Earnings Call Transcript - NABL Q4 2024

Operator, Operator

Hello, and welcome everyone to the N-able Fourth Quarter 2024 Earnings Call. My name is Becky, and I'll be your operator today. I will now hand over to your host Griffin, Investor Relations Senior Manager to begin. Please go ahead.

Griffin Gyr, Investor Relations Senior Manager

Thanks, operator, and welcome everyone to N-able's fourth quarter 2024 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 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, President and CEO

Thank you, Griffin, and welcome to everyone joining us on the call. We closed 2024 in a position of strength and we believe we are poised for even greater success in 2025. As our results demonstrate, our comprehensive software solutions encompassing security, data protection, and unified endpoint management are resonating in the market, allowing SMB and mid-market companies across the globe to keep their digital operations safe and functioning. Fourth quarter revenue grew 7% year-over-year in constant currency, and full year 2024 revenue grew 10% at constant currency. We exited fiscal year 2024 with ARR of $482 million, growing 10% at constant currency. Our adjusted EBITDA in the fourth quarter was $38.1 million, reflecting a 32.7% margin, and $169.4 million for the full year, reflecting a 36.3% margin. A year ago we set three strategic objectives for the business that, if executed, would establish a foundation of lasting success for N-able: First, we wanted to provide SMB and mid-market businesses with leading security and data protection solutions to give them the cyber resilience they need to run their businesses; second, we aimed to drive rapid innovation into our Unified Endpoint Management or UEM tech stack, providing customers the capabilities needed to ensure their IT environments are productive and secure; and third, we want to double down on our engagement model and deliver a differentiated level of service to our massive collective market. Looking back on the year, I am pleased with the foundation we have created and the progress made on all three key objectives. The successful launch of XDR headlined our security objectives. Initially brought to market via our partnership with Adlumin, our solution made a substantial impact in the industry and quickly became our fastest-growing SKU and largest pipeline generator in fiscal year 2024 as customers eagerly chose the offering to better defend their environments. The partnership validated our belief in the solutions and category, and we were thrilled to acquire Adlumin and its cloud-native AI-powered XDR platform in the fourth quarter. We are also delighted to welcome over 175 talented Adlumin colleagues to our team. We believe the strategic acquisition creates multi-dimensional value for N-able. From a technology standpoint, adding Adlumin to our portfolio allows us to deliver comprehensive cyber resilience to our customers by unifying security, endpoint management, and data protection in an integrated platform. This is powerful. IT operations and security operations are converging within the SMB and mid-market, and IT management software must seamlessly connect with security software. Silos and gaps create risk and additional unnecessary work. N-able's end-to-end portfolio closes gaps and distinctively addresses technician needs for visibility and control across their IT estate, making them more effective and efficient. We believe this cohesive approach positions us to lead and win in the new world of interconnected operations. The acquisition also accelerates our expansion beyond the MSP market. Adlumin primarily serviced the mid-market to the reseller channel, while N-able focused on MSPs as a road to the SMB. These reseller relationships took years for Adlumin to develop and are valuable assets we now own. We are excited to leverage these resellers to further the adoption of our security solutions while also expanding the reach of our data protection and UEM products. Early results are promising. Since the acquisition in mid-November, Adlumin stands alongside Cove Data Protection as one of our two highest booking products. We also deepened our data protection capabilities. Here, we are sticking to our proven Cove playbook: improve ease of use, expand our workload coverage, strengthen our security posture, and lean into the power of superior architecture to deliver fast and reliable backup and recovery. The year was marked by significant innovation, highlighted by the introduction of immutable backups that keep customers' data isolated and safe from attackers, and enhanced restore through AI, which delivers over 95% restore accuracy. The playbook is clearly working. Cove protects over 180,000 businesses, continues to outpace total company growth, and is our largest revenue-generating product. We also made significant strides in our second objective, accelerating innovation in the highly strategic UEM category, which includes our RMM products. Enhancements like new APIs and integrations expanded our open Ecoverse, while key innovations, including support for Microsoft Entra ID and improvements in Apple Device Management, equipped technicians to manage more assets with greater efficiency. We continue to break new ground and recently announced the launch of our AI-powered developer portal that accelerates API integrations for faster IT and security service delivery, reducing tasks from hours to seconds. We were recently recognized as a 2024 RMM champion by Canalys for the second year in a row and are committed to leading in the category and helping keep our customers' IT systems running smoothly and securely. And lastly, our world-class go-to-market teams delivered. In 2024, we transitioned the business from less than 10% of revenue from annual contracts to over 50%. We believe this will create stickier, stronger customer relationships and drive improved gross and net retention over time. We also expanded our routes to market. With a significant portion of SMB and mid-market IT spending flowing through resellers in the broader channel, we invested in people and programs to enhance our ability to bring our solutions to market through these avenues. We believe these investments will expand our serviceable addressable market and unlock significant growth potential. Reflecting on our progress in 2024, we broadened our portfolio, enhanced our technical moats, and expanded our routes to market. Building on this foundation in 2025, we aim to further evolve our highly effective business model with three key pillars: first, expand our security leadership in servicing our SMB and mid-market customers; second, scale our go-to-market and replicate our success in the MSP community with resellers in the broader channel; and third, elevate the customer experience with tailored support, service, and connection. Let's first discuss security leadership. Security digital operations are imperative for modern business and the need for cyber resilience is particularly acute for small to mid-market organizations. The World Economic Forum's 2025 Global Cybersecurity Outlook highlights that 35% of small organizations felt their cyber resilience was insufficient, five times the rate of larger organizations. Adlumin XDR and MDR underpin our confidence in meeting this customer need. Adlumin is AI-powered, built in the cloud, and winning. One key differentiator is our endpoint-agnostic capabilities. We can ingest data from across the spectrum of endpoint security providers while driving superior security outcomes for our customers. We can also decouple XDR software from MDR services. One customer segment may want both XDR and MDR, while other segments may want only XDR or MDR. We can meet customers where they are and win in every segment. We believe these attributes are competitive moats that will be difficult for the competition to replicate and will serve to power our success in this category for years to come. With this in mind, our dedicated sales teams are full speed ahead, leveraging their expertise to put the powerful Adlumin solution in front of our large customer base. And it's working. Our biggest cross-sell deal in the fourth quarter was an Adlumin deal for over $250,000 of ARR. The customer had service issues with their existing well-known MDR provider, and our team delivered expertise, trust, and service to win the deal. Security also permeates our UEM roadmap. Put simply, a well-managed IT asset is a safe IT asset. We are building on our deep strength in patch management and aiming to add vulnerability management, posture management, and other features to support our customers in playing the best defense. Data protection rounds out our layered approach to cyber resilience. One key initiative is developing anomaly detection technology to proactively flag indicators of compromise. The ability to not just recover from attacks but help prevent them is the next frontier in data protection. And we intend for Cove to be at the forefront. We are also working to develop integrations with external ticketing systems, security platforms, and robotic process automation firms to improve incident response and automate tasks. Having a team committed to delivering big picture headline capabilities like anomaly detection while solving seemingly small use cases like exposing improved ticketing is why technicians love Cove and why we are excited about our roadmap. All these initiatives further Cove's reputation as a comprehensive solution for IT organizations. The takeaway is clear. Our customers' needs have evolved, and N-able is investing to help them stay ahead of the curve. Our security and data protection categories represent our TAM's largest and fastest-growing sections, accounting for over 70% of our fourth quarter bookings. Protecting digital operations is the future of N-able, and we are investing accordingly. Turning to our second pillar, we are investing to scale our go-to-market and expand our presence with resellers and other channel providers. This unlocks significant opportunity. Companies with internal IT teams that may not need the support services offered by MSPs often rely on trusted resellers and channel providers to guide their software purchasing. We want to ensure N-able's products are in those reseller conversations. Our powerful, multi-tenanted products coupled with our focus on partnership have propelled us to a leadership position in the MSP community. And we are confident these factors will serve as a successful blueprint for channel expansion. In fiscal year 2025, we are specifically focused on leveraging the robust North American reseller channel we acquired via the Adlumin acquisition and further expanding our mid-market channel presence. We will also look to add our data protection and UEM products to reseller channels in North America and also plan to replicate this channel motion in attractive international markets such as the U.K., DACH, and Australia. This considerably widens the strike zone, and we expect growth in the reseller portion of our business to outpace the growth of our MSP business in the coming years. Our final pillar is to elevate our customer experience. We have an extensive product suite that is purpose-built to meet the needs of our customers and an approximately $2.5 billion cross-sell opportunity within our base. As our customers grow increasingly diverse in size, product, and geography, we are scaling our tailored strategy that delivers a higher touch approach for higher-value accounts. Customer success is part of our DNA, and we believe this is a core differentiator for N-able. While many companies talk about servicing small and mid-market businesses, we've successfully done it for over 20 years. 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, EVP and CFO

Thank you, John, and thank you all for joining us today. We made considerable progress across the business in 2024. Our product and go-to-market teams executed critical initiatives, and we once again operated above the Rule of 40. We also executed the strategic acquisition of Adlumin. The addition of Adlumin expands the aperture of our business. The purchase brings N-able a new growth avenue in the high-demand security market, established reseller and channel relationships, and greatly enhances our product suite. With Adlumin in the fold and strong progress across our broader business, we are excited about the firepower we have to scale N-able to new heights. Let's review our 2024 results, discuss our 2025 outlook, and key strategic and operational initiatives as we move forward. Total revenue in the fourth quarter was $116.5 million, representing 7% year-over-year growth on a reported and constant currency basis. Subscription revenue was $115 million, representing approximately 8% year-over-year growth on a reported and constant currency basis. Other revenue, which primarily represents maintenance revenue from our discontinued perpetual license model, was $1.5 million. We ended the quarter with 2,349 customers contributing $50,000 or more of ARR, up approximately 7% year-over-year. Customers with over $50,000 of ARR now represent 57% of our total ARR, up from 56% a year ago. Dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was approximately 103% on both a reported and constant currency basis. For the full year, we finished 2024 ahead of our outlook with total revenue of $466 million, representing year-over-year growth of 10% on both a reported and constant currency basis. Subscription revenue was $459 million, growing approximately 11% year-over-year on both a reported and constant currency basis. Given the impact of ASC 606-related revenue recognition timing resulting from our long-term contract initiative, we will now begin providing annualized recurring revenue. ARR, as of December 31, 2024, was $482 million, growing at 9% year-over-year on a reported basis and 10% on a constant currency basis, inclusive of the impact of the Adlumin acquisition. On a pro forma basis, our 2024 year-over-year constant currency ARR growth was approximately 7%. 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 $38.1 million, representing a 32.7% adjusted EBITDA margin. Full year 2024 adjusted EBITDA was $169.4 million, representing an adjusted EBITDA margin of 36.3%. Fourth quarter gross margin was 82.3% compared to 84.5% in the fourth quarter of 2023. Full year 2024 gross margin was 83.8% compared to 84.6% in 2023. Unlevered free cash flow was $98.7 million in 2024 and $29 million in the fourth quarter. CapEx was $23.7 million inclusive of $6.2 million of capitalized software development costs or 5.1% of revenue for the full year. CapEx was $8.1 million inclusive of $1 million of capitalized software development costs or 7% of revenue in the fourth quarter. Non-GAAP earnings per share was $0.10 in the fourth quarter based on 188 million weighted average diluted shares and $0.48 for the full year based on 188 million weighted average diluted shares. We ended the year with $85 million of cash and equivalents and had an outstanding loan principal balance of $339 million, representing net leverage of approximately 1.5x based on trailing 12-month EBITDA. Approximately 45% of our revenue was outside of North America in the quarter and 46% for the full year. Before turning to our 2025 outlook, I will provide commentary on our results. Fourth quarter revenue and adjusted EBITDA were once again above our guidance. We continue to execute, see steady demand in our markets, and maintain disciplined cost management. The fourth quarter also includes the impact of the Adlumin acquisition we closed on November 20. This brings us to our first quarter and full year 2025 guidance. I want to outline a few key assumptions. First, we anticipate FX rates will be slightly lower on average versus 2024 and are assuming FX rates of 1.04 for the euro and 1.25 for the pound for the remainder of 2025. As a reminder, in 2025, every point on the euro represents approximately $1.2 million of annual revenue impact, while every point on the pound represents approximately $400,000. Second, our guidance incorporates the acquisition of Adlumin. At the time of acquisition in November of 2024, Adlumin represented approximately $21 million of ARR, growing healthily above market rates. We aim to continue this strong velocity in 2025 and we see three new growth opportunities by acquiring Adlumin: One, developing a new customer acquisition motion with XDR and MDR. We primarily use Adlumin as a cross-sell motion in the partnership model and see a substantial opportunity to land new customers, including greenfield deals in the exciting security operations market. Two, bring our data protection and UEM products to the established Adlumin North American channel; and three, bring the Adlumin portfolio to enable a strong international customer base. We also wanted to provide color on the impact of ASC 606 revenue recognition. Due to the timing of our long-term contract initiative, we anticipate transitory lumpiness in our revenue. We expect revenue recognition dynamics to drive an approximate 5% year-over-year revenue growth rate headwind in the first quarter of 2025 and a 4% year-over-year revenue growth rate headwind for the full year 2025. As stated previously, due to these mechanics, we are introducing ARR as a new top line velocity measure, and we anticipate ARR dollar growth to build throughout the year as we integrate the Adlumin acquisition. Turning to the bottom line, we expect 2025 adjusted EBITDA margin to be below our target model as we integrate Adlumin into the business, invest in a new development site in India, and realize the impact of the timing of our long-term contract initiative. We expect Q1 margins to be a low point due to these factors, coupled with seasonality. We expect to return adjusted EBITDA margin to north of 30% in 2026. Now, I will provide our financial outlook for the first quarter and full year 2025. For the first quarter of 2025, we expect total revenue in the range of $115 million to $116 million, representing approximately 1% to 2% year-over-year growth, or 3% to 4% on a constant currency basis. We expect first quarter adjusted EBITDA in the range of $27.5 million to $28.5 million, representing an approximately 24% to 25% margin. For the full year 2025, we expect total revenue of $486.5 million to $492.5 million, representing 4% to 6% year-over-year growth or 6% to 8% growth on a constant currency basis. We expect full year ARR in the range of $514 million to $522 million, representing 7% to 8% year-over-year growth or 7% to 9% on a constant currency basis. Our 2025 ARR guide represents pro forma constant currency growth acceleration. We expect full year adjusted EBITDA in the range of $132 million to $138 million, representing approximately 27% to 28% margin. For the full year 2025, we expect CapEx, which includes capitalized software development costs, to be approximately 6% of revenue, and adjusted EBITDA conversion to unlevered free cash flow to be approximately 65%. As a reminder, our debt is floating and currently fixed to SOFR. In 2025, we anticipate approximately $27 million in interest expense for the full year, which assumes an effective interest rate of approximately 7.5%. We expect total weighted average diluted shares outstanding of approximately 189 million to 190 million for the first quarter and approximately 191 million for the full year. Finally, we expect our non-GAAP tax rate to be approximately 25% to 29% in both the first quarter and the full year. We are entering 2025 with energy and confidence. As a proven leader in UEM, we've built a foundation of trust and excellence. Cove is a jewel in the high-growth cloud-first data protection market, while the addition of Adlumin's MDR and XDR represents our next frontier, addressing the critical security needs of digital-first, SMBs, and mid-market companies. Our go-to-market is scaling and our end markets remain strong, as we sit at the intersection of powerful secular tailwinds in cybersecurity, data growth, and digital transformation. The opportunity is clear, and we are investing to seize this opportunity and scale N-able to new heights. Now, I will hand it back over to John for closing remarks.

John Pagliuca, President and CEO

Thanks, Tim. We had our 2025 leadership kickoff a few weeks ago, and I wanted to close today with the same message I shared with our N-able team. N-able is focused on growth. Our high conviction bet on XDR and MDR gives us a powerful vehicle in the race for security dollars and enhances our end-to-end platform. By investing more in the channel, the N-able name will be injected in the conversation of billions of dollars of potential spending. These are growth opportunities. We are playing offense. I'm very excited about 2025 and the road ahead for N-able. Our guide calls for over $500 million of ARR and strong profit margins. We are executing at scale with a durable business model and high ambition. Every day, we are pushing the envelope to give our customers the solutions they need to protect and drive the success of small mid-market companies across the globe, and we are determined to deliver. We look forward to further discussing the opportunity for N-able at our Investor Day on March 13 and encourage you to join via live webcast. And with that, operator, we will turn it over for questions.

Operator, Operator

Thank you. Our first question is from Mike Cikos from Needham. Your line is now open. Please go ahead.

Mike Cikos, Analyst

Great. Thanks for taking my questions here, guys. I just wanted to start with Adlumin and the acquisition here. Can you help us think through what was the revenue contribution from Adlumin in Q4? And what is embedded in the calendar 2025 guide here, when we look at the ARR revenue that you guys are guiding to?

Tim O'Brien, EVP and CFO

Hi, Mike, thanks for the question. Q4 contribution was from the acquisition date of November 20 through the end of the year. It was probably in the range of about $2.5 million of contribution in Q4. And then, at the time of acquisition, Adlumin was approximately $21 million in ARR. We're not breaking down the contributions in the 2025 guide, but as you kind of think through year-over-year compares, I think that's a good baseline to leverage as to what the starting point was with that part of the business.

Mike Cikos, Analyst

Thanks for that. And I know you've obviously had this long-term initiative and moving customers to annual contracts now for the last year, now north of 50%. Is there an expected headwind or benefit? Like, if we think about we're north of 50% today, are you guys trying to drive that to north of 70% in this coming year? Is there any way to kind of quantify how we should be thinking about that initiative?

Tim O'Brien, EVP and CFO

Yes. The initiative will continue. I would expect basically all new business coming in is generally 90% or so plus in committed contracts going forward. So I would expect more of a natural blend up, over time. I wouldn't expect another significant uptick like we had in 2024 as we go forward. So I would say, generally, the mix will just kind of uptick in probably the mid- to high single-digit range annually for the next few years.

Mike Cikos, Analyst

Terrific. Thank you very much, guys.

Operator, Operator

Thank you. Our next question is from Brian Essex from JPMorgan. Your line is now open. Please go ahead.

Brian Essex, Analyst

Hi. Good morning and thank you for taking my questions. I guess, maybe John for you just to start would love to understand how conversations with Adlumin's reseller and partnership arrangements - like reseller and mid-market partners are. How has engagement been on the partner side for Adlumin? And what needs to happen for you to be fully engaged both for Adlumin and like legacy N-able?

John Pagliuca, President and CEO

Good morning, Brian. Thank you for your question. I have been involved with some of the larger resellers. It's interesting to note that both the managed service providers and these resellers serve as advisers to small and medium businesses, as well as the mid-market, but in different capacities. The managed service provider tends to be more hands-on, taking on some operational roles for these businesses, whereas the reseller plays more of a role in procurement and helping them understand the market. When we engage in discussions, these resellers have shown a lot of enthusiasm about the acquisition because we now have the support of a publicly traded company, bringing the rigor associated with that. Additionally, they have gained a partner that offers a comprehensive solution with Cove Data Protection, our UEM products, and EDR, expanding their portfolio and capabilities. The Adlumin reseller channel has mainly focused on North America and has developed a strong presence there, which we plan to utilize and expand in 2025. As we mentioned earlier, we intend to replicate this success internationally in the UK, DACH, and Australia, as well as globally. The feedback from resellers has been very positive, and even the managed service providers are keen to adopt the Adlumin XDR offering as well. Overall, things are progressing well.

Brian Essex, Analyst

Got it. That's super helpful. Maybe just a follow-up. There are a lot of XDR MDR options out there. Maybe help us understand like who does Adlumin typically see competitively? And what is that conversation like? Is it mostly kind of like they have some level of product differentiation on the mid-market SMB side that sets them apart? How should we think about their ability to penetrate that market?

John Pagliuca, President and CEO

The main request from our managed service providers two years ago was for assistance in understanding threats and analyzing logs across the network. Despite the presence of numerous competitors, they weren't meeting this need. We discovered Adlumin and initially partnered with them through an OEM, which eventually led to our acquisition. Adlumin is winning in the market for several reasons. First, it is a cloud-based solution that utilizes current generation AI and agentic AI technology for autonomous operations. This is significant because it improves margins, resembling a software-focused business model, and enables us to offer competitive pricing to mid-market and small-medium enterprises, allowing widespread deployment. Secondly, it is endpoint-agnostic, meaning it can gather data from various endpoints such as Microsoft Defender, SentinelOne, Bitdefender, or CrowdStrike, unlike some major firms that are tied to their endpoints. This flexibility is crucial for the MSP community, which typically manages diverse network environments. The cloud-native and AI-driven design also facilitates automation. Lastly, it empowers MSPs and mid-market companies to distinguish between software and service offerings. Many competitors tend to provide opaque services that do not offer visibility, while Adlumin allows technicians to see the software and understand what is happening. They have the option to utilize it purely as software through an XDR deployment or as part of a service, where their SOC analysts provide support. This added visibility is transformative for these organizations; they desire clarity and just need some assistance. Therefore, we do not operate as a black box MDR service but rather as an XDR platform with MDR capabilities, which explains why we are succeeding in the mid-market and MSP sectors.

Brian Essex, Analyst

That makes a lot of sense. Super helpful color. Thank you.

Operator, Operator

Thank you. Our next question is from Matt Hedberg from RBC. Your line is now open. Please go ahead.

Matt Hedberg, Analyst

Thank you for taking my questions. I would like some clarification. It seems that at the midpoint of your 2025 revenue guidance, you're projecting 7% constant currency growth. However, if we adjust for some revenue fluctuations, it appears to be more like 11%, which might be considered more of an inorganic figure. Is that the correct way to interpret it?

Tim O'Brien, EVP and CFO

That will be correct. Yes. Matt, the kind of 606 impact on the revenue growth rate in 2025 for the full year is approximately 4%.

Matt Hedberg, Analyst

Okay. As a related question, I know you're not providing guidance on ARR, but conceptually, should ARR build throughout the year? Would you expect ARR to end the year at a double-digit growth rate or potentially outpace revenue? I'm trying to understand how we should consider ARR growth in 2025.

Tim O'Brien, EVP and CFO

Hey, Matt, we actually did guide exit ARR for 2025. On a constant currency basis, that was 7% to 9%. And on a pro forma basis, exiting 2024 was 7%. So we are expecting acceleration on the ARR line as we go through 2025.

Matt Hedberg, Analyst

Got it. Okay. And then, John, thinking about this, I assume this might be part of your Analyst Day, which we're looking forward to. If we take a step back, you mentioned several drivers such as Adlumin and Cove expanding MSP relationships. What do you believe is the single biggest factor in getting you back on track? I believe you can still grow in the mid-teens. What do you think is the key factor to reach that level of growth again?

John Pagliuca, President and CEO

We share that perspective, Matt. We'll discuss this further during Analyst Day. Reflecting on our business model's metadata and structure, it's clear how much we've progressed in the past few years. Currently, we have the XDR platform, which represents a new NCA strategy for us and opens up significant cross-selling opportunities, creating a substantial tailwind. Additionally, we've been focusing on the SMB market, which encompasses trillions of dollars in spending, but primarily through the MSP route, a smaller segment of that market. Now, we’re excited to leverage the channel that Adlumin brings. It's worth noting that we started investing in this channel organically before acquiring Adlumin due to the increasing demand we observed from this market segment. From a business model perspective, these are the two new levers we’re introducing. We laid the groundwork in 2024 and plan to scale these initiatives in 2025. Essentially, we’re using the XDR platform not only for cross-selling but also as an NCA platform. This is a significant development. The second lever involves engaging directly with resellers and channel partners. In summary, these are two major levers we’ve established, which we will expand in 2025.

Matt Hedberg, Analyst

Got it. Thanks a lot.

Operator, Operator

Thank you. Our next question is from Keith Bachman from BMO. Your line is now open. Please go ahead.

Keith Bachman, Analyst

Thank you very much. I wanted to ask some similar questions. You are guiding for a 7% revenue growth at the midpoint, but some of the 606 items suggest an 11% growth. However, if we exclude the Adlumin contribution, the growth appears to be in the mid to low single digits. I'm trying to understand the variables at play, especially considering that the ARR guidance is about 8% at the midpoint, which also includes Adlumin. If we remove Adlumin from that growth rate, it seems we are again in the mid to low single digits. So, I'm trying to grasp what is affecting organic growth, particularly when adjusting for 606 and M&A. You mentioned that the market is growing at 14%, or your Total Addressable Market is expected to grow at that rate over the next couple of years, and I want to understand the gap regarding what is impacting growth, especially in 2025. Additionally, could you provide some insight into your net retention rate or gross retention rates? I believe it dropped a bit to around 85% this year. It would be helpful to hear your thoughts on these two metrics—gross and net retention—as we work to reconcile what the organic growth rate is and what you are projecting for 2025.

John Pagliuca, President and CEO

Yes, I’ll start and then I’ll ask Tim to add in. There are a few things to mention, and Tim addressed some of these on the last call as well. In the first half of the year, we are facing some challenges as we manage the long-term commitment contracts. When we discuss gross revenue retention or net revenue retention, we look at it on a trailing 12-month basis, and this will affect both of those key performance indicators as well as our growth rate for that period. We anticipate that things will pick up in the second half of the year. Additionally, we are very excited about the Adlumin acquisition. However, it's important to note that it’s a new acquisition, and they've been part of our company for less than 90 days. We are approaching this with caution regarding how this will influence our projections for the latter half of the year. We expect to keep performing well, and as we do, we'll build more confidence in this area. Our intention is to offer guidance that provides both the selling and buying sides with assurance, reflecting the current acceleration. As we gain traction, we may reassess our position. Therefore, it’s crucial to communicate that we are being cautious with the Adlumin projections.

Tim O'Brien, EVP and CFO

Yes. To clarify the normalized rates, Keith, I believe they are in the higher single-digit range rather than the lower single-digits to mid-single-digits you mentioned. Looking at the ARR guidance, a constant currency growth of 7% to 9% for 2024 includes the Adlumin exit ARR as of 2025. Therefore, there isn't a full inorganic impact needed to reconcile in that figure, if that makes sense.

Keith Bachman, Analyst

Can you talk about how you're thinking about gross and net retention?

Tim O'Brien, EVP and CFO

Yes, I would say, we're expecting both lines to improve as we go through 2025. From a trailing 12-month basis, I would expect it to bottom out in the first quarter. But from there, on a trailing 12-month basis, I would expect it to improve from Q2 onwards.

Operator, Operator

Thank you. Our next question is from Joe Vandrick from Scotiabank. Your line is open. Please go ahead.

Joe Vandrick, Analyst

Hi. Good morning and thanks for taking my questions. John, maybe for you, I know Cove is the largest recurring revenue product group. You've mentioned that in the last two quarters. So for customers that are leveraging Cove for their backup solution but maybe not using other enabled products, what's the playbook to target these customers and drive consolidation? And can you talk about if you've had any success there?

John Pagliuca, President and CEO

Thank you for the question, Joe. Q4 was an exceptionally strong quarter for us, with bookings reaching some of the highest levels we've seen in years. This success can be attributed to the strength of Cove as a new customer acquisition path alongside XDR. We are successfully attracting new customers with Cove and are now able to guide them through the N-able experience, demonstrating that we are more than just a software provider. We assist them with their business strategies and the way they package services for their small to mid-sized market customers. We're showcasing the advantages of an integrated platform, walking them through how they can achieve greater efficiencies and security by integrating Cove with our UEM and N-central offerings. Additionally, we are exploring ways to enhance data sharing between Cove and our XDR platform to provide Managed Service Providers a comprehensive view of their operations. With our XDR, data protection, and UEM offerings, we believe we stand out as one of the best complete solutions for management, monitoring, data recovery, and security, enhancing efficiency and effectiveness for MSPs and their mid-market customers. This narrative is beginning to resonate, as we're witnessing customers who started with Cove adding UEM, those who began with XDR adding EDR, and longstanding customers leveraging N-central now transitioning to Adlumin. They recognize the holistic approach we offer, improving their operational efficiency and effectiveness. We planted the seed in 2024, and we aim to scale and encourage more cross-selling in 2025.

Tim O'Brien, EVP and CFO

We don't have direct visibility into the end customer of the MSPs. But anecdotally, we're very diversified from the end markets that they serve. And I wouldn't expect our business to be impacted in any different way compared to the general mix from that perspective. So I wouldn't expect too much impact from anything there at this point. We haven't heard anything anecdotal from our customers.

John Pagliuca, President and CEO

Yeah. And Joe, remember, nearly half of our revenue is outside of the U.S. as well. So we have a diverse revenue base just from a geography which is part of our strength. And then as Tim mentioned, it's a very, very diverse customer base and the industry that the MSPs are servicing.

Operator, Operator

Thank you. We currently have no further questions, so I'll hand back to John for closing remarks.

John Pagliuca, President and CEO

Great. Thank you all for your time and your questions today. Looking forward to talking with you all at Analyst Day, here in another 10 days or so.

Operator, Operator

This concludes today's call. Thank you for joining us. You may now disconnect.