Earnings Call Transcript - NABL Q3 2021

Operator, Operator

Hello, everyone, and welcome to the N-able Third Quarter 2021 Earnings Call. My name is Charlie and I will be your coordinator for today's call. You will have the opportunity to ask a question at the end of the presentation. I will now hand you over to your host Howard Ma, Senior Director of Investor Relations, to begin. Howard, please go ahead.

Howard Ma, Senior Director of Investor Relations

Thank you, Charlie, and welcome, everyone, to N-able's third-quarter 2021 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, our continued expectations following the spinoff of our business from SolarWinds in July 2021, and the impact of the global economic environment on our business. These statements are based on currently available information and assumptions and we undertake no duty to update this information except as required by law. These statements are also subject to a number of risks and uncertainties including those related to the spinoff transaction completed in July. 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 IR 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 on our earnings press release on our IR website. And now I will turn the call over to John.

John Pagliuca, President and CEO

Thanks, Howard, and thank you all for joining us today. First off, I want to express my gratitude to the entire N-able team for staying focused on operational execution. We rallied around the phrase 'Forward Together' and leveraged that sentiment to our MSP partners and N-able employee base to deliver on a successful spinoff. It's still hard to believe that the transaction was only a few months ago and, with that milestone in our rearview mirror, everyone really has a renewed energy. It has been rewarding to witness the ownership and drive to serve our MSP partners across the entire organization, and it shows in our performance in the third quarter and what we are already seeing in the fourth quarter. Our third-quarter revenue of $88.4 million exceeded the high end of our outlook, representing approximately 16% year-over-year growth, which included approximately 2 percentage points of FX benefit. Our net retention rate remains consistent at 110% on a trailing 12-month basis, reflecting healthy expansion across our partner base while leveraging customers. For those that represent $50,000 or more of ARR on our platform, now represent 46% of total ARR as of quarter end. We believe N-able is well positioned in a dynamic industry with increasing tailwinds. Businesses both big and small around the world don't have the means to deal with ever-growing IP complexity and cyber threats. The digital evolution is accelerating with small and medium enterprises looking to differentiate their business and enable distributed workforces across a variety of environments and devices. As a result, SMEs increasingly rely on MSPs for proactive and recurring IT services. We believe MSPs are and will continue to be the essential workforce for SMEs to serve mission-critical IT needs. Meanwhile, MSPs, and more broadly IT service providers of all types, need platforms aligned with the needs of their end customers. We saw continued robust demand for security and data protection offerings in the quarter, which were outpacing our overall revenue growth. Cybersecurity is increasingly top of mind for service providers of all sizes as cyber criminals exploit vulnerabilities in the supply chain and ransomware and phishing attacks become more prevalent. Partners are more intensely scrutinizing both the built-in security mechanisms within vendor products and vendor security protocols. Security is a core aspect of N-able's culture, and we are committed to the shared responsibility we all have as technology companies within the MSP ecosystem. The increased investments we have made in effective security management and our people, processes, and technology is a strength we bring to our conversations with partners. With that in mind, I wanted to share some wins in the quarter that illustrate the power of N-able's model and our ability to capitalize on key industry trends, including platform standardization, MSP consolidation, and heightened focus on cybersecurity. First, a US-based MSP with a dedicated security practice signed a multiproduct six-figure ARR deal, including our RMM, EDR, backup, and risk intelligence, which displaced an incumbent competitor. Our breadth of offerings, partner success programs, and security capabilities were the deciding factors in this win. Second, a Netherlands-based MSP that recently acquired four partners chose to standardize on our RMM platform, also a six-figure ARR deal due to our ease of use, extensibility, and our strong automation capabilities. Third, in a similar situation, an existing US-based partner was acquired as part of the rollup strategy. The acquirer was looking to standardize multiple RMM platforms onto one. After a competitive process, they ultimately chose N-able due to our scalability, automation capabilities, and partner success programs, which resulted in a large five-figure ARR deal. These standardization plays reflect our leadership in RMM and indicate that our strategy, product mix, and approach to partner success are resonating with market demands. We matter the most with the messiest for our MSPs and tens of thousands of partners around the world prove that. We also had some notable expansion deals in the quarter. First, a US-based partner that was using a competitive RMM vendor for a separate company's division standardized on our RMM while also adopting EDR, resulting in a six-figure ARR deal through the preferred vendor due to our ability to drive efficiency via automation of key processes, resulting in reduction of labor costs for the MSP. Second, we had a five-figure ARR EDR cross-sell win to a Canadian MSP that has been an RMM customer for over five years as they upgraded their endpoint security posture. Third, we had a large five-figure ARR data protection cross-sell deal to a UK-based MSP. Here we displaced a competitor with our fully cloud-based image recovery approach to backup that is fast, comprehensive, and highly cost-effective. We are seeing success across several areas that reflect fundamental pillars of our go-to-market strategy. From a technology perspective, we win because of our platform's scalability, security, and extensibility. Our partners need technology that is powerful and easy to use, which enables them to deliver high value to their end customers while earning higher profits for themselves. For instance, our EDR solution, powered by native integration with SentinelOne, is being leveraged by many MSPs to increase both revenue within their existing customer base and to win new customers. Our EDR allows partners to create advanced security packages containing behavior-based threat detection and faster rollback capabilities. It enables partners to decrease risk to their customers while increasing their margins. The expansion deals I highlighted are all-around team efforts and evidence that our partner success investments are paying off. Every day partner success managers work to help partners identify business challenges and leverage our proprietary resources such as the MSP Institute, Head Nerds, and MarketBuilder to solve those challenges. They also help connect success engineers and sales engineers with partners to resolve technical issues while educating them on automation and security features. Partner success is a critical component of our customer-centric culture. Our focus on partner success allows us to listen and learn from our customers, which directly informs innovation, what new products to bring to market, and how to best meet customer needs. Moving along, I wanted to share some third-quarter product highlights. We were recognized in CRM's 2021 annual report card as the best-in-class MSP platform, ranking first in three of four major categories scored, including product innovation, partnership, and managed and cloud services. Our Mail Assure email security solution received Virus Bulletin's verified spam plus rating with zero false positives. Our Microsoft engine integration continues to provide value for customers looking to manage Microsoft devices. We now have over 400 MSPs using this capability. As we look ahead to Q4 on the product front, our DNS filtering offering is in preview in a limited number of customer live environments, and the early feedback has been positive. This not only marks an important addition to our security stack but also illustrates our differentiated ecosystem approach. By enabling our solution via a single pane of glass and natively integrating with leading third-party technology providers, our ecosystem framework powers a flexibility and extensibility that our partners desire. Additionally, our solutions fully support the recently released Microsoft Windows 11 operating system. This was a significant release and a major event for our partners to upgrade and migrate their customers. N-able continues to work diligently to help ensure that partners and prospects experience this new transition to the upgrade. We will fully support Apple's new Mac OS Monterey by the end of this quarter. Now I will touch on the progress we've made through branding, marketing, and recruiting efforts before turning the call over to Tim. While we officially rebranded in March, it takes time for a new brand to fully resonate. About six months after the rebrand, the number of monthly search queries for N-able has multiplied nearly tenfold, surpassing what we were getting as SolarWinds MSP. In addition, the number of monthly qualified opportunities generated from brand queries has increased significantly in comparison to the same period a year ago before our name change. We will continue to improve and refine the Why N-able story by demonstrating the differentiated value of our solutions relative to competitors. Our website is a key vehicle for the story, and we are evolving our online presence and positioning to demonstrate our value proposition to prospects and existing partners. Additionally, we plan to increase our marketing activities with more N-able hosted events, participation in trade shows, engaging videos, and webinars. Last but not least, we remain focused on hiring and retaining top talent to support our growth initiatives. In the third quarter we launched what we call 'The Way We Work,' which is a hybrid working model based on trust and flexibility that supports meaningful interactions for our colleagues. We are committed to exploring innovative ways to support our growing base of more than 1,300 N-able employees around the world. Thank you. I will now turn the call over to Tim for a review of our Q3 financial results and outlook.

Tim O'Brien, EVP and CFO

Thank you, John, and thanks to all of you for joining us on the call today. I will start out with a note that our third-quarter financial results contain a 19-day sub-period, during which we still operated as a part of SolarWinds prior to the completion of our spinoff. For those 19 days, our financials were calculated using carve-out methodology. Starting in the fourth quarter, N-able's financial results will be presented on a completely standalone basis. As John mentioned, total revenue in the third quarter was $88.4 million, an increase of 16% year-over-year, and included approximately 2 points of FX benefit. Subscription revenue was $86.1 million, an increase of approximately 17% year-over-year. Other revenue was $2.3 million, down 11% year-over-year, and primarily represents maintenance revenue from a legacy license model that we discontinued in the first quarter of 2020. Quarterly performance continued to be driven by our security and data protection solutions. Revenue from our N-able EDR and staff cloud-to-cloud backup solutions outpaced overall revenue growth. From a geographic perspective, revenue outside of North America represented 49% of the total. Dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was 110%. Our healthy expansion rates have been driven by our partner-enabled growth model where we grow by acquiring new partners when existing partners acquire new end customers and when they manage more devices and deliver incremental services powered by the N-able platform. We ended the quarter with 1,662 partners that represent $50,000 or more of ARR with us, a 25% year-over-year increase. Partners with over $50,000 of ARR now represent 46% of our total ARR, up from 40% a year ago. 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. Third-quarter gross margin was 87.7% compared to 87.4% in the third quarter of 2020. Adjusted EBITDA was $29.7 million, representing an adjusted EBITDA margin of 33.6%. Unlevered free cash flow was approximately $1.3 million in the quarter and contained two one-time items. The first was a $20 million outflow representing a net repayment to SolarWinds related to intercompany trade payables which occurred prior to the spinoff and our cash peg of $50 million at the time of spinoff. The second was $3.4 million related to the transfer of assets in our Philippines office from SolarWinds to us that is recognized in the CapEx line. This transfer was cash neutral. Excluding these two items, unlevered free cash flow would have been $24.8 million in the quarter. CapEx was $7.3 million, or approximately 8% of revenue. CapEx contained $3.4 million of asset transfers related to our Philippines office that I just mentioned. Excluding that, CapEx would have been approximately $4 million or 4.5% of revenue. Non-GAAP earnings per share in the quarter was $0.10 based on 175.8 million weighted average diluted shares. We ended the third quarter with approximately $62 million of cash, up from approximately $50 million at the end of the second quarter. Our outstanding loan principal balance was $350 million representing net leverage of approximately 2.5 times. Now I will provide our financial outlook for the fourth quarter and full year. For the fourth quarter, we expect total revenue of $88.5 million to $89 million, representing approximately 11% year-over-year growth. Based on current rates, we expect FX to have a neutral impact on reported revenue in the fourth quarter. Note that the fourth quarter has tougher year-ago comparisons relative to the third quarter. In the fourth quarter of 2020, we started to see improvements in both new ARR and expansion rates following the COVID impact on the second and third quarters of 2020. This was followed by a challenging start to 2021 due to a slowdown in demand generation after the Sunburst cyber incident and rebranding efforts, which had flow-through impact on the first three quarters of the year. We expect fourth-quarter adjusted EBITDA of $27.5 million to $28 million, representing approximately 31% margin at the midpoint. For the full year of 2021, we are raising total revenue expectations to $345.5 million to $346 million, representing 14% year-over-year growth. We expect approximately 3 percentage points of FX benefit for the full year 2021. We are raising our adjusted EBITDA outlook for 2021 to a range of $113.1 million to $113.6 million or a 32.8% margin at the midpoint. We expect elevated CapEx in the fourth quarter in the range of $12 million to $14 million primarily due to timing of spinout-related office build-outs. We expect CapEx to return to approximately 4% of revenue starting in 2022. We expect total weighted average diluted shares outstanding of approximately 181 million in the fourth quarter and approximately 169 million for the full year. We expect our non-GAAP tax rate to be approximately 25% in both the fourth quarter and the full year.

John Pagliuca, President and CEO

Thanks, Tim. Q3 was our first almost full quarter as a standalone company. While we are focused on execution, it's important to remind ourselves of our recent achievements, including rebranding, successfully separating from SolarWinds, building out a new executive team, and continuing to hire top talent on top of this foundation. And we did all this while weathering a pandemic. We have entered a period of time where businesses of all sizes are ramping up, not just to differentiate for the post-pandemic new economy, but for a new type of worker who is used to a hybrid working model. In this environment, MSPs are looking to us to help them ensure that their service offerings are robust, scalable, and secure. We are proud that we are an integral part of our MSPs' ability to land, expand, and retain their customers. We grow as they grow. Above and beyond our software platform, it is the support and guidance we provide them with our award-winning training, education, and marketing resources that is one of the keys to their success. As we focus on acceleration in 2022, it is the teamwork of our people and the support of our partners that sets us up for the bright future for the company. As we look ahead, we will continue to invest in our go-to-market motions, partner success initiatives, and innovation to ensure we deliver and remain top of mind for our partners going forward. With that, operator, we are ready to take questions.

Operator, Operator

Operator instructions.

Matt Hedberg, Analyst, RBC Capital Markets

Great, guys, thanks for taking my questions. Good morning. John, so growth in large customers was really impressive this quarter. And you noted a lot of overall momentum in the business and you even just said you're focused on accelerating in 2022. Can you put a finer point, though, on specifically why you're having success in some of these larger customers? Is it sort of an evolution of the business, is it product? I assume it's a lot of things, but that really stood out to me with the growth there.

John Pagliuca, President and CEO

Good morning, Matt, and thank you for your question. There are a couple of factors at play. On a macro level, we're observing the market maturing. Some in the industry describe the current MSP era as a golden age. We are witnessing MSPs begin to consolidate, and smart investments are entering the space. MSPs are evolving and starting to target larger opportunities, not only within SMEs but also in the midmarket. As they expand, our RMM platform aligns well with their needs. We are equipped to handle complex environments that MSPs are encountering, and our extensive security offerings suit these larger, more advanced MSPs. As the market continues to mature and MSPs grow in size and sophistication, our platform and strategy position us to succeed in this area. This is a result of both macro trends and our strategy, which empowers MSPs to manage more complex environments. The depth of our security offerings is a significant advantage for these MSPs. Additionally, our tailored partner success initiatives further support their business development. This combination positions us well for these larger MSPs.

Tim O'Brien, EVP and CFO

Yes, sure, Matt. Thanks for the question. In terms of seasonality, we don’t have much seasonality in the business. I would say it’s fairly linear; we don’t have any hockey stick periods or anything like that to model out in terms of how we look to 2022.

Mike Cikos, Analyst, Needham & Company

Thank you for taking the questions. I have another one regarding the growth outlook for Q4 and the calendar year 2022. I'm trying to understand how currency and the challenging comparison in Q4 of 2020 might play a role. Given that there was a pause in lead generation activities earlier this year, can you help clarify that? While we are focused on Q4, as we approach early 2022, will the pause in lead generation still have an impact, or should we expect to be largely past it by the end of Q4? Any insights would be appreciated.

Tim O'Brien, EVP and CFO

Yes, to give some color. So yes, if we look back at a year ago, we saw the business accelerating coming out of COVID. As we said in the prepared remarks, in Q1 we had a slowdown in demand gen due to the rebrand and the cyber incident. In our business, sometimes it takes a quarter or two just for some of that impact to matriculate into the results. I think we are seeing things come back from where they were in the first half of the year now, which we would expect to matriculate into the business as we grow over some of those challenges as we get into 2022.

John Pagliuca, President and CEO

Yes, Mike, to follow up on some of the points I mentioned, we are observing improved performance in our website, demand generation, and search optimization. A part of this improvement is attributed to the rebranding. As we continue to develop, we are beginning to notice strong momentum as we approach Q4.

Mike Cikos, Analyst, Needham & Company

That's great, thanks. For the follow-up, could you remind us of the three key areas we're focusing on? They are international investments, partner success investments, and research innovation on the platform. I want to focus on the last one because I know you've discussed security and data protection, as well as the strong demand you've seen over the past two quarters. How sustainable do you believe that is? It seems like the market is responding positively to you, and I'm trying to understand this better as we look ahead.

John Pagliuca, President and CEO

You're right, and I appreciate how you've framed the growth initiatives. Investing in international sales and marketing is our top priority, and we're starting to see positive results. Throughout 2021, we have made significant investments and are observing early signs of success. The partner success initiatives mentioned in the prepared remarks highlight opportunities we've identified through effective conversations with MSPs, where we listen to their challenges and provide solutions. Often, these solutions go beyond technology; they also involve business strategies. When we collaborate with MSPs on their growth strategies, we discover that they're seeking ways to increase their share of business with small and medium enterprises as well as mid-market companies. These small and medium enterprises recognize the need for a layered security approach. We're equipping MSPs with the necessary tools, materials, and frameworks to engage small and medium enterprise owners and CEOs in discussions about layered security. This is why solutions like EDR and data protection are thriving; MSPs are having the right conversations with SMEs who realize they need to enhance their security measures. What was once viewed as a minor inconvenience following a cyber incident is now seen as a potentially devastating event for small and medium enterprises. They understand the stakes and are prepared to invest accordingly. This presents a valuable opportunity for both N-able and MSPs to connect more closely with customers while introducing additional layers of security. Regarding sustainability, I believe we are just beginning to tap into the potential of data protection, EDR, and endpoint protection. Unfortunately, there isn't a single solution that guarantees security; as cyber threats evolve, we must adapt and provide effective security solutions to MSPs and SMEs to help them stay secure. In the event of an incident, it’s crucial that we assist them in recovering swiftly. We are committed to continuing our investments in continuity solutions, including our DNS filtering initiative. We plan to expand our security and data protection offerings, recognizing that we are still in the early stages and that a comprehensive layered approach is essential to ensure business continuity and prevent potential catastrophes.

Edward Magi, Analyst, Berenberg

Congrats on a strong quarter. You guys noted in a few of these key wins and contract expansions that your automation capabilities were one of the key reasons for the win. Can you dig a little deeper into the automation capabilities of your offerings just to get a little better understanding of what you mean when you use the term automation here? Thanks.

John Pagliuca, President and CEO

Yes, that's a great question. The term automation is often used a bit too loosely. We offer two RMM platforms, one aimed at the lower end of the market and the other at the higher end. In both, we provide an automation platform that enables MSPs to utilize scripts, often PowerShell scripts. There are two main aspects: we have a library of scripts that an MSP can use, and we also provide a workbench where they can create their own scripts. This capability helps them eliminate or significantly reduce repetitive tasks. For instance, if there are checks or updates to perform, they can write a script. Labor is the biggest expense for MSPs, so if we can help them manage more with fewer staff and reduce man-hours, they can spend less time monitoring screens and implement automation or scripts that require minimal human intervention. This approach lowers labor costs and enhances profitability. Moreover, it leads to better utilization of technicians since they prefer not to be bogged down with mundane tasks. By writing a script once, they can apply it across different customers for weeks or months, or even implement that automation throughout their entire operations. This is the strength of our platform; it allows them to deploy scripts or policies across their entire system, reducing labor costs and increasing profitability. Does that clarify things?

Edward Magi, Analyst, Berenberg

Great, great color there. Thanks a lot for that. And perhaps another product vision focused question. You announced that Mail Assure security received a top result from an independent test. Can you expand upon the sophistication of email threats for SMEs and MSPs and the importance of mail assured security software in preventing these threats? Thanks.

John Pagliuca, President and CEO

Yes, great question. So, right now we are all seeing it. It doesn't matter if they are a small enterprise, midmarket, or large company. Phishing attacks and spam are some of the more prevalent ways hackers are trying to infiltrate these environments. By adding an additional layer that's filtering out the spam with our vast database, we have millions of mailboxes. The way our solution works is it is machine learning where it learns all the behaviors and aggregates, taking the collective intelligence across all these different mailboxes. When something is marked as spam, we store that data. So, if we have a small-medium enterprise that marks something in Australia as spam, we are aggregating that relatively close to real-time, putting that in place so that if someone sees a similar type of behavior, a similar type of domain coming across now let's say in North America hours later, that's now being blocked. With email, it's about scale, right? Our algorithm is strong due to the scale that we have. It’s this collective intelligence that allows us to continue as one of the more highly rated filtering solutions out there. The more you can filter, the smarter the engine gets. The bigger your mailbox, the larger your ecosystem, the sharper the algorithm and the better the performance. This is all really to help MSPs and their SMEs block out some of these phishing and spam attacks. We're proud of what the team has accomplished with our Mail Assure offering; it is a key component on this layered security for MSPs.

Edward Magi, Analyst, Berenberg

Fantastic. Thanks for the color there and congrats on achieving that. That is all from me. Appreciate it.

Jason Ader, Analyst, William Blair

Thank you, good morning. I have two questions. First, regarding the NRR trajectory, which is currently at 110% and appears stable. What factors could influence that as you look ahead over the next couple of years? Do you believe there is potential for improvement in the NRR? Also, since it's based on the trailing 12 months, could you provide some insight on the current trendline?

Tim O'Brien, EVP and CFO

Thanks, Jason. Hey, this is Tim. Happy to give some more color there. When I think about breaking down our dollar-based net retention, I really think about how we think about our growth algorithm. There are really a few components to it. One is just gross retention on the existing base, and then it's the partner-led expansion that we really focus on between our partners' success motion and our sales motion. I think we have opportunity for improvement on all three of those fronts. We've seen improvement on gross retention in this past quarter. We're starting to see some of the returns from that partner success investment that John spoke to. Our focus of our partner success managers is to help our partners sell in markets and new SMEs. That's part of the expansion story on the partner-enabled growth. In addition, we have added color on success we’ve seen with our EDR and cloud-to-cloud backup solutions is cross-selling new offerings to SMEs and working with and partnering with MSPs to bring those new services to market, which generates strong new revenue streams for them going forward. Hopefully that helps.

Jason Ader, Analyst, William Blair

Got it. So, it sounds like from a trajectory standpoint it's moving in the right direction because of the gross retention improvement. Is that fair?

Tim O'Brien, EVP and CFO

Yes, I would say that's been the driver, but I think my point was that there's opportunity, I feel or we feel, on all three of those fronts: on the SME expansion, the selling of additional services, and improved gross retention.

John Pagliuca, President and CEO

I do not believe the smaller MSPs are losing their significance. Let's consider the context of COVID as a relevant example. During this time, MSPs made the right moves by prioritizing their existing clients. Like any other business, part of the growth strategy for MSPs involves acquiring new customers. However, during COVID, they had to focus on assisting their current client base instead of bringing in new clients. Customers were adapting to a hybrid workforce and dealing with increased security challenges. As a result, MSPs moved from communicating with clients once a month or quarter to daily interactions. Their attention shifted from acquiring new customers to strengthening their existing relationships, which led to growth in their business as they added services and improved retention rates. However, the number of new client acquisitions slowed down. In terms of consolidation, we observe that MSPs are expanding their reach into larger companies, not just SMEs, due to a broader labor shortage affecting the entire market. This trend of co-managed IT is becoming increasingly common, where MSPs take on essential functions within internal IT departments. Given that mid-size and large MSPs are tapping into bigger opportunities, this opens doors for smaller MSPs to serve what we classify as more traditional or very small SMEs. Overall, I remain optimistic about the MSP industry's health. We see strong performance at the high end, significant consolidation, and many smaller firms thriving by utilizing our automation for profitability, even as they face their own labor shortages. You're right to consider it a tailwind. I consider it a tailwind, and we look at that as an opportunity to help our MSPs in a couple of different areas. We talked about automation quite a bit on this call. The breadth and depth of our monitoring is another aspect. We give MSPs the ability to monitor Apple devices, Windows devices. With the integration we've done with Microsoft, we've allowed them, again, the concept of doing more with less; Jason, that’s one of our big themes, and we believe we are the vendor or partner that MSPs look at as giving them the ability to do more with less. That will win the long game. That’s what our strategy is and that's where our investment is. By the way, it's equal parts technology and platform, as well as partner success. We need to give them more tools and leverage our collective intelligence that we see across our 25,000 MSPs to help them sharpen their business. The good news is we are seeing MSPs increase their EBITDA, which is healthy for the ecosystem. We are seeing MSPs leveraging the automation, expanding their book of business with their end customers, going into larger accounts, and in turn that is creating a more profitable customer base for us, which obviously, from an ecosystem point of view, is a good thing. I agree with you more so as I leave it. I believe that it is a tailwind for both N-able and also the MSPs who are servicing these companies that are dealing with labor scarcity.

Keith Bachman, Analyst, Bank of Montreal

I had a clarification and then a question. Clarification, could you talk about what FX rates have done on your dollar-based net retention both in the June quarter and for the current quarter and the implications for the December quarter? I think it was quite a bit of help in the June quarter, perhaps a bit less in September. I'm just trying to normalize the dollar-based net retention. The larger question, big picture, is on the backup market, and I was hoping you could talk about your current expectations, how we should be thinking about the backup market, break it down into A, the competition, what is the pure play vendors on your technology platform versus others that are out there? And then B, how we should be thinking about perhaps some of the capabilities of Microsoft and their Azure workplace in particular? Thanks very much.

John Pagliuca, President and CEO

Sure. Thanks, Keith. Let's start with the second question. Our backup and data protection offering is one of our most significant and rapidly growing products. We engage both new managed service providers (MSPs) and internal IT departments with our backup solution, while also cross-selling our data protection offering to MSPs using various remote monitoring and management platforms and other tools. This offering has shown remarkable success in both cross-selling and acquiring new customers. The key factor is our technology; it is entirely cloud-based, as opposed to some competitors who still rely on hardware and appliances. The algorithm we use for backup and restore is designed to be faster and more efficient, benefiting MSPs, small and medium enterprises (SMEs), and bandwidth usage. We believe our offering not only competes but excels against many solutions built on older technology. This market is essential for MSPs, as backup and recovery are fundamental services they provide. It's also a crucial aspect of the NIST framework. More workloads are transitioning to the cloud, and with the increasing use of Office 365, the demand for backup services remains strong. We are seeing significant growth in our Office 365 data protection offering, which enables SMEs to back up their Office 365, SharePoint, and Teams environments at an affordable cost. This serves as a reliable backup approach, primarily for the restoration capability, which we believe is superior to many competitors. This creates a positive momentum for our business and is a valuable asset for MSPs. The integration of our technology within our platform enhances its efficiency. We support MSPs in backing up and protecting not just workstations, but also servers and virtual machines, including Office 365 instances. From a comprehensive platform perspective, we believe we offer a unique breadth of services that is unmatched.

Tim O'Brien, EVP and CFO

Hey, Keith. Just to add some color on the FX. If I look back over the trailing 12 months, there's a little bit of a tailwind on net retention, probably in the range of a point or two. I can't predict the future; I don't know where FX rates will go over the next 12 months. But if I just look at where they are now compared to where they were over the course of most of or at least the first half of 2021, it would lead to a bit of a headwind as we go forward.

Howard Ma, Senior Director of Investor Relations

That’s all from our side. We appreciate everyone calling in and showing their interest in N-able. Thank you.

Operator, Operator

We thank you for joining today's call. The call has now concluded and you may now disconnect your lines.