, I look forward to updating you on our journey to manage everything. As we all know, managing IT assets is critical but not enough. That's why the second focus area for our MSPs is 'protect and secure.' In 2023, we plan to further execute on the full potential of Cove Data Protection, expanding into broader Azure and Microsoft 365 use cases, along with continued investment in underlying product functionality. These investments will better position us to ride the wave of demand for enterprise-grade, cloud-first, integrated data protection solutions. Protection and security go hand-in-hand, driving the trend we see with Cove as an entry point for many prospective MSP partners. I've recently been speaking with a top 10 partner about security in the MSP business, and they summed it up perfectly when they said, 'We love what you have, but give us more.' We intend to do just that. We see a growing convergence in endpoint management and security and are actively working on adding new solutions to identify security risks in environments we already manage. Look to hear more from us in 2023 on the security front. Finally, the key area is what we refer to as 'operational efficiency,' which is helping our partners through automation and standardization with N-able as their one-stop shop for fulfilling their business goals. Standardization for the MSP means software cost consolidation, improved technician efficiency, and significant time savings. As we work with our partners to automate their processes using our tools, they can accelerate their customers’ transitions to the cloud, stack more solutions to increase the value they provide, and scale their growth in efficiency seamlessly. This implies a significant cross-sell opportunity within our existing base, but also the potential for growing our market share. Once again, as our partners grow, we grow. Our market is resilient, our positioning and strategy are on target, and our focus is clear. We look forward to delivering updates on our strategic initiatives within these focus areas throughout the year. I will now turn the call over to Tim to discuss our financial results and outlook.

Thank you, John, and thanks to all of you for joining us on the call today. I want to start by recognizing the many accomplishments of our team in 2022, including enhancing our product capabilities, bringing new offerings to market, and successfully operating in an evolving macroeconomic environment throughout the year. I look forward to building on this foundation in 2023. Now I will review our fourth quarter and full-year 2022 results. Total revenue in the fourth quarter was $95.8 million, representing 7% year-over-year growth, or 13% on a constant currency basis. Subscription revenue was $93.4 million, representing approximately 7% year-over-year growth or 13% on a constant currency basis. Other revenue, which primarily represents maintenance revenue from our discontinued perpetual license model, was $2.4 million, up 5% year-over-year. We ended the quarter with 1,898 partners that represent $50,000 or more of ARR, a 13% year-over-year increase. Partners with over $50,000 of ARR now represent 51% of our total ARR, up from 47% a year ago. Dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was 103%. On a constant currency basis, dollar-based net retention held steady quarter-over-quarter at 108%. For the full year, we finished 2022 ahead of our outlook with total revenue of $371.8 million, representing approximately 7% year-over-year growth or 13% on a constant currency basis. Subscription revenue was $362.6 million, representing approximately 98% of total revenue and growing approximately 8% year-over-year or 13% 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. Also note that historical financials for the period prior to the effective spin-off date of July 19, 2021, included operating expenses that were prepared using our carve-out allocation methodology while we were still a part of SolarWinds. While the allocations and estimates in these carve-out financials are based on assumptions that we believe are reasonable, our stand-alone financials are not necessarily directly comparable to those prepared prior to the effective spin-off date. Fourth quarter adjusted EBITDA was $31.3 million, coming in well ahead of the high-end of our outlook, representing a 32.6% adjusted EBITDA margin. Full-year 2022 adjusted EBITDA was $114.7 million, which represents an adjusted EBITDA margin of 30.9%. Fourth quarter gross margin was 85%, compared to 86.6% in the fourth quarter of 2021. Full-year 2022 gross margin was 85.2%, compared to 86.8% in 2021. The key drivers of the decline are changes in foreign exchange rates, product mix, and new product investments. Unlevered free cash flow was $74.9 million in 2022 and $17.6 million in the fourth quarter. Unlevered free cash flow for the year represented 65% conversion from adjusted EBITDA. CapEx was $21 million or 5.7% of revenue for the full year and $7.8 million or 8.2% of revenue in the fourth quarter. CapEx in the fourth quarter included the impact from a strategic asset purchase. Non-GAAP earnings per share was $0.10 in the fourth quarter based on 182 million weighted average diluted shares and $0.34 for the full year based on 181 million weighted average diluted shares. We ended the year with $98.8 million of cash and had an outstanding loan principal balance of $345.6 million, representing net leverage of approximately 2.2 times based on trailing 12-month EBITDA. Before turning to our 2023 outlook, I want to give some commentary on our fourth quarter and full-year results, as well as share some thoughts about the state of our business. The fourth quarter beat on revenue was driven by strong demand for solutions across all categories. Relative to our stated guidance rates, we also saw favorable FX in the quarter, which drove approximately half of the $2 million beat. The strong adjusted EBITDA output in the quarter is a function of the flow-through of the revenue beat to the bottom line, some seasonal fluctuations in spending, and a reduction in force that represented less than 5% of our workforce. The decision to take this action was a difficult one to make, was done across the company, and was not focused on any particular function or location. As we came to year-end, we wanted to ensure our business and teams were best positioned for future growth and success in 2023 and beyond with the right levels of investment in resources. Now I will provide our financial outlook for the first quarter and full-year 2023. For the first quarter of 2023, we expect total revenue in the range of $97.5 million to $98 million, representing approximately 7% to 8% year-over-year growth or approximately 11% to 12% on a constant currency basis. We expect first quarter adjusted EBITDA in the range of $29 million to $29.5 million, representing approximately 30% margin at midpoint. For the full year 2023, we expect total revenue of $408 million to $412 million, representing 10% to 11% year-over-year growth or 11% to 12% growth on a constant currency basis. We expect full-year adjusted EBITDA in the range of $122 million to $126 million or approximately 30% to 31% margin. With the continued macro uncertainty and variability we observed in 2022, we are assuming FX rates for the remainder of 2023 of 1.04 for the euro and 1.17 for the pound. For full-year 2023, we expect CapEx to be approximately 6% of revenue and adjusted EBITDA conversion to unlevered free cash flow to be approximately 65%, both in line with 2022. As a reminder, our debt is floating and currently fixed to LIBOR. We will transition to SOFR in 2023, and we anticipate approximately $30 million of 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 183 million for the first quarter and approximately 184 million for the full year. Finally, we expect our non-GAAP tax rate to be approximately 27% to 28% in both the first quarter and the full year. To recap, we saw strong market demand in Q4, and we are confident in our strategy and positioning as we enter 2023. We believe the outlook we provided for the first quarter and full-year accounts for the current macro environment. As a reminder, our model has many different growth vectors, including new customer acquisition, cross-selling our existing product suite into our partner base, launching new product offerings, and capacity growth. We will continue to monitor the performance of all aspects of the model. Our 2023 operating plan calls for continued investment in our growth, and it is important to reiterate that our business model allows us to be nimble and adapt to these plans if we see changes in the demand environment. We believe strongly in the long-term secular trend of SME IT spend and managed services growth, and we intend to continue to invest in important strategic areas outlined by John earlier, in a profitable and sustainable manner. Now I'll turn it over to John for closing remarks.

Thank you, Tim. As we dive into 2023, the leadership team and our fellow N-ablelites are energized by the potential we have to make a real impact for our partners and for their SME customers. We will raise the bar to deliver solutions and services that are purpose-built for the MSP market. As previously mentioned, we are focused on enabling MSPs to manage everything, protect and secure, and elevate their operational efficiency. We believe we have positioned ourselves optimally to provide the solutions that MSPs need to alleviate the pain points for SMEs to grow as they grow and to continue to adapt ahead of the curve, riding these industry trends well into the future. We believe that we have an all-weather business model to deliver both growth and profit, and we will continue to provide core, must-have software and services to MSPs through an efficient platform experience. Our focus is sharp, and we look forward to continuing to execute on our vision. With that, operator, we are ready to take questions.

Thank you. Our first question is taken from Mike Cikos from Needham & Company. Your line is open.

Hey, thanks for taking the questions, guys. The first topic I wanted to delve into would really be the guidance we have for calendar 2023 with the 11% to 12% constant currency revenue growth. Can you help us think through what gives you the confidence to guide to that 11% to 12% FX-neutral revenue growth? And then the second, what are the puts and takes that the team weighed in deriving that growth forecast? Can you help us think through that?

Yes, sure. Hey Mike, how are you? This is John. Tim outlined the dynamics of our business model nicely in the prepared remarks, right? It starts with that gross retention number and those 25,000 MSPs that continue to be part of that snowball, as I like to say. The foundation is that our gross retention is on the uptick, and customer satisfaction continues to be high. That gives us our base. If you think about our revenue snowball, it's in the mid-90% of our business coming from our existing base, the retention of the customer base, and then the expansion there. We continue to see the second leg of our MSP partners buying more services from us. Our data protection, we noted the penetration that we're obtaining at the MSP level. There continues to be a lot of white space as they continue to adopt Cove across their base. Our MSPs are continuing to add our security services, and we've got really good traction. Again, there's significant white space in our endpoint security and our DNS filtering and our mail security. We monitor the traction and success of our cross-sell motion and the white space that's not just for us but also our MSPs. That's the base of our revenue and forecast. We have strong views into each of the cohorts and the consistency of those cohorts. Like every business, we consider the velocity and demand for new customer acquisition. We exercised prudence in that regard, not leaning forward as far as new customer acquisition, but that's not as significant a part of our snowball revenue there. Those are the dimensions, and that's how we looked at the year, starting with looking at the customers by geography, by segment, and building based on the cohort growth from there.

That's great. If I could just build on that for a second. I know you were talking about the gross retention, and we got the fact that the net revenue retention, again, on an FX-neutral basis was consistent quarter-to-quarter at that 108%, right? As look at calendar 2023, are you assuming improvements in either that net retention rate or that gross retention rate?

No, Mike, I wouldn't say the guidance assumes that we hold both fairly steady in the 2023 outlook.

Got it. And one more, if I could, before I turn it over to my colleagues. I know that you discussed the sub-5% workforce reduction. Can you help us think through the expected cost benefit to N-able from that? The second question is, is the company still hiring post-reduction? If you are, where are those more strategic areas where you continue to build expertise?

Sure, sure. Again, this is John, Mike. Short answer is we continue to lean in, and we're hiring. We're hiring in key areas, including quota-carrying sales folks and R&D. As a technology company, we continue to prioritize investing in R&D. In the prepared remarks, we discussed staying ahead of the curve, providing MSPs with the tools they need to adapt to the ever-changing technology landscape. So we're leaning in on R&D, and we are continuing to recruit in that area; it's our highest area of recruiting effort right now. As for the reduction in force, as Tim mentioned, we take these decisions seriously. We concluded our first year as a public company, made some investments, hired based on planning for that year, and now, moving into 2023, we made decisions to shift our investments and functions where we had some scale and efficiency. Overall, from a net point of view, we will be hiring more in 2023 and expect to be at a higher headcount rate at the end of this year than at the end of 2022. So net-net, we expect to bring on more N-ablelites, advancing our technology agenda faster than we did in 2022, where we launched six new offerings.

Got it. Just to circle back on the RIF. Did you quantify what the cost benefit of that was, and when was it implemented? Or is there still more to come as far as communicating that to the affected folks?

Mike, we didn't comment on the savings but as John highlighted, it was primarily implemented to shift our investments as we went into 2023. We executed it within Q4, and I would say we did see some savings, which likely contributed to the profit beat and margin acceleration, probably to the tune of about 50 to 100 basis points in the quarter.

Got it. Thank you very much, guys.

Thanks, Mike.

We now turn to Matt Hedberg from RBC Capital Markets. Your line is open.

Great. Thanks, guys, for the questions. John, in the past, we've talked about RMM and I think it's like $1 to $3, maybe a couple of bucks per device. What stood out to me is all the innovation you talked about, the six products launched last year. Can you talk about what potential that has on a per-device basis as you expand this broader platform?

Sure. Yes. The economics of the business go to the root of the business model, Matt. So the remote monitoring piece, depending on the size and scale of the MSP, it can range from $1 to $3 per month per device. When you stack all our offerings up, that number gets closer to about $15 or $16 per device per month within our existing customer base. If we crossed that and achieved 100% adoption across every device, that's far over $1 billion of additional opportunity inside our existing base with our current solutions. And that's before we add managed EDR or other new offerings. EDR is a good example of how we increase our endpoint security. Historically, endpoint security on antivirus was as low as $1 per month per device, but with EDR, that could be a couple of dollars, and as we continue to enhance that, that revenue and ASP per device stacks to potentially $7 per device. There is a significant amount of white space in endpoint security. MSPs excel at packaging that and offering it to SMEs. Compliance and cyber insurance companies are mandating services like EDR for companies that want to be underwritten. That means there is a tremendous white space opportunity for both N-able and our MSP partners. We continue adding MSPs, who are adding SMEs and devices, which pushes this incredible opportunity.

Got it. Yes. That per-device opportunity continues to go up, which is great. Tim, maybe on the capital allocation side, you discussed the RIF. As you approach 2023, how do you think about capital allocation between deleveraging, or is that at the level you need to be, M&A, and general capital allocation philosophy?

Yes, Matt. The way we think about it is looking at the capital markets today. We have favorability compared to the current rate environment. We feel comfortable with where we're at and we're capable of considering anything strategic as we go through 2023. Our plan as of now is to stay the course.

Got it. Thanks, guys, and congrats on the strong year-end.

Thanks, Matt.

We now turn to Jason Ader from William Blair. Your line is open.

Yes, thanks. I want to ask first about the macro environment. How is this period different than what we saw in the early days of COVID in terms of demand? Please include comments on U.S. versus Europe.

Sure. Compared to COVID, there are some similarities, and I’ll detail those along with some differences. During COVID, MSPs were logging into our platform at twice the rate they did before, indicating how mission-critical our platform is in helping them transition their small and medium enterprises into a remote work environment. We noticed an uptick in demand for data protection and security as MSPs prepared their customers for this new work style. Post-COVID, we still observe strong demand for our data protection and security services. Security spending tends to be resilient, and unlike COVID, where MSPs focused solely on existing customers, we're observing them explore new RMM platforms now. Their retention and net customer acquisition have strengthened as well. Thus, we're performing much better in terms of acquiring new customers and expanding our offerings. Regarding geographical performance, demand remains robust across service areas, with no particular issues arising across regions, including Asia Pacific and Europe.

Great, thanks for that. As an unrelated follow-up, how do we assess the threat from Microsoft Intune to your RMM business and the RMM sector overall, especially considering the adoption rates?

Yes. We have a good working relationship with Microsoft. Intune isn’t an RMM solution, and any MSP or technician will affirm that. We integrate with Intune because we believe our MSP experience is purpose-built and tailored for professionals. Our integrated platform consolidates management across devices, users, and services effectively, which is our competitive edge. Microsoft recognizes this; their terms suggest third-party solutions for cloud-based backups to ensure additional security. We continue to distinguish ourselves by providing a consolidated management experience, and that's why we believe our solutions effectively empower MSPs even amid Microsoft’s offerings.

Okay, thanks. Tim, can you break down the product mix for us? I know you've done that in the past, focusing on RMM, security, backup, and PSA.

We haven't specifically broken down the mix, but we've provided insight on growth rates in those segments. The trending story remains unchanged, where both the data protection and security portions of our business are growing faster than our overall revenue. We anticipate that growth trajectory to continue into the year's beginning.

Great, thanks. Good luck.

Thanks, Matt.

We now turn to Brian Essex from JPMorgan. Your line is open.

Hi, good morning, and thank you for taking our question. I was wondering if I could ask about your over $50,000 MSPs. How should we think about the margin contribution from those MSPs as you grow, especially compared to the smaller ones that you service?

Yes. The stat shows that we continue to grow large MSPs. The beauty in our model is that we can land in an MSP with as little as $12,000 of ACV, and as they expand, their ACV grows. This often leads to an increase in services, which augment their LTV significantly. We’re maintaining a dominant presence with larger MSPs due to our robust offerings, which means the input and retention rates are favorably proportional to volume. Thus, our costs to retain are better than industry standards. A lot of our growth derives not from us selling directly but from our MSPs adding services to SMEs, enhancing their offerings and generating more revenue.

How do we assess profitability given the higher catch rates of those over $50,000 MSPs compared to the rest of the customer base?

The larger MSPs typically incur higher initial sales, resulting in quicker break-even periods than smaller MSPs. However, due to the robustness of our technology, both large and small MSPs yield strong unit economics. This is evident in our 30% EBITDA margins.

To add some context, if we consider an LTV to CAC ratio, it’s notably more favorable for the larger customer segment, with higher gross retention rates present among that $50,000 ARR customer segment. This is a tailwind for the LTV to CAC ratio measuring higher customer profitability from those relationships.

How do you view our current position? Are we at an inflection point now that larger MSPs comprise more than half of our ARR? And regarding the confidence in the 2023 guidance, how much visibility do you gain from your MSP customers in terms of demand?

We have a high frequency of contact with our 25,000 MSPs and have invested in partner success initiatives that deepen those engagements. This allows for better insights regarding their growth areas. MSPs are focused on optimizing their wallet share rather than just acquiring new customers, enabling them to grow profits without strictly needing to hire. We believe we will see continuing strong demand with a focus on growing wallet share, particularly in security and data protection. My recent discussions with our top partners have confirmed robust demand across the board in these key areas.

Thanks. What is your perspective on MSP consolidation? How does it compare to previous trends, and how might it affect your business moving forward?

Our TAM is defined by the SME IT spend rather than just the number of MSPs available. Consolidation doesn’t diminish the overall TAM. Conversely, it typically forces MSPs to mature their operations, thereby enabling them to sell to larger clients, including mid-market and even Fortune 1000 companies. Over the past decade, we've seen MSPs evolve from targeting businesses with 50 employees down to addressing larger markets. Typically, our N-central product benefits more sophisticated larger MSPs. As for consolidation trends, we do continue to observe it, and while rising interest rates may pressure acquisition activity, MSPs are persistently pursuing acquisitions to improve technology, broaden their client bases, or extend their geographic reach.

Very informative insights, thank you.

Thanks, Brian.

This concludes our Q&A. I'll now hand back to John Pagliuca, CEO, for closing remarks.

Thank you, operator, and thank you all for joining and listening to the fourth quarter results. We look forward to providing an update in another quarter or so. Thank you, and have a great day.

This call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.