Earnings Call Transcript - NABL Q1 2023

Operator, Operator

Hello, and welcome to the N-able First Quarter 2023 Earnings Call. My name is Lauren, and I will be coordinating your call today. I will now hand you over to your host, Griffin Gyr, Investor Relations lead, to begin. Please go ahead.

Griffin Gyr, Investor Relations Lead

Thanks, operator, and welcome, everyone, to N-able’s first 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. 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, our continued expectations following the spin-off of our business 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 subject to risks and uncertainties, including those related to the spin-off transaction completed in July 2021. Additional information concerning these statements and the risks associated with them is highlighted in today’s earnings release and in our filings with the SEC. Copies are available on the SEC or our Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures on today’s call. Unless otherwise specified, when referring 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 and on our Investor Relations website. And now I will turn the call over to John.

John Pagliuca, President and CEO

Thank you, Griffin, and thank you all for joining us today. Our Q1 results resonated with clear takeaways: Demand for our purpose-built solutions is strong. Our business model, which we believe is both durable and differentiated, continues to deliver growth and profit. We solidly beat our Q1 expectations on both the top and bottom line, with revenue of $99.8 million or 13% year-over-year growth on a constant currency basis and adjusted EBITDA of $32.7 million, representing an adjusted EBITDA margin of approximately 33%. Our constant currency net revenue retention held steady at 108%. As Tim will tell you shortly, we are raising revenue and adjusted EBITDA guidance for the year. The MSP market reserve remains healthy, driven by persistent tailwinds. IT management continues to increase in complexity; cyber threats are escalating and becoming more insidious. It remains the case that small and medium-sized businesses are challenged to hire technicians in a tight IT labor market. These dynamics push SMEs to use outsourced IT providers such as our MSP partners. Then MSPs use N-able software to manage and monitor the SMEs' IT environments, protect them against cyberattacks, and backup and restore their data in the event of a cyberattack or some other disaster. With a business model aimed at delivering enterprise-grade software to the underserved SME market, we believe we are uniquely positioned to benefit from the long-term secular growth of SME IT spending and the trend of outsourcing IT needs to our MSP partners. Earlier today, I gave a keynote address on stage at our annual customer event in Prague called Empower, attended by MSPs, distributors, and vendors from across the globe. The Empower conference is an event full of educational content, expert speakers, and programming tracks geared towards helping MSPs scale and grow their business. During my keynote, I reminded the audience that the rate of innovation is accelerating. As technologists, MSPs must turn uncertainty and change into assurance for their customers by keeping them informed and equipped, not merely to survive the rapid pace of change, but to make new technologies a competitive differentiator in their markets. Now more than ever, small and medium businesses look to MSPs to be that trusted technology and business adviser. I also stressed to our MSP partners that managing and securing the cloud is no longer optional. SME spending in the cloud is rising, and market analysts are forecasting continued demand growth. According to Gartner projections, 95% of new digital workloads will be deployed on cloud-native platforms by 2025, and we are making significant investments to enable our partners to address this growing demand. We deliver our solutions in the cloud. For example, our RMM solutions, N-central and N-sight, scale with our MSP partners and allow device management across several operating systems from one dashboard delivered seamlessly through the cloud. For Cove, our cloud-first data protection-as-a-service solution, we just announced that we are strengthening disaster recovery-as-a-service by combining a highly efficient, cloud-first, multi-tenant architecture with the convenience of recovery directly into Azure. As of the end of the first quarter, our cloud-based Microsoft 365 backup offering was deployed for over 1.4 million unique users, up from about 900,000 in the first quarter of 2022. Our EDR solution, also cloud-based, is gaining traction in the market with approximately 1.4 million devices protected. Our Cloud User Hub enables our partners to automate and manage their Microsoft 365 and Azure licenses in a consolidated platform. Meeting with partners today at Empower, they echoed that they value the way we go beyond technology. We are not just in the software business; we are in the relationship business. Our MSPs are effectively an extension of our sales force. This intertwined relationship is a critical component of our profitable business model. N-able is committed to being the partner of choice for MSPs of all sizes around the world, and we will continue to raise the bar in 2023 by delivering purpose-built solutions that meet the growing needs of MSPs to keep them ahead of the technology curve.

Tim O’Brien, EVP and CFO

Thank you, John, and thanks to all of you for joining us on the call today. We delivered strong results in the first quarter, beating the high end of our revenue and adjusted EBITDA guidance. The overall value of the N-able platform, our strategy aimed at capturing the long-term secular trend of SME IT spending and managed services growth, the multiple vectors of growth in our business, and disciplined cost management all helped drive our performance. We aim to operate an all-weather business model that drives continued revenue and profit growth. The revenue in the first quarter was $99.8 million, representing 10% year-over-year growth or 13% on a constant currency basis. Subscription revenue was $97.4 million, also representing approximately 10% 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 7% year-over-year. We ended the quarter with 1,936 partners that contribute $50,000 or more of ARR, a 12% year-over-year increase. Looking at net retention for the first quarter, dollar-based net revenue retention was 103% or 108% on a constant currency basis. First quarter adjusted EBITDA was $32.7 million, representing approximately 33% EBITDA margin. The profit beat was driven by strong cost management and the benefit of the revenue outperformance to the bottom line. We expect total revenue in the range of $102.5 million to $103 million for the second quarter, representing approximately 12% year-over-year growth or approximately 14% on a constant currency basis. For the full year 2023, we are raising our revenue outlook and now expect total revenue of $414 million to $417 million, representing 11% to 12% year-over-year growth or 12% to 13% growth on a constant currency basis. We are also raising our adjusted EBITDA outlook and now expect full year adjusted EBITDA of $127 million to $130 million, representing approximately 31% margin. The adjusted EBITDA raise for the full year is driven by the impact of the incremental revenue to the bottom line and our efficient operational execution.

John Pagliuca, President and CEO

The new normal in our market is that we, along with our MSP partners, must constantly adapt to the ever-changing nature of the macro environment. While external circumstances may change, our strategy remains on target. We believe we are well positioned as a critical infrastructure component to help our MSPs take advantage of the durable secular trends that exist regardless of the economic cycle. The healthy demand we see gives us confidence we have the right strategy and the right business model to address the IT complexities, cyber threats, and IT labor challenges that face the industry. We must also continue to execute and earn more fans.

Mike Cikos, Analyst

Hey, guys. Thanks for taking the question. I wanted to start off with Tim. Just looking at the guidance, good to see the strong results here in Q1 as well as the acceleration that you guys are looking for on a constant currency basis with the 14% for Q2. Could you provide a little bit more clarity on that constant currency? What are some of the puts and takes you’re looking at on the product front? Are the price increases generally the same each year?

Tim O’Brien, EVP and CFO

Mike, thanks for the question. I’ll take a step back and give a little bit of color just on how we approach price increases each year. We really look at a combination of unwinding discounts as well as reviewing list prices across the portfolio. Historically, we’ve done our price increases in the March timeframe. Last year or two, that had been pushed out to June, but we pulled those back into April this year. So that’s the acute impact on the price increase timing from Q2. This year’s increases are a little bit higher than we’ve done historically, primarily due to inflation that we’ve seen recently.

John Pagliuca, President and CEO

Yes, on Cove, Cove is disruptive for both the MSP and us. It’s disruptive because of the architecture. It’s cloud-first, meaning on the security front, there is not an appliance or a vector to attack. With our true Delta technology, we are only looking at the change and not necessarily having to back up or restore, which means less storage is required than our competitors. Therefore, the backup time is less. Overall, Cove offers a better total cost of ownership for the MSP, and it appeals to all levels of maturity of the MSP.

Mike Cikos, Analyst

Got it. Thank you for that clarification. Can you provide any information on how you’re using Generative AI on your side to assist your MSPs amidst continuous cybersecurity threats?

John Pagliuca, President and CEO

We’ve been in the automation and scripting game from the beginning. We help MSPs with our own automation and scripting as well as providing them tools for their own scripting. We are also looking at RPA and machine learning. Some of our products today use data science and machine learning, especially in some of our mail and security offerings. It's part of our DNA. We’ll continue to invest and lean into that area.

Jason Ader, Analyst

Yes, thank you. Good morning. I wanted to get a sense of how the macro environment is manifesting in your business right now. Is it affecting expansion, new customer adds, or anything geographically? Can you provide broader commentary on the macro impact?

John Pagliuca, President and CEO

Look, the sentiment I’m hearing is consistent. MSPs are growing both organically and inorganically. Their growth is a mix of adding new customers and services. The heat map shows they are adding services, especially around security and data protection, aligning with our growth. Recurring revenue is strong, with an uptick in projects initiated in 2023, suggesting healthy demand for MSPs’ services.

Brian Essex, Analyst

Hi, good morning, and nice results for the quarter. I was wondering if we could start with Managed EDR and what you are seeing from the new products rolled out over the past quarter. Specifically, for Managed EDR, what percentage of incremental new revenue might be attributed to it? And do you have expectations for what that might represent in terms of revenue mix over the next several years?

John Pagliuca, President and CEO

It's too early to talk about Managed EDR as a separate line item. We launched it last quarter and have seen good traction. We believe this managed layer offers MSPs value, as it allows them to leverage experts for a small increase in cost, which enhances their overall efficiency and profitability.

Tim O’Brien, EVP and CFO

From a leverage standpoint, we are very comfortable below 3x. For the right strategic asset, we would be prepared to go above that for a short period. We'll continue to seek improvements in our gross retention and net retention rates as we distribute new products and add market share.

John Pagliuca, President and CEO

Thanks for the questions. The three verticals we focus on are monitoring and management, data protection, and security. We look to expand on all three and assess whether to build, buy, or partner based on market needs and our core competencies.

Keith Bachman, Analyst

Thank you very much. I wanted to ask about the growth algorithm you're thinking of over the next two years. How should we view your portfolio expansion and the key drivers like organic growth, acquisition, or partnerships?

John Pagliuca, President and CEO

The growth process will depend on what we observe in the market, where we believe we can provide the best solutions for our MSPs. We’ll continue to lean into R&D related to monitoring and management especially as we believe it is vital for driving long-term, sustainable growth.

Tim O’Brien, EVP and CFO

From a retention standpoint, I think we can maintain steady performance throughout the year, particularly on a constant currency basis. We saw some headwinds from currency in 2022, but we expect consistent performance going forward.

John Pagliuca, President and CEO

Thank you all for joining us on this quarterly earnings call, and we appreciate your ongoing interest in N-able.

Operator, Operator

This concludes today’s call. Thank you for joining. You may now disconnect your lines.