N-able Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 13, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome to the Enable Third Quarter 2023 Earnings Call. My name is Alex, and I'll be coordinating the call today. I'll now hand it over to your host, Griffin Gear, Investor Relations Manager. I'll now hand it over to your host, Griffin Gere, Investor Relations Manager. Please go ahead.

Speaker 1

Thanks, operator, and welcome, everyone, to Enable's Q3 2023 earnings call. With me today are John Paliuca, Naval'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. Enable.com.

Speaker 1

There, you can also find our earnings press release, which is intended to supplement our prepared remarks during today's 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.

Speaker 1

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 and our Investor Relations website. And now, I will turn the call over to John.

Speaker 2

Thank you, Griffin. Welcome, everyone, and thank you for joining us today. As the age of the managed service provider advances, the IT outsourcing market remains strong. There are a few key factors for this. IT is getting more complex and expensive as organizations look To realize the benefit of digital operations, modernize their legacy systems and meet growing regulatory requirements.

Speaker 2

This trifecta of challenges distracts organizations from their core operations and can push them to outsource and augment their IT needs to MSPs. Enable was formed with this in mind. Our unwavering mission to empower MSPs With purpose built technology positions us favorably with the expanding small and medium enterprise IT Ecosystem by helping partners meet these challenges head on. We believe our Q3 results highlight the strength of our market And cement our standing as a leading software provider to MSPs. Despite an uncertain macro environment, We exceeded top and bottom line guidance with revenue of $107,600,000 growing 15% year over year Or 13% on constant currency basis and adjusted EBITDA of $36,600,000 Representing an adjusted EBITDA margin of 34%, our highest margin ever as a standalone public company.

Speaker 2

And as Tim will elaborate, we are maintaining our full year 2023 constant currency revenue guide of 13% And raising the midpoint of our full year 2023 adjusted EBITDA guide from $136,300,000 to $139,500,000 We accomplished all of this, while laying the groundwork for future success. Our teams advanced important strategic initiatives, And we are particularly excited to announce that we are entering into a new product category, bringing Enable Managed Detection and Response To market this month, our relentless determination to bring value to the MSP community Requires adapting to fast changing technology needs through focused product innovation. With our approximately 25,000 MSPs Ranging in size from sole proprietors to global publicly traded technology service providers, We believe we have a unique line of sight into the dynamic market landscape. And I want to discuss 3 prominent trends influencing our product development, 1st, consolidation and modernization second, the movement up market And 3rd, increasing security standards. 1st, we see technology consolidation and modernization driving customer behavior.

Speaker 2

In an uncertain economic environment, MSPs have an eye on operational efficiency and solutions with proven ROI. Our integrated platform and leading technology solutions align with MSP needs, helping to reduce tool straw and unlock their growth. We believe our tech suite of top tier RMM, data protection and security solutions coupled with our multi tentative platform and external integration Strongly positions us to satisfy MSP's desire to consolidate and modernize their tech stack. A second trend is MSPs going up market. Large enterprises face many of the same IT challenges as SMBs And are increasingly turning to MSPs to augment or run their IT or security operations.

Speaker 2

We believe This means a larger addressable market for both MSPs and Enable. And our product and go to market investments aim to enable MSPs To realize this opportunity, the scalability, automation and efficiency of our solutions appeal to upmarket focused MSPs, And we continue to raise the bar to position Enable as a leader in this evolving market segment. A great byproduct of the MSP upmarket trend is the capabilities we developed to help win MSPs win upmarket, Also better position our teams to land midsize and large IT departments directly. While our core focus is our MSP partners, we continue to pursue direct IT sales opportunistically and are seeing positive momentum in this part of our business. Now turning to our 3rd trend, increasing security standards.

Speaker 2

The significant business impact of a successful cyber attack Has long placed security as a top IT priority. In addition to MSP's buying security solutions to protect from bad actors, They also face growing global compliance requirements that serve as a tailwind to security demand. Here the message is clear. Security is shifting from an option to a requirement. With our robust and recently expanded suite of security options Spanning endpoint protection, mail protection, content filtering and more, we provide a layered security approach that is built to fulfill regulatory requirements And Safeguard, the modern digital enterprise.

Speaker 2

We made exciting progress in the last quarter to advance our product suite to capitalize on these trends. And I want to share these updates and the encouraging market feedback we received. Starting with Cove, we have invested considerably in developing our technology to Further Cove's ability to scale into larger domains and help MSPs move up market. A 3rd quarter deal Involving the displacement of a known upmarket competitor and representing our largest initial Coveland ever at over 500,000 of ARR at scale Speaks to our success here. Another excellent example of Cove's market traction comes from a recent MSP customer with 11 legacy data protection solutions.

Speaker 2

Understanding the risks and headaches of a multi vendor approach, They decided to consolidate on Cove. The MSP thoroughly evaluated each product and specifically commented On Cove's strong technical performance, intuitive technician friendly interface and ability to meet data sovereignty requirements With Cove Data Centers located worldwide. With sophisticated attacks often going beyond an organization's core network And now targeting data storage copies. The distinction between data protection and security is increasingly blurry. Modern data protection solutions can't just restore data.

Speaker 2

They must keep data safe and Cove was built with this in mind. Because of our cloud first approach, customers' data copies are not exposed to local network, which reduces the attack surface and gives our customers peace of mind. The market is responding to Cove's innovation. Our 2023 new customer cohort is the best ever. And our Cove Microsoft 365 backup solution is now protecting over 1,800,000 users growing at approximately 48% year over year.

Speaker 2

Cova is also receiving industry recognition and we are delighted to share that Canalys, a global technology research firm Recently named Coava Champion in their managed backup and recovery leadership matrix. On the RMM front, We remain laser focused on meeting MSPs where it's messiest. We simplify the complexity of hybrid environments, users and devices, Going beyond the confines of traditional RMMs. This means delivering a modern end to end unified IT management platform. We made significant progress on this vision in the Q3.

Speaker 2

We released a refreshed user interface, unveiling a new asset inventory view, Which comes on the heels of the analytics feature and enhanced Apple management capabilities we released earlier this year. These advancements give technicians deeper insight into their IT environment and enable them to manage their IT stacks better. This can translate to tangible business impact. Our powerful capabilities bolster MSP's ability to go up market And service large organizations with disparate operating systems, while realizing the benefit of consolidation. Our approach is resonating with customers And we are seeing steady demand in this segment.

Speaker 2

Turning to security. We continue to advance our security suite And I'm particularly excited about our entry into managed detection and response. MDR is a unique marriage in the security industry, Combining cutting edge technology with human oversight and expertise to give organizations advanced protection. This combination solves a deep pain point for our customers because threats are increasing, but organizations cannot manage those threats alone. Alert fatigue, staying ahead of the evolving threat environment and staffing challenges mean organizations need help.

Speaker 2

In a recent poll we conducted with thousands of our MSPs, they expressed a strong desire for MDR from Enable. Industry research firms also validate the MDR market with Canals recently stating that the cybersecurity services opportunity for partners We'll be larger than selling cybersecurity technology this year. MDR is much more than managed EDR, Because MDR goes beyond the endpoint, providing broad security visibility and response across the customer's entire IT ecosystem, Including their users, cloud applications and network. This is powerful. Adding MDR broadens our appeal as a one stop shop for security solutions and services.

Speaker 2

And we have the backing of a strategic partner in this space, Born from the front lines of National Cyber Defense with multi tenanted cloud native modern architecture. We believe there's a significant opportunity and perhaps most telling since commercializing this technology, customer engagement has met our high expectations. In addition to delivering more solutions, we are focused on a superior customer experience. To this end, we recently enhanced our integration framework, improving functionality across our security offerings. This enhanced framework also expands our ecosystem breadth, facilitating faster time to market with vendors that want to expand their go to market reach through an enabled partnership.

Speaker 2

Across the security spectrum, from MDR to mail, security remains mission critical, and we are committed to helping propel our customer security Journey forward. With these trends powering demand, we are investing and operating for the long term and are focused on delivering great technology Depositions enable to advance the age of the MSP. Our operational efforts and strategic goals Are all focused within the framework of our sell to and sell through business model. We refer to our MSP customers as partners. As we leverage the reach of our approximately 25,000 MSPs to gain access and sell our solutions Over 500,000 small and medium sized businesses.

Speaker 2

This partnership enables a multi pronged growth algorithm, Which allows us to reach the SME at healthy profit margins. When we land an MSP, we grow. When an MSP lands a customer, we grow. And when an MSP customer adds an employee, we grow. And when we bring a new service to market, we unlock the potential to grow across that MSP and SME base.

Speaker 2

These elements of our model form the building blocks of our growth algorithm, which are MSP retention, cross selling of new services to existing MSPs, MSP device growth and lastly, Enable adding new MSPs. And I want to discuss operational updates in the 3rd quarter regarding each of these components. Starting with Enable adding new MSPs, our new customer engine continues to be strong. While we're only 3 quarters through the year, the 2023 customer cohort dollars are the best ever since we became

Speaker 3

a public

Speaker 2

company. We are reaching new customers who are choosing to partner with Enable. This success, despite an uncertain macro environment, Reflects the strength of our compelling value proposition. It is a testament to the efforts of our go to market teams. Education leads to adoption, And the Enable Purple was out in force in the market, connecting with customers.

Speaker 2

In the Q3 alone, we hosted 7 roadshows across North America, Sponsored 11 global industry events and hosted over 50 Head Nerd boot camps, reaching thousands of partners and prospects. In addition to helping land new MSPs, our efforts to educate our partners on the value of our offerings help drive their expansion And we saw steady cross sell in the quarter. With our solution set spanning RMM, data protection and security, Enable MSPs have a low friction path to expansion. Our average revenue per partner is growing as customers buy more of our solution. And there's steady penetration and uptake across our product set.

Speaker 2

We see a rich opportunity for further penetration With multi $1,000,000,000 cross sell potential in our existing base. While cross sell and NCA are healthy, The uncertain macro environment is weighing on partner device growth and retention. We are seeing tighter IT budgets and slower device growth. We believe tighter budgets have led to rationalization and optimization of existing spend. That said, there are numerous bright spots in our operational effort to retain and expand customers.

Speaker 2

Our partner success organization Score their highest ever customer satisfaction score on technical support. We see continued demand for our Enable head nerds, Who are partner evangelists and subject matter experts. And as part of our ongoing mission to constantly improve every aspect of the customer experience, We launched a new partner success center EnableMe and have already engaged with nearly 13,000 partners through the center. We invest in these elements of our business because we grow as our partners grow. With the MSPs acting as an extension of our sales force, We efficiently access SME IT spend and our Q3 adjusted EBITDA margin was the highest in our public history, which serves as a strong testament To the effectiveness of our strategy.

Speaker 2

Great technology and superior operational execution are the lifeblood of our business, But our people and culture are the oxygen. One key focus area is our continued diversity, Equality and belonging journey. As one recent example, we hosted a global cross functional women leadership summit To help drive cultural transformation and execution excellence and further develop our women leaders. We were also honored to be recognized by Comparably, A leading workplace, culture and corporate brand reputation platform with 3 awards in the quarter.

Speaker 3

With that, I would like

Speaker 2

to turn the call over to Tim to discuss our financial results and outlook. Then I will circle back to some closing remarks. Tim?

Speaker 3

Thank you, John, and thank you all for joining us today. Our 3rd quarter results were strong, exceeding guidance on both the top Steady demand for our platform, solutions and strong cost management, Highlighted by our highest ever adjusted EBITDA margin as a public company helped drive our outperformance. Looking ahead, we believe our market remains durable. And while we are mindful of the macro environment, our business model With multiple growth vectors and a clear strategic focus remains well positioned to capitalize on the growing demand for MSPs. For our Q3 results, total revenue was $107,600,000 Representing approximately 15% year over year growth or approximately 13% on a constant currency basis.

Speaker 3

Subscription revenue was $105,200,000 representing approximately 15% year over year growth or approximately 13% on a constant currency basis. Other revenue, which consists primarily of revenue from the sale of maintenance services associated With the historical sales of perpetual licenses and revenue from professional services was $2,400,000 up approximately 2% year over year. We ended the quarter with 2,134 partners That contribute $50,000 or more of ARR, which is up approximately 19% year over year. Partners with over $50,000 of ARR now represent approximately 55% of our total ARR, up from approximately 50% a year ago. Looking at net retention for the 3rd quarter, Dollar based net revenue retention, which is calculated on a trailing 12 month basis, was approximately 108% or 110% on a constant currency basis.

Speaker 3

Turning to profit and margin, 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. 3rd quarter gross margin was 84.6% Compared to 84.8% in the same period in 2022. 3rd quarter adjusted EBITDA With $36,600,000 up approximately 27% year over year, representing approximately 34% adjusted EBITDA margin. Unlevered free cash flow was $30,200,000 in the 3rd quarter And CapEx inclusive of $2,000,000 of capitalized software development costs was $5,500,000 or 5.1 percent of revenue. Non GAAP earnings per share was $0.09 in the quarter based on 186,000,000 weighted average diluted shares.

Speaker 3

We ended the quarter with approximately $127,000,000 of cash And an outstanding loan principal balance of approximately $343,000,000 representing net leverage of approximately 1.6 times. Approximately 46% of our revenue was outside of North America in the quarter. Turning to our financial outlook. As John discussed, we see tailwinds in our market and believe in the long term opportunity for Enable. As we look to the near term, we see macro uncertainty creating caution in SME IT budgets, With organizations seeking to optimize spend in a tighter budgetary environment, which we have reflected in our guidance.

Speaker 3

And while our R and D engine continues to bring critical, robust solutions to MSPs, Our growth expectations are reflective of the time to market for these new products, which we continue to work to accelerate. With that in mind, for the Q4 of 2023, we expect total revenue in the range of $106,500,000 The $107,000,000 representing approximately 11% to 12% year over year growth Or approximately 10% to 11% on a constant currency basis. We expect 4th quarter adjusted EBITDA in the range of $35,000,000 to $35,500,000 representing an adjusted EBITDA margin of approximately 33%. For the full year 2023, we now expect total revenue of $420,000,000 to $420,500,000 Maintaining the midpoint of our prior full year guidance, representing approximately 13% year over year growth on both a reported and constant currency basis. We are raising our adjusted EBITDA outlook And now expect full year adjusted EBITDA of $139,200,000 to $139,700,000 Up approximately 22% year over year at the midpoint and representing an approximately 33% adjusted EBITDA margin.

Speaker 3

There have been changes to the foreign exchange environment since our last outlook, and I want to take a moment to reconcile the impact of these changes on our guidance. In our previous call, we assumed FX rates for the euro and pound of 1.07 and 1.25 respectively. Using updated FX rates for the remainder of the year of 1.05 for the euro And 1.22 for the pound and updating other currencies to reflect the current rate environment translate To a negative impact on revenue of approximately $1,100,000 for the 4th quarter. We believe our ability to maintain the midpoint of our full year 2023 revenue guidance and raise full year 2023 Adjusted EBITDA guidance despite these FX headwinds speaks to our operational strength. We reiterate that we expect CapEx, which includes capitalized software development costs of approximately $8,500,000 will be approximately 6% of total revenue for 2023.

Speaker 3

We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 65% for the full year. We expect total weighted average diluted shares outstanding of approximately 187,000,000 for the 4th quarter And $186,000,000 for the full year. Finally, we expect our non GAAP tax rate to be approximately 23% in the 4th quarter and 25% for the full year. In closing, we are pleased with our strong Q3. Looking forward, while we are mindful of the macro uncertainty, we believe we are uniquely positioned to benefit from the robust Long term addressable market opportunity.

Speaker 3

We have a proven track record of execution. Our customer base is diversified by region And Industry. And the IT Management, Security and Data Protection solutions we provide are high IT priorities. The addition of our new MDR offering adds another gear to the business model. With our strong adjusted EBITDA margins, Free cash flow and balance sheet, we have considerable capital allocation flexibility to invest strategically to meet the needs of our market.

Speaker 3

Now, I will turn it over to John for closing remarks.

Speaker 2

Thanks, Tim. We scaled our business to new heights in the 3rd quarter And made progress on critical strategic initiatives. As we march forward on our quest to advance the age of the MSP, Our vision is clear and we believe the opportunity is vast. The SME IT ecosystem we serve is large and growing. And our differentiated model, which efficiently cracks the code to the $1,000,000,000,000 plus SME IT market By providing enterprise grade technology to MSPs, delivers both growth and profit.

Speaker 2

With our clear strategy and appealing market opportunity providing direction and energy to over 1500 plus Enable Lights, Our sharp focus is on driving operational excellence and continuing to deliver great technology to MSPs. And with that, we will open up the line for questions. Operator?

Operator

Thank you. Our first question for today comes from Mike Secoss of to Needham. Your line is now open. Please go ahead.

Speaker 4

Hey, team. Thanks for taking the questions here. Great to see the revenue beat here and the maintenance of that revenue guide as well as the EBITDA, the beat and raise for the full year that we're seeing here Some of those FX headwinds that I know that Tim had addressed earlier. I think there's probably 2 different angles, but both of these questions are kind of getting The new customer engine that we're talking to and John appreciate the comments as well as far as that growth algorithm. The first question is really tied to the macro.

Speaker 4

And I know that you guys are saying, hey, the calendar 2023 customer cohort is the strongest Cohort from a dollar perspective and thinking about those new customers for the company as a publicly traded company since the spin. I guess in the context of macro, Can you help us think about I know you guys are saying that it's potentially more cautionary environment. Is that cautionary comment Demonstrating even on a quarter to quarter basis that things might be more difficult versus where we were 90 days ago? That's the first question. I do have

Speaker 2

a follow-up beyond the macro. Thanks, Mike, and I appreciate Following the stock and looking forward to talking to you and your team a little bit more tomorrow. So on the quarter on quarter comment, Look, we purposely wanted to spell out the growth algorithm just to remind folks that we have this multifaceted approach. As you mentioned, the NCA Part of the algorithm is quite strong. It was quite strong in Q3 even compared to Q2.

Speaker 2

There's really no major difference in the macro environment that we're necessarily seeing from a Q2 to Q3 like quarter over quarter performance. I would say it's more of Mike a little bit of a continuation of the same where we're seeing MSPs looking to hit their targets, both their top line and their bottom line targets. And the way that they're achieving that is more through cross sell of additional services rather than adding SMEs. And so that's where we're seeing a little bit of that moderated Device adds coming up. And so I'd say it's a continuation of really the moderated device add and a little bit more of a focus on where they're Spending their money as it relates to licenses, licensing costs across their broader portfolio.

Speaker 4

Got it. Thank you for the color there. And then the second question, this one comes back to the new customers, but the SKUDA lens is Almost a competition here. And so I just wanted to see is there any change on the competitive front? Obviously, with some quarters removed from the Datto acquisition, Is there any benefit coming to Enable through that?

Speaker 4

And then the secondary piece is obviously you guys are talking about the MDR offer What that does for Enable, but I have to imagine in some sense that that elevates you guys at a competitive level. So any feedback that you guys are receiving since the MDR? I know you had some bullish comments in the prepared remarks, but just wanted to see if I

Speaker 2

could get any incremental color on those two pieces. Thank you. Yes. On the NCA, I'd say we continue to see a strong uptick in our Cove Data Protection offering. So when we spun the business out a couple of years back, we looked at COVID and data protection as a category, the tremendous opportunity, 1, From the category and what we're seeing as the demand from the MSP base, but 2, we have a differentiated offering from a technology and from a TCO, a total cost of ownership.

Speaker 2

So we decided a couple of years back to invest in the new brand, bring back up to the front as we called it internally and really started pushing The COVID initiative and suite as more of an NCA new customer offering as opposed to just a cross sell offering. And really we're starting to see The fruit of all that hard work from our go to market teams and the brand and our product leadership continuing to differentiate that offering. So Overall across the geos, I would say, we're pretty consistent. But if I had to point to one headline or bright spot, it's really that Cove's data protection offering having success in new customers. On the MDR front, yes, we are bullish.

Speaker 2

This is an offering That we've been studying in the market that we've been studying for quite some time. We wanted to make sure that we found an offering that could by itself differentiate Enable compared to all the competitive landscape. And we think this will help Mike both on our cross sell. As you know, we have a large security offering and so MSPs look to Enable And they trust Enable with the security offerings, so we expect them to continue to trust Enable with the MDR offering. But also this will help us With NDA and new customer acquisition and even some of our early conversations with some of the MSPs in the market, if they're not in the market For data protection offering or an RMM offering, we're having now a conversation with them on MDR.

Speaker 2

And so we're quite excited as to What this offering brings both in terms of cross sell, but also new customer acquisitions. So look for further updates as we get into 2024 there.

Speaker 4

That's great to hear. Thank you.

Operator

Thank you. Our next question comes from Jason Ader of William Blair. Your line is now open. Please go ahead.

Speaker 5

Yes. Thank you. Good morning, guys. I just wanted to ask about the RMM business, drill down on that a little bit. And just for modeling purposes, can you just remind us what you've said publicly about how big RMM is as a percentage of your revenue?

Speaker 3

Hey, Jason. This is Tim. Thanks for the question. Drilling down the RMM business. In terms of what we said historically in terms of The size of the business, we don't disclose the size of the underlying kind of product lines within the business, But we have given color on just kind of stack ranking them and just how to think about the components of the overall business.

Speaker 3

So RMM It's number 1. Data protection is number 2 and security is number 3. And the combination of data protection and security is bigger than RMM. So they're all sizable product lines within the business.

Speaker 5

Got you. Okay. And then on the RMM side, it sounds like it's sort of a continuation of some of the pressure on device growth. We've heard sort of in the market that there's also been a fair amount of pressure on pricing, sort of per device pricing. And I'm wondering just what how have those dynamics shifted over time?

Speaker 5

I don't know if it's a competitive situation where some people in the market are Kind of bombing the price. But what I guess, what is the strategy To grow RMM in a weaker macro environment, let's just assume that we're going to be in a sort of same tighter Environment through 2024, how do you guys counteract maybe some of that pressure, either it's on device growth Or on pricing, and I don't want to put words in your mouth, but if you could comment on the pricing environment there and then also just what the strategy would be to grow RMM in a weaker Chrome environment, putting aside the strength that you're seeing in DP and Security.

Speaker 2

Thanks, Jason. This is John P. So when we one of the reasons by the way that we don't really disclose revenue by type As we look at the broader opportunity from the LTV of the MSP. And so if you think about the opportunity The NSP, and I know you're familiar with our Investor Relations deck. We typically say, hey, per device, that's That's around mid-twenty dollars per device type of opportunity.

Speaker 2

By the way, now with MDR, that opportunity is now in the low 30s, right? So That's why we're so excited about MDR. But when you think about the stack, RMM, depending on what offering they have, That could be $1 to $3 of that $30 backup and data protection is a material piece. Security is, From an opportunity stack point, it'd be probably the largest one. And so what we try to do is focus on the word adoption as opposed to just revenue by RMM.

Speaker 2

And so for us, and this is not too dissimilar to some of our competitors, we're looking to land and get the trust of the MSP. Historically, The front door coming into enable for MSPs has been RMM. And so that's when they would come in and then we would go and add and cross sell from there. But now with data protection, we're finding a different rhythm and a different pattern. We're actually landing with Cove, and now we're cross selling into RMM.

Speaker 2

We hope and expect to do that with MDR as well. So that will give at least 3, potentially 4 different lanes or avenues into Enable from the cross sell motion. And then we could begin building that trust and that value with the MSPs to get that stack up to about that $30 per device or $30 per user per month type of opportunity. So for us, the focus really is not necessarily on the RMM revenue. It's on the RMM adoption, but more so it's On the Enable MSP partner relationship, so we can unlock that $30 If you take that $30 And you smash it times the roughly 8,000,000 devices that we have and multiply that by 12, you get that $2,000,000,000 to $3,000,000,000 opportunity, and that's where the real the game is going to be won.

Speaker 2

For us, it's all about landing the customer regardless of What path? And then through trust and showing the value of the platform and how we can help them with their TCO, their total cost of ownership And help with their efficiency play, add more and more services to the MSP. So that's really the strategy. And the slight, I'd say, evolution there, 3 or 4 years ago, it was, hey, come in to enable through RMM, one of our 2 RMMs. Today, it's come in through one of those 2 Leading RMMs or through data protection.

Speaker 2

And then tomorrow, it will be through MDR and other type of security offerings. So that's why We're excited in how we think about the overall $2,830,000,000 opportunity that's just within our customer base today.

Speaker 5

Got you. Makes sense. And I just want to understand sort of the evolution that you just referred to. Is that evolution Partly due to the pricing over the last 5 plus years, that $1 to $3 that that's actually been coming down. And therefore you guys have had to sort of broaden or is there something or is it just more the needs of the market have shifted?

Speaker 2

I'd say this, the stack, the opportunity stack has gotten larger, right? When I think about The market, I often refer to it as the X and Y axis, right? And on the X axis are all the services. And if you're a business or any company, if you have one service that you're going to Well, then you're laser focused on particularly that price point. But as we add services and the TAM increases by the X axis, Well, now you have a little bit more of a strategy as to what you're playing for.

Speaker 2

And what we're really playing for are making sure that we're landing the MSP and helping them add more small, medium enterprises. So You're willing to take a different cost mix for the different offerings because you're not just focused on one offering. It's one of The benefits I'd say of becoming a bigger, more of a platform story, adding data protection, adding security, we now can focus on the bigger LTV. So I'm not I don't think it's necessarily that the need for RMM is diminished. I just believe that that tech stack has gone up just with us by itself.

Speaker 2

I've been in this business for about 10 years. That tech stack might have started about $15 or so years ago. And now that we're adding things In endpoint security, we're adding things like managed detection and response. We're adding things like Office 365 backup. The value of the tech stack continues to increase, Which somewhat changes the strategy and the tactics that you want to go and really acquire those customers because they're of a more value To you to land them and grow them.

Speaker 5

Makes sense. Thanks. Thanks for that. Appreciate it.

Operator

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

Speaker 6

Great, guys. Thanks for taking my questions. John, in your prepared remarks, I believe you said that Having a direct IT relationships with certain customers could make sense. I presume these are Fairly large customers. Just wondering if you could provide a little bit more detail on that strategy and sort of where do you draw the line between letting an MSP Handle everything and more of a direct relationship.

Speaker 2

Yes, thanks. Great question. Yes, and what I was referring to there is that internal IT department, Right. And so if you think about our offerings, Matt, whether it's our Cove data protection offering or the remote monitoring and management, Those use cases are very similar and Scratch is similar if to the internal IT department, especially where there's more of a real go framework, right? Remote office, branch office, folks from home, they're in a hybrid environment, different geos, different offices and the IT professional is under the same type of scrutiny And performance issues as is an MSP and what's that all about?

Speaker 2

Efficiency. And an MSP or an internal IT department has Same need where they can leverage our tools, our platform via our automation and do more with less. So the use case and the personas are very similar. And we've been finding that our offerings have had quite excuse me, have had success for quite some time. We're really just leaning in a little bit more with more of a specialized sales and go to market team, Matt, because what we're finding is We were not necessarily marketing or selling to that mid market enterprise, but they were buying from us.

Speaker 2

And in 2023, we really began a little bit more of a focused effort to talk to that persona, understand what that persona needs and setting up a sales and marketing motion that satisfies their needs. And so It's been a success overall. That part of the business has been one of our bright spots for sure. And as far as your second question on the line, there's not really a line. If an internal IT department Is choosing to manage their own digital assets themselves, then Enable will provide them that software.

Speaker 2

The benefit of our And the same thing with our MDR offering is we allow MSPs to co manage with these customers. And so if you're a CIO of an internal IT department, You can choose to use our in central RM platform or Cove Data Protection and then you can bring in an MSP to augment. So both your internal team And your managed service provider, your IT consultant, both can have eyes on glass and see the same environment. And so what's happening now, Matt, I mentioned with Jason's question that I always refer to our TAM as the x axis on the services and the y axis is the size of the customers. And because of both our direct motion to internal IT departments, but also as a result of MSPs landing larger and larger customers, our TAM is increasing That Y axis and the size of enterprise that enable a servicing is getting bigger in this concept of a co managed environment where a CIO is saying, hey, look, I have my own IT staffing issues.

Speaker 2

Let me pull in an MSP to augment some of these services that I need And I can do so at a and actually save some budget as well. And so we're finding that to be a healthy formula. So the fact that Our platform allows both MSPs and internal IT departments to either do it separately or together in a co managed model. Just really resonates with these personas that are both trying to solve the Same thing, doing more with less, keeping their digital assets protected, productive and so that their workforce can do so in a collaborative manner. So the persona is similar And our platforms are perfectly really built and architected for that type of persona.

Speaker 6

That's super helpful, John. It seems like a nice Incremental catalyst as well next year as you kind of continue that motion. And then maybe one for Tim. NRR, I think it looks like it ticked up maybe 100 basis Points on a constant currency perspective from Q2. Obviously, this is a it's a trailing 12 month metric.

Speaker 6

But with that slight improvement, How do you see that perhaps trending into Q4? I mean, could it move up a little bit if there's a little bit of Q4 budget flush? Because obviously, there's an impact on maybe 2024 as a result of that, but just kind of curious on your thoughts there.

Speaker 3

Yes. On the trailing 12 month, it was slightly up. I would say on the quarter, It was pretty consistent Q3 versus Q2. I wouldn't say Historically, we haven't seen like a budget flush end of year from an MSP perspective to lend to any type of On natural acceleration from an NRR perspective, and as I would say, as we think about NRR in Q4, I would expect it to be fairly consistent. It's been a pretty steady metric.

Speaker 3

We did get that slight Increased due to the timing of some of the price change in Q2. That will live with us kind of through the Q2 of Sure. But we aren't modeling any significant change from an NRR perspective quarter over quarter. Got it. Thanks a lot, guys.

Operator

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

Speaker 6

Hi, good afternoon. Thank you for taking the question and great to see the incremental Operating margin expansion. Maybe on that point, Tim, if you could help us understand some of the levers behind some of the cost controls that you had in Looks like operating expenses actually declined sequentially, which initially looks like it might be seasonal, but then when we dig into some of the, I guess drivers of that, some of them may be different. Maybe you can help us understand where what levers did you pull in the quarter? How sustainable are they?

Speaker 6

And How you think about operating leverage as we kind of start to look into 2024?

Speaker 3

Yes, absolutely. Looking across the P and L, I think we've touched on this historically, but we see leverage opportunities across kind of All three aspects, whether it be G and A, sales and marketing and R and D. If you look at 23, we've made a bigger investment into R and D Strategically to drive new an accelerated pace of new product Being introduced to our partner base in 2023 beyond. I expect us to be able to get leverage On that incremental investment that we made in 2023 on that line. G and A, again, that line has been pretty flat since we spun the business out And continue to expect to get leverage there over the short, medium and long term.

Speaker 3

And then the last piece is sales and marketing where I would say we're always scrutinizing and making sure we're getting the proper ROI

Speaker 6

from a sales and marketing perspective,

Speaker 3

breaking down our For ROI from a sales and marketing perspective, breaking down our spend into deciles and Optimizing where we see the ROI is not up to our standard. So that's a continuous process that we've looked at kind of since we've been a public company On the sales and marketing front and we expect to continue to do that. But stack ranking the opportunity for leverage across the P and L, I would say, 1, still sits as G and A, 2, would be in sales and marketing and 3, would be in R and D, but opportunity on all three nonetheless.

Speaker 6

Got it. That's super helpful. Maybe if I could circle back on MBR to follow-up. Any sense that you might have in terms of any pent up demand and how long you might be You may have been, I guess, seeding your installed base for that and what you anticipate ultimate penetration rate might be?

Speaker 2

Sure. It's we know from talking to our customers and we hit this a little bit on the prepared remarks. So we did A pretty sizable customer survey where we asked them what their bigger focus These areas were for 2023 2024 and cybersecurity services was very much top of mind. And from talking to our customers and even looking at the survey results, we believe that there's a good amount of opportunity. And the good news here, Brian, is that they're for Both are small MSPs and our large MSPs.

Speaker 2

So on your adoption, I believe that it will cover The broader installed base. And so the double click into that is, what type of uptick What the MSPs have as they roll this out to their small medium enterprise. And so we believe as there's more of a driver from Compliance point of view, and by the way, if we back up, there's 2 things that are really driving this. 1, when companies looking to get cyber insurance, There's a much more focus overall on the STACK and being able to not just protect, but also to detect and respond Across the base, this is helping MSPs. And the second thing, there's a big push from a compliance point of view.

Speaker 2

So security, Really before it was a decision how

Speaker 4

what is the

Speaker 2

level of risk I'm willing to take as a small medium enterprise or as an MSP? And now with compliance, what used to be maybe a sliding scale from a risk aversion or a range of gray It's now more black and white and binary. If you want to be compliant, whether you're in the healthcare industry or a fintech, whether you're in a certain geography like in the U. K. With Cyber Essentials, If you want to play in that market as a small medium enterprise, you need to be compliant and they're pretty specific as to what that need It is and what those requirements are.

Speaker 2

So that's driving a lot of the need for the cybersecurity services to pop up at the small medium enterprise. And we're seeing it across The geographies and across the verticals that our MSPs participate in and across the different sizes. So We're quite bullish on the opportunity. It'll take some time as the MSPs roll this out and get comfortable with The motion themselves, but we're quite bullish that it will have a broad appeal to our installed base.

Speaker 6

Great, great color. Thank you.

Operator

Thank you. At this time, we currently have no further questions. So I'll hand back to John Perlukia for any further remarks.

Speaker 2

Thank you all for participating in our quarterly call and for the questions and looking

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Earnings Conference Call
N-able Q3 2023
00:00 / 00:00