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. I'd now like to hand over to Griffin Gyr, Investor Relations Manager. Please go ahead.

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.

Thank you, Griffin, and welcome to everyone joining us on the call. Today, I want to discuss our 2023 results, 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. On the product front, we increased the depth and breadth of our offerings. The launch of N-able MDR in late Q4 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 at 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 touchpoints translate to customer value. Through active relationship management, an account executive uncovered an existing MSP's desire to grow their security operations center business. This MSP attended one of our business transformation events focused on building security service. 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. 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 MSPs 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 trying to manage their IT operations. MSPs provide the help and critical expertise SMEs need. With these durable forces powering demand, we steadfastly believe in N-able's 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 MSPs' 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 MSPs' offerings, driving 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 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. MSPs' 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. 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 mistake-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 MSPs' service capacity. 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, with increased attack velocity, the pace of innovation by threat adversaries, and growing compliance standards elevating 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. MDR fundamentally changed this equation. It is a powerful solution, offering a new entryway 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 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. An MSP told us he was seeing strong client demand for security services. 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 his own business. We believe we can profitably replicate this 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 more of a greenfield opportunity for MSPs. Cove also aligns with companies that need to be secure. Implementing mechanisms to stop a breach is critical but not sufficient. Cove acts as a stalwart failsafe, 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 way 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 environments 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. 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, positioning 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.

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 an 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.

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 sails as we enter 2024 with a 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.

The first question comes from Mike Cikos with Needham. Your line is open. Please go ahead.

Hi everyone, I appreciate the opportunity to ask a question. I'm interested in gaining more insights regarding your outlook for 2024. There are two aspects I would like to discuss. Tim, the first aspect concerns the growth algorithm. While I understand you are highlighting a muted device count, can you share any assumptions regarding net retention? For instance, if you're estimating around 110 on a constant currency basis, how is that figure composed? Would it include 7 to 8 points from cross-selling, perhaps one point from device count, and an additional point from new customer acquisitions? How should we view these components as they develop throughout 2024? I also have a quick follow-up.

Yes, absolutely, Mike. Thanks for the question. Overall, our 2024 guide philosophy is unchanged. We continue to guide prudently and responsibly accounting for a bunch of different range of outcomes, but we touched on a couple of the kind of moving pieces to think about as you kind of unpack 2024. One part is on retention. So John touched on gross retention. We continue to see very steady retention at the - from a dollar-based perspective at the MSP level, where we've seen some impact, and that's more touching on that device trend that you mentioned, and we also mentioned is where we've seen some impact there, more at the SME level. And then I also touched on kind of the grow-over impact from a pricing and packaging standpoint in '24 versus '23. That grow-over is in the range probably 2 to 2.5 points year-over-year. And then as you think about the growth in net retention, so some impact on the gross retention due to that device growth at the SME level, we're expecting very steady cross-sell and expansion sales across the portfolio. One of the themes that we touched on is how we've expanded the cross-sell opportunity that exists within the base with some of the new offerings. That's a big focus area for us as we've entered 2024 here, and we're expecting to perform at a higher level on that aspect of the growth algorithm throughout the course of 2024.

Got it. I'll rephrase the second question because I was going to ask about the growth impact. I'm glad you're mentioning the 2 to 2.5 point contribution at calendar '23, which is a headwind for '24 growth. In the prepared remarks, John noted the gross retention expectations for calendar '24 at 86%, compared to the 88% you achieved in calendar '23. What factors are contributing to the anticipated 2-point decline in gross retention on a year-over-year basis? Is it primarily due to the device count, or are there other factors at play?

No, it's mostly there, and I'll double back on kind of where we're seeing it. We're seeing very steady dollar-based retention with our MSPs in total. It's more of atrophy at the SME level. So I think it's more macro-driven from what's going on at the SME more broadly. And that is in our model where we see it from a device expansion perspective.

Got it. Thank you. I'll turn it over to my colleagues.

Thanks Mike.

Thank you for taking my question. As a follow-up to Tim's comments about last year's price increase, I'm curious if there are any planned price increases for this year. Last year's increase was larger than usual, so I'm wondering if we can expect any additional price increases this year.

Matt, thanks for the question. Every year, we kind of strategically plan kind of pricing and packaging changes based on a number of different factors on value we brought to market from roadmap execution perspective, competition as well as kind of the inflationary environment. So annually, we always plan some form of pricing and packaging changes. So we do have that in 2024, the size compared to what we did in 2023 is kind of where I spoke to that impact year-over-year. So we are doing something in the same time frame as 2023 in April lens, but it's probably just not as impactful from a size perspective in '24 versus '23.

So I think you mentioned 2 to maybe 2.5 points. That's net of this year's price increase, so it's inclusive of this year and last year.

Right. Correct. That's the right way to think about it.

Okay, got it. Very clear. John, understanding your guidance, or Tim if you want to chime in, it includes expectations for slower device counts in 2024. Can you rank the opportunities to accelerate growth beyond that initial target? You mentioned several on the call; it seems like cross-selling could be significant, and MDR might also be substantial. I'm curious about how you prioritize those opportunities.

Sure. In 2023, we made a significant improvement in our white space opportunity. Previously, we were in the mid-20s or low 20s per device. With the addition of some key SKUs and the expansion into adjacent markets, we have increased that opportunity to over $30 per device, which is quite substantial. Our focus now is on leveraging this white space opportunity in several ways. The increase allows us to introduce more creative bundled packages, which will benefit both the large and smaller segments of the MSP market. We've started to see early signs of success in this area. Our primary goal is to capitalize on the substantial white space opportunity within our existing base of 25,000 MSPs serving over 0.5 million SMEs. By providing them with a platform to utilize these multiple SKUs, we can help them improve their efficiency and boost their revenue. This focus will ultimately drive up the average selling price per device. With 8 million devices in play, even a small increase translates to a significant impact on our business.

Got it. Thanks a lot. Best of luck guys.

Thanks, Ben.

Hi. Thank you very much. I want to congratulate you on the solid results in a challenging area of security. That brings me to my first question. I understand your comments on pricing, but I want to explore a different angle. What is the risk that you might need to lower prices on a like-for-like basis? The other night, Paolo expressed concerns about the overall security market, including endpoint security. I recognize that Palo is an enterprise player, while your focus is different. However, there are worries about more aggressive pricing across a broad spectrum of customers and various security areas, including endpoint. I would like to understand how you assess the risk of needing to be more aggressive with pricing on a like-for-like basis, or if you believe that is not a concern within the SMB segment.

Great question. And I will not pretend to be an expert on the Paolo results. But from my understanding and listening to the cash, he was clear, the demand for security and security services remains quite strong and quite robust. And my understanding was he was more moving his business more toward a platform play as opposed to a point solution play. Well, we're already a platform play. And so it's the combination of those different offerings and not a point solution that gives us the strength in our packaging to our customers, right? And it also provides a technical but also an economic moat around that offering. And so as an example, what we're giving our MSPs is the ability to monitor and manage and provide endpoint security offerings in one platform and one view so they can manage their businesses effectively. It's that combination. And really, that's why we exist. We really exist to allow our MSPs to monitor, manage, and secure in a highly effective way. And that provides that, again, that economic and technical moat. So we're mindful of what's going on in the market, but we believe that the value that we bring in this combination was better together monitoring and management and security is a differentiator that allows us to price in a way that is very profitable for our MSPs. And we know that our MSPs and their growth algorithm are driving a lot of top line and bottom line results via this combination of monitoring and management and security. So we're mindful of it. We're always keeping an eye on what's going on in the market, but it's that killer combination that we believe gives us that moat and some of that protection.

Okay. I'm not certain that demand is strong across the board, but we will see how it unfolds. I wanted to shift focus to Cove for a moment. Could you discuss the competitive environment there, how you are competing with Cove? What strategies are you employing to achieve success? Do you encounter competitors like Rubrik and Cohesity in your market segment, or are they primarily focused on larger clients? It would be helpful to hear about growth rates, competitive advantages and disadvantages, and any opportunities you see. That's all from me. Thank you.

Sure. So with our data protection offering and just a quick history lesson. Historically, we were really going to market with our backup offerings as a cross-sell motion. And then in 2022, we really rebranded our Cove offering and because of the investment we made in the expansion of that offering with our data protection offering. So we began to go to market not just as a cross-sell but also in new customer acquisition. And we win there. So we don't necessarily bump into the Cohesity or Rubrik so much of the world. There was a little bit more enterprise. Cove does win at the mid-market. We have a team that's dedicated in selling our data protection offering into the mid-market. Historically, we face significant competition from companies like Veeam or Datto, and potentially Accent or StorageCraft. We succeed in these areas primarily because our product and technology are distinct. Unlike many competitors, we do not require an appliance; our solution connects directly to the cloud. The algorithm in Cove enables a much better total cost of ownership, reducing storage needs and the time technicians spend on backups significantly due to our TrueDelta technology, which captures a snapshot of the image and only updates the changes in the cloud for virtual machines, servers, workstations, or M365. This technology sets us apart, saving technicians' time and allowing us to offer competitive pricing. Our technology leads the way, with disruptive pricing and support from validation points like Canalys. We are now recognized as a leader in data protection offerings, especially in the mid-market and among Managed Service Providers. This combination of advanced technology, competitive pricing, and overall total cost of ownership for our customers is truly impactful.

Excellent. Any comments on how that business is growing?

Sure. The demand remains quite strong. I'd say overall Cove is growing at a faster clip than N-able as a whole.

Our next question comes from Brian Essex with JPMorgan. Your line is open. Please go ahead.

Hi, good morning and thank you for your question. Could you share some insights on the launch of MDR? Are you noticing significant pent-up demand? How has the traction been so far, and what are the expectations for its contribution in 2024 given the price increase?

Sure. Thanks for the question. With MDR, when we survey our MSPs and small shops or large shops, there's always two areas of demand that pop up. One is cloud management. The second is cybersecurity services. And what we're seeing with MSPs is the need to service their customers. The reason why security demand remains high has a lot to do with compliance and regulatory bodies, right? And so now small and medium enterprises are looking to make sure that they're compliant with whatever regulatory body that they're servicing, whether it be a government or a particular vertical. They are turning to MSPs to help them be compliant. A lot of that requires a deeper level of protection and detection and response. And so that's where MDR really comes into play. So we're seeing it as probably the number one or two area of demand for managed service providers. The exciting aspect is that this opportunity is not limited to large managed service providers; it's also available to smaller ones. If you're facing demand from your customers, you have two options. You can invest millions in building a security operations center, which may be challenging without enough personnel, or you can partner with existing solutions like the N-able MDR offering. This allows our teams and technology to assist, enabling you to focus on serving your customers and ensuring their security while they operate their businesses. We're still in the early stages, having officially entered the market in January after some preliminary efforts in the previous quarter. We've begun to establish a strong presence early this quarter, and so far, the results look promising. The demand is growing, the narrative is resonating, and the technology proves effective. Our goal is to simplify technology for our MSPs, and they value the transparency it offers. We’re in the early phases and look forward to providing more updates on the progress of this offering in the future.

Excellent. Thank you for that. And then maybe to follow up on your response, I think it was the last question about the white space within the MSPs. How should we think about where the points of friction are for incremental adoption? Is it MSPs penetrating the Cove installed base and where there's already potentially some, I guess, potential for right adoption with existing customers? Or is it this long tail of unpenetrated customers that they're focusing on penetrating? And how are their incentives aligned with your ability for incremental penetration into the installed base?

So the beauty of our model and what I'd want to remind everyone is that we're a sell-to but also a sell-through. What I mean by that is whether it be endpoint security or data protection, our MSPs sometimes are faced with, in their customer base, managing 2, 3, 6, 10 different backup offerings, right? One of the big bits that we preach here at N-able is how our MSPs can standardize on a particular technology stack because that drives a bunch of efficiencies from a software cost, but also from labor cost. That's typically the long pull, right? They need to go through some of their customers and standardize and flip their backup offering or flip their endpoint security offering. I'd say our largest, more mature, upper decile MSPs do that a little bit more easily than some of our smaller shops. The smaller shops are a little reticent to go do that, and that takes a lot more time. So in the majority of the logos and that bottom 75% quartile, it takes time for them to standardize through their base. We could win an account, but it might only reflect 5% of the MSP's estate, and getting that MSP to push through to their entire SMB base to realize the efficiencies gained is a little bit more of a journey. It was a little bit of education, and it requires the MSP to push through. So I'd say that's what takes the longest time. What we really try to help them do is to automate that and push through that standardization process.

Very helpful clarity, thank you for that. And thanks for taking the question.

Our final question today comes from Jason Ader with William Blair. Your line is open. Please go ahead.

Yes, thanks, good morning guys. I want to just ask on the device commentary. I know you talked about pressure on device additions, but wondering if there's any pricing pressure in terms of the RMM kind of per device cost. I know that there's been competitors out there that have tried to use RMM as kind of a loss leader and just whether that's having an impact as well?

Sure, Jason, thank you for the question. The expansion of our white space opportunity is beneficial. Increasing our market reach allows us more flexibility in bundling, which enhances the lifetime value for our managed service provider. Many have inquired about the breakdown between our remote monitoring and management revenue and our backup revenue. As a leadership team, we concentrate on the customer’s lifetime value. If we need to incentivize a specific service like remote monitoring and management to secure other essential services like endpoint security and data protection, we can do that. A larger white space opportunity gives us greater freedom for creative bundling. So, this expansion allows for more flexibility in our bundling strategies. The second point we mentioned on what we're focused on 2024 is around some of these committed contracts. What we're doing that's somewhat different than we did last year is we're really giving MSPs a choice. We're saying, 'Hey, look, in exchange for a committed contract, there's a potential to get better economic terms for you, but in exchange, we want that long-term commitment.' What we're finding is the MSPs prefer the choice there, and it's helping them lock in the economics long term, which will give us much better visibility into our customer retention and allow us to focus on that white space opportunity. So that's what we're looking to do as it relates to some of the initiatives there for 2024.

I understand your point. While you didn’t directly address my question, I think I follow. Is it accurate to say that there has been some general market pressure on pricing, but you aren't overly concerned due to the other opportunities you mentioned and your ability to leverage your position?

Yes. So. No, no, no. It's a fair follow-up. We're winning in our RMM category, and our Q4 is one of our strongest quarters as it relates to bookings, and that NCA, that new customer acquisition and monitoring and management. So we're winning there. I don't really see a challenge on the price points for our RMM nodes. It's more of the flexibility as to what the prize really is. Is the price the, we'll call it, $2 to $3 on the monitoring and management node, or is the prize on the $30 on the entire estate when you add the data protection and security? So we're trying to look at it a little bit more holistically. So I'm not seeing really a change in the market and an increase in competitive pricing on the node. No, we're not.

Okay. Good. Tim, regarding January and February, we're nearly finished with February now. I know you provided guidance for Q1, but do you have any comments or insights about changes in the first couple of months of this year compared to the last three months of 2023? Is there anything noteworthy in terms of demand?

Yes. I mean demand in Q4 was strong, and it was our best booking quarter of the year. December was our best booking month of the year, and demand in pipe has been very solid and very steady as we've started 2024. I think some of that's on the heels of that white space expansion as well that John spoke to with some of the new product offerings kind of coming into the fold and beginning to build the pipeline around those with Cloud Commander and MDR. The combination of being able to put together more bundling and more multi-SKU deals, I would say, has been a net positive to kind of pipe creation as we've entered 2024. But Q4 demand was strong, and that's been very steady as we've gotten into the beginning parts of 2024 here.

Okay. So growth rate in Q4 was the lowest of the year in terms of revenue on a year-over-year basis, it was 11%. But you're saying that if you looked at bookings, would it be a different story?

Yes. Yes. And as a reminder, the impact of in-quarter bookings on in-quarter revenue is very, very minimal. A lot of the revenue generated from bookings shows up in the next quarter from a revenue perspective.

Got it. So, for my final question, regarding the free cash flow for 2024, what factors should we consider? It appears that you achieved a 16% free cash flow margin in 2023. Is there an expectation that this will increase as a percentage of revenue in 2024? Additionally, are there any specific aspects we should keep in mind while developing our models?

I expect the free cash flow margin to increase in line with the rising EBITDA margin. We are committed to optimizing the conversion of EBITDA to free cash flow at a quicker pace. One uncertainty for free cash flow in 2024 will be the interest rate environment. However, we have managed to achieve substantial growth in unlevered free cash flow and improved its conversion. We are exploring various strategies to enhance this from both a tax and working capital standpoint as we move through 2024. There is definitely potential for improvement in both unlevered free cash flow margin and free cash flow margin as we progress into 2024. Our focus remains on continuing to grow in this area.

If you get more committed contracts kind of longer term, does that help free cash flow because you have more deferred revenue? How does that work?

I would not expect that to impact free cash flow. But the model from like a monthly billing perspective, I would not expect to change via the long-term commitment. The long-term commitment will still drive a monthly billing model. So I wouldn't expect big swings in additional deferred revenue.

So there's no deferred revenue impact from that.

Yes, there won't be deferred revenue impact there.

All right. Thank you.

Thanks Jason.

Ladies and gentlemen, this concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.