N-able Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 9 speakers on the call.

Operator

Hello, and welcome to the Enable First Quarter 2023 Earnings Call. My name is Lauren, and I'll be coordinating your call today. I will now hand you over to your host, Griffin Gear, Investor Relations Lead to begin. Please go ahead.

Speaker 1

Thanks, operator, And welcome everyone to Enable's Q1 2023 earnings call. With me today are John Falayuca, Enable'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 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, 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 spin off transaction completed in July 2021. Additional information concerning these statements and the risks and uncertainties Furthermore, we will discuss various non GAAP financial measures on today's call.

Speaker 1

Unless otherwise specified, When we refer to financial measures, we will be referring to the non GAAP financial measures. A reconciliation of certain GAAP The non GAAP financial measures discussed on today's call is available in our earnings press release on our Investor Relations website. And now, I will turn the call over to John.

Speaker 2

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. And we are executing our strategic initiatives to drive value for our customers.

Speaker 2

We solidly beat our Q1 expectations on both the top and bottom line With revenue of $99,800,000 or 13% year over year growth on a constant currency basis And adjusted EBITDA of $32,700,000 representing an adjusted EBITDA margin of approximately 33%. Our constant currency net revenue retention held Sedi at 108%. And as Tim will tell you shortly, We are raising revenue and adjusted EBITDA guidance for the year. The MSP market we serve remains healthy, Driven by persistent tailwinds, IT management continues to increase in complexity, cyber threats are escalating and becoming more insidious And 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.

Speaker 2

Then MSPs use Enable Software to manage and monitor the SME's IT environments, Protect them against cyber attacks and back up and restore their data in the event of a cyber attack 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 toward helping MSP scale and grow their business. During my keynote, I reminded the audience that the rate of innovation is accelerating.

Speaker 2

And 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 advisor. And while changes become constant With the right strategy and focus, I reminded our MSP partners that the opportunities are massive. I also stress 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.

Speaker 2

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 do this in several ways. First, we deliver our solutions in the cloud. For example, Our RMM solutions and central and insight scale with our MSP partners and allow device management across several operating systems From 1 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, Further standardizing business continuity for our partners and allowing MSPs to utilize their Azure instances versus investing in infrastructure or private cloud offerings.

Speaker 2

The benefit of this near instant approach on ReStore combined with the benefits of the public cloud Including availability, scalability, cyber resilience and geo redundancy. As of the end of the first quarter, Our cloud based Microsoft 365 backup offering was deployed for over 1,400,000 unique users, From about $900,000 in the Q1 of 2022. And on the layered security front, our EDR solution, Also cloud based is gaining traction in the market with approximately 1,400,000 devices protected. 2nd, we deliver solutions that help our partners manage the cloud. Our cloud user hub Enables our partners to automate and manage their Microsoft 365 and Azure licenses in a consolidated platform.

Speaker 2

We continue to evolve our cloud monitoring and management capabilities across our portfolio. And as SMEs demand for the cloud grows, Enable is committed to providing the solutions our MSP partners need to help satisfy that demand. 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.

Speaker 2

And our relationship does not end when we complete a sale to our MSP partners. It begins. To name but a few of our partner programs, We have a dedicated global partner success team and our head nerds who collectively spend hundreds of hours a month in 1 on 1 sessions with our partners. In addition, we host events like Empower, focused on peer to peer networking and education. We constantly work with our partners To help them automate their business, so they can be efficient with their technician time.

Speaker 2

And we train them in best practices Give them materials to help them price, package and market their services. We do this because our MSP success is our success. Our MSPs are effectively an extension of our sales force. This intertwined relationship is a critical component of our profitable business model. By enabling MSPs to grow, we efficiently penetrate the fragmented SME market, which helps us grow our 30 plus percent adjusted EBITDA margins.

Speaker 2

Enable 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. And though we believe demand is healthy And the trends point in our favor, that alone does not guarantee our success. We must also continue to execute and earn more fans. During our Q4 earnings call, we spoke about our key focus areas for the year. Number 1, manage everything.

Speaker 2

Number 2, protect and secure and number 3, operational efficiency. And I wanted to share update on these strategic initiatives. Looking first at our Manage Everything initiative. In the Q1, We began rolling out updates to our management platform to offer MSPs the ability to manage Windows, Linux and Apple Devices from one dashboard. We believe the addition of these powerful new Apple management capabilities is a strategic differentiator that can expand our TAM And put us side by side in competition with pure play Mac vendors.

Speaker 2

An example of our value proposition for integrated management capabilities It's a Q1 new customer deal for more than $140,000 of ARR. The initial conversation Around this MSP's existing RMM product, which they felt lacked the automation, customization and flexibility they needed. After showing them that in central we could more than satisfy what they were missing from their legacy RMM, the conversation turned to Cove and EDR. They realized they could both save money and gain functionality by switching to Cove and were impressed by the updated protection EDR offered compared to legacy antivirus. Our customer service capabilities sealed the deal and we completed a sale of EnCentral, Cove and EDR.

Speaker 2

We're pleased to see continued traction in new customer logos in our RMM platforms. We also made progress in our second focus area, Protect and secure. A number of market factors are driving our focus in this initiative, including evolving compliance and regulatory standards. Companies of all sizes face growing regulatory pressure to ensure data is adequately protected from bad actors, Putting MSP squarely in the compliance business. On top of that, we are seeing insurance providers effectively mandate SMEs must have qualifying cybersecurity solutions in place before they underwrite a policy.

Speaker 2

This, Along with the growing sophistication of attacks has helped shift security from a nice to have to a must have for the small and medium enterprise. We saw this firsthand during the security roadshows we did this past quarter across 4 countries and 3 continents. The message from our partners was clear. They need security software that can effectively protect them and their customers from attacks And be easily deployed across the endpoints they manage. And we believe that our security offerings meet these market needs.

Speaker 2

MSP conversion from legacy antivirus to EDR production, including our recently launched managed EDR offering It's a significant opportunity for us to help our partners who want to ensure ongoing endpoint monitoring and immediate mitigation of malicious events. On the data protection front, our new capability to utilize Cove Standby Image for Restore in the Azure public cloud across multiple regions It's an elegant approach for service providers to deliver enterprise grade disaster recovery as a service to their customers flexibly and affordably. And our security and data protection offerings continue to outpace Enable's total company revenue growth. And our last focus area, operational efficiency. We continue to improve our partners' efficiency through automation and standardization.

Speaker 2

You can see the evidence of our success here in our trailing 12 month Dollar based constant currency net retention, which remains strong at 108%. And in fact, the partners are layering more solutions across our product suite. One great example of partners seeking to standardize and enable tech stack is an EDR deal of more than $300,000 of ARR We signed in the Q1. The MSP started its relationship with Enable using our EnCentral product in early 2022. After working with us for the past year, they understood how more products from Enable could benefit their operational efficiency.

Speaker 2

As a result, we landed the EDR business. Notably, over 50% of this deal was from the managed EDR solution I mentioned a minute ago. This deal is one of the largest single deals in the Able Company history and it perfectly represents the value proposition we can offer partners Who standardize their tech stack with us. It is important to emphasize that none of this happens without the effort of EnableIt across the globe. In the Q1, we were delighted to receive recognition by A Great Place TO Work in the U.

Speaker 2

S. For the 2nd year in a row, a Comparably Global Culture Award And we were included on Built In's 2023 Best Places TO Work. We are also proud to note that we recently published our inaugural ESG report And look forward to discussing our ESG efforts in the future. With that, I would like to turn the call over to Tim to discuss our financial results and outlook. Then I'll circle back for some closing remarks.

Speaker 2

Tim?

Speaker 3

Thank you, John, and thanks to all of you for joining us on the call today. We delivered strong results in the Q1, beating the high end of our revenue and adjusted EBITDA guidance. The overall value of the Enable 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 help drive our performance. We aim to operate an all weather business model That drives continued revenue and profit growth. Now let's review our Q1 financial results and then discuss our financial outlook for the remainder of 2023.

Speaker 3

The revenue in the Q1 was $99,800,000 representing 10% year over year growth or 13% on a constant currency basis. Subscription revenue With $97,400,000 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 $2,400,000 up 7% year over year. FX favorability contributed Approximately $600,000 to the revenue beat in Q1 versus our guidance. We ended the quarter with 19 36 partners that contribute $50,000 or more of ARR, A 12% year over year increase.

Speaker 3

Partners with over $50,000 of ARR now represent 52% of our total ARR, Up from 48% a year ago. Looking at net retention for the Q1, Which is calculated on a trailing 12 month basis. Dollar based net revenue retention was 103% Or 108% on a constant currency basis. Turning to profit and margins, note that unless otherwise stated, All references to profit measures and expenses are calculated on a non GAAP basis and exclude the items outlined in the GAAP to non GAAP reconciliations Provided in today's press release. 1st quarter gross margin was 84.6% Compared to 85.7% in the same period in 2022.

Speaker 3

1st quarter adjusted EBITDA was $32,700,000 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. Unlevered free cash flow was $13,900,000 in the first quarter. CapEx was $5,600,000 or approximately 5.6 percent of revenue. Non GAAP earnings per share was $0.08 in the quarter based on $183,000,000 weighted average diluted shares.

Speaker 3

We ended the quarter with approximately $98,000,000 of cash and an outstanding loan principal balance of approximately $345,000,000 Representing net leverage of approximately 2.0 times. Approximately 46% of our revenue was outside of North America. Turning to our financial outlook. For the Q2 of 2023, we expect total revenue in the range $102,500,000 to $103,000,000 representing approximately 12% year over year growth Or approximately 14% on a constant currency basis. The constant currency revenue growth guidance Factors in the strength we've seen across the business and the timing of our annual price increases, which increases our Q2 year over year growth expectations.

Speaker 3

We expect 2nd quarter adjusted EBITDA in the range of $32,000,000 to $32,500,000 representing approximately 31% to 32% margin. For the full year 2023, We are raising our revenue outlook and now expect total revenue of $414,000,000 to $417,000,000 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 $127,000,000 to $130,000,000 Representing approximately 31% margin. Regarding foreign exchange rates, we are assuming FX rates For the remainder of the year of 1.06 for the euro and 1.21 for the pound, which has a positive incremental impact of approximately $2,000,000 of revenue on our updated full year outlook. Regarding profit, 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.

Speaker 3

We reiterate that we expect CapEx will be approximately 6% of total revenue for 2023 And we also expect adjusted EBITDA conversion to unleverage free cash flow to be approximately 65% for the full year. We expect total weighted average diluted shares outstanding of approximately 185,000,000 for both the second quarter And the full year. Finally, we expect our non GAAP tax rate to be approximately 28% in the Q2 and for the full year. Now, I will turn it over to John for closing remarks. Thank you, Tim.

Speaker 2

The new normal in our market is that we, Along with our MSP partners, we must constantly adapt to the ever changing nature of the macro environment. And 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, which industry observers echo, Give us confidence we have the right strategy with the right business model to address the IT complexities, cyber threats and IT labor challenges that face the industry. So as Tim told you, we are executing efficiently and investing strategically as we aim to deliver both profitability and growth.

Speaker 2

And our teams are laser focused on keeping ourselves and our partners ahead of the technology curve, able to manage everything, protect and secure their customers And grow and operate their businesses efficiently. Thank you all for your interest in Enable. And with that, operator, we are ready to take questions.

Operator

Thank If you change your mind, please press star followed by 2. We're preparing to ask your question, please ensure that your phone is unmuted locally. Our first question comes from Mike Sicos from Needham and Co. Mike, please go ahead.

Speaker 4

Hey, guys. Thanks for taking the questions here. I wanted to start off with Brian. And first 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 business basis with the 14% for 2Q, I We're just hoping, could you provide a little bit more clarity, especially on that constant currency? First, what are some of the puts and takes you're looking at On the product front, especially, I know you guys have been talking more about, let's say, COVID with the success and the traction it's seen, As well as the comment that you had in your prepared remarks on the outlook reflecting the timing of annual price increases.

Speaker 4

You give us a sense, are the price increases, do they tend to be the same each year or how is it you guys are thinking about it, especially in this current environment?

Speaker 3

Hey Mike, thanks for the question. This is Tim. I'll take a step back and give a little bit of color just on how we approach price We really look at a combination of unwinding discounts as well as reviewing kind of Prices across the portfolio. Historically, we've done our price increases In the March timeframe and through COVID and other circumstances that had gotten pushed out to June over the last year or 2. And we pulled those back into the April timeframe this year to kind of try to get back towards more of our regular cadence.

Speaker 3

So That's the more acute impact on the price increase timing from a Q2 perspective on Q2 more specifically. And then as we think about the overall price increases for the year, this year is a little bit higher than we've done Historically, more acutely due to some of the inflationary environment that we've seen over the past 12 12 to 18 months or so now. So overall for the year, there's about a 1%, 1.5% impact From the size of the price increase this year versus last year.

Speaker 4

Got it. And thank you for calling that out. And it makes sense too. I mean, we've seen it across our coverage as far as companies pushing some of these price increases given the inflationary environment. The second part of the question is more of a, I guess, geared towards John, but a 2 porter, if you will.

Speaker 4

First, again, just on Cove. Is there any way to think about the traction that you guys are seeing? Is there a particular customer Or profile or do they need to have a certain maturity curve before Cove starts to really resonate or what is it you guys are seeing on that front Given the consistent messaging and traction for that product and then separately, but this goes back to your opening remarks. There's a lot of hype around, Gen AI right now obviously and I know that you guys are talking about the consistent drumbeat of Cybersecurity threats. I would think that the cybersecurity adversary continues to become more advanced Because of what generative AI is actually unlocking and if anything, I think it's probably fair to assume that almost pushes SMEs and MSPs more in your direction, but wanted to see how you guys are using GenAI on your side to ensure that you're helping your Teases they navigate these cross currents.

Speaker 4

So a lot to unpack there, but if you could shed any light, it'd be helpful.

Speaker 2

Yes, sure, Mike. Hey, how are you? This is John. And yes, a lot to unpack. Let's do it step by step.

Speaker 2

So on Cove, Cove is disruptive Both for the MSP and for us, it's disruptive because of the architecture. It's cloud first, Which means, number 1, on the security front, there's not an appliance or a vector to attack for the bad guys. Number 2, because of our approach with True Delta Technology, in other words, we're only looking at the change and not necessarily having to back up the restore. The amount of storage That we require is much less than our competitors. Therefore, the process time, the backup time is much less.

Speaker 2

Overall, Mike, It's just a better TCO for the MSP. So the MSPs are spending less hours of last time, spending less on software, and it's a better solution. The solution appeals to all levels of maturity, the MSP. Okay. Now, what did we announce today?

Speaker 2

Today, we announced advancement in our disaster recovery as a service. And as I mentioned in my prepared remarks, I'm in Prague with about, 400 other folks in the MSP ecosystem. And so My answers will be somewhat biased to the conversations I've been having in the last couple of days. Earlier today, I had a conversation with an MSP from Scotland. They have about 1200 servers and virtual machines, 300 of which are on Cove.

Speaker 2

So they're using Cove for for about a quarter of their installed base. And when I asked why is it that they're not using Cove completely, he said they were dependent on us building out our more of our standby image and disaster recovery offering. And now that we're continuing on that journey and developing more of a disaster recovery, a continuity plan for these MSPs, I expect that we will get better standardization among our MSPs. So for us, the growth algorithm is twofold with Cove. 1, Want to continue to plant the Cove flag in a bunch of MSPs across the globe and those can be MSPs that have our RMM Are those MSPs that do not have our RMM?

Speaker 2

Last year, we began leading with COVE because it's such a disruptive technology. And then number 2 is through standardization and disaster recovery is Big component of that, giving our MSPs now the comfort and confidence that they now can have everything that they're Covered with Coke. That can be Office 365. And you can see by the traction in our prepared remarks, that's been a success. And now with the disaster recovery, I'm expecting to get better standardization across the footprint.

Speaker 2

So that's on code. Look, on security, that's another big hot topic here in Prague, right? MSPs And the story has changed. I talked about this a little bit in my prepared remarks. What's happening more and more is that MSPs and their customers And their customers' customers are now because of compliance or regulatory reasons needing to make sure that they have A layered security bit and the prescription, so to speak, about good cyber hygiene is being dictated to these small medium enterprises in all these different verticals.

Speaker 2

What that means for the MSP is they're no longer needing to sell the security. They now just need to help their MSPs, excuse me, their customers, their SME Be compliant. And that is that continues to be a big tailwind. We're seeing the need for SMEs to retain their logs, Maintain better files, making sure they have a cloud based backup. Things like EDR are now part of that compliance checklist that MSPs need, things like MFA.

Speaker 2

So the hygiene has gotten much higher. It's creating a bigger tailwind as it relates to AI and how we use it. Look, The name of our game is all about automation and efficiency. And what we try to do is help MSPs. We've been in the automation game and then the scripting game really from the very beginning.

Speaker 2

We help MSPs. We provide them our own scripting and our own automation, and we also Provide them a scripting with PowerShell and our automation managers so they can go and build their own their own automation, excuse me. We continue to push on that front. We look at RPA and machine learning. We use data science and ML and machine learning in some of our products today, In particular, in some of our mail and other security offerings.

Speaker 2

So it's a part of our DNA. We'll continue to invest and lean in there. We'll continue to leverage the technology to better serve our MSPs.

Speaker 4

That's great. Thanks for the color, John. And just one correction on my side, Tim O'Brien. Sorry, I haven't had enough coffee today, and I guess I'm just crossing wires, but I think I called you Brian earlier. So apologies for that.

Speaker 4

We'll turn it over to my colleague. Oh, good bye.

Operator

Thank you. Our next question comes from Jason Ader from William Blair. Jason, please go ahead.

Speaker 5

Yes. Thank you. Good morning, guys. Just wanted to get first a sense of how macro is manifesting in the business right now. Is it affecting expansion, new customer adds?

Speaker 5

Is there anything kind of geographically going on? Just Any kind of broader commentary on the macro impact on the business?

Speaker 2

Hey, Jason, thank you for the question. Look, and again, I'll use a little bit of my recency bias, but it's a great heat map of what's going on. Here at Prague, we have MSPs from 18 different countries, including North America, obviously, the U. S. And Canada and as far away as New Zealand and Australia and South Africa.

Speaker 2

So a bunch of different continents, a bunch of different countries. And honestly, the sentiment is pretty consistent. Their MSPs are growing both organically and inorganically. Their growth algorithm is a healthy mix between adding new customers And adding services. The heat map here is where they're adding services continues to be around security and data protection.

Speaker 2

And so That roughly really aligns with where we're seeing our growth, data protection and our security offerings continue to outpace our overall I bet. And so I'd say overall, the demand for the MSPs world is quite high. Unlike a lot of other industries, Jason, where there might be some headwinds in markets, Things related to labor shortage or cybersecurity or even cloud optimization, for MSPs, that's an opportunity. 1 MSP that's in the UK, what they told me earlier today was that their projects in Q4 Of last year, it began to slow down. And so the second half of the last year from a project base slowed down, but the recurring revenue and the recurring service was strong and now they've seen an uptick in projects being initiated in the first half of twenty twenty three and those projects usually are good feeding ground Ongoing managed services.

Speaker 2

So, the recurring revenue continued to be strong in 2023. Their project seems to slow. This is from a couple of different MSPs that I spoke to. But now that they're seeing that demand and an uptick as well. So that's some of the anecdotes that have been on the floor over the last couple of days here in Prague.

Speaker 5

Okay. I guess what I was getting at just in terms of the macro is, there's been obviously credit tightening And I was wondering if that's impacted, I don't know, new MSP starts or expansions For M and A, I don't know. Just it seems like credit tightening should be having an impact on the SMB market. And just I mean, it doesn't sound like it's material for you, but that's what I was getting at.

Speaker 2

Okay, sure. So On the debt side, it's not that material. What we're hearing a little bit is the number of M and A deals Beginning to slow slightly as far as the MSPs and from some of the conversation for the same, but the quality of the deal remains. They're seeing valuations Maintain. So it's not really having that much of an impact.

Speaker 2

And Jason, remember like the service that these MSPs provide are mission critical. So These are not shops that get over levered, right? These are not small medium enterprises and MSPs in general. They're not using debt maybe as much as some of the Hyper businesses are hyper growth type of businesses. So they're not, I'd say seeing that.

Speaker 2

I'm sure they're failing that if they have any type of variable type of debt, But by and large, we're not seeing any impact on our demand or on their demand.

Speaker 5

Okay, great. And then the second question just is on competitive landscape. And I'm sure there's some kind of crosscurrents there. If you could just try to talk us through, especially on whether you I think you're gaining share relative to both some of the incumbents, the bigger players than you and then some of the newer entrants Where we've heard some momentum from some of these up and coming players and so maybe just paint the picture for us.

Speaker 2

Sure. With our rebrand of Cove that we did about a year ago, we're getting much we're definitely improving our share of voice In the market, and we're seeing that whether it be in a Reddit forum or in different type of marketplace. And we're seeing it in our numbers. So Our Cove customer acquisition is definitely on the rise. We're definitely taking market share from some of the bigger players, both traditional MSP vendors, Jason, But also, backup and disaster recovery vendors that are not focused on the MSP.

Speaker 2

So we're winning On both fronts, on the MSP focused guys and on the generalist. And that's for backup. Our endpoint detection in our EDR continues to roar. On RMM, there's 2 halves of the market. There's the low end.

Speaker 2

And to your point on some of the new players, We are a little bit over, I think we mentioned this to you guys before, but maybe about a year and a half ago, we're seeing a slowdown in our new customer acquisition at the low end. And we repackaged with Insight. So we and we did a bunch of improvements on our workflows and brought in 3 solutions into 1. And so the repackaging and the repricing and the work that we've done, we actually saw a pretty immediate reversal and we're now winning market share in the low end. And on the high end, we continue to do well there.

Speaker 2

Our in central platform services the large MSPs quite well. We win because of our breadth and depth of our offering, we win because of our automation and we win because of our layered security integrated approach. So we continue to see Yes. Strong market share results there. I'd say no new news on the high end of our end.

Speaker 2

We continue to make the progress that we want to make and continue to gain the market share.

Speaker 5

Okay, great. Thank you.

Operator

Thank you. Our next question comes from Matt Hedberg from RBC Capital Markets. Matt, please go ahead.

Speaker 6

Thanks. Good morning, guys. Thanks for the question. Strong results and obviously, John, your comments on a strong demand environment, I think It's great to hear. I guess, Tim, the question for you is on the guide.

Speaker 6

You raised the full year revenue guide by more than the Q1 beat, Which is great, but I'm just kind of curious, what kind of gave you the confidence to take that full year range up even more than what you'd be versus Say passing it through or another company sort of maintaining a full year after a Q1 beat. Just maybe a little bit of comment on sort of the thought process on the full year guide.

Speaker 3

Yes, absolutely, Matt. It's a combination of 2 things. 1, it is the strong demand environment that John touched on that We've continued to see in the market and the other piece and I touched on in the script is the FX rates. We've assumed higher FX rates For the remainder of the year than we did at the onset when we gave our original full year guide, that impact is about $2,000,000 On the updated full year outlook and the balance of that is due to the demand environment that we're seeing from an operational perspective.

Speaker 6

Got it. Okay, helpful. And then obviously the profitability is great as well. Thoughts on hiring, is it easier to find talent these days? And how are you trying to balance this sort of durable growth with obviously a very profitable model as the year progresses?

Speaker 3

Yes, absolutely. I would say we've had more success probably more acutely In the R and D hiring part of the equation, I would say that was a more challenging spot 18 to 24 months ago. We've seen that improve as we look to lean in and invest heavier in engineering and dev throughout 2023. So I would say we have seen an improved environment from a hiring perspective. And we've touched on kind of where our investment focus is as we go into 2023 and That is more acutely in the R and D part of the P and L from our perspective.

Speaker 7

Got it. Thanks guys.

Operator

Thank you. Our next question comes from Brian Essex from JPMorgan. Brian, please go ahead.

Speaker 7

Hi, good morning and thank you for taking the question and nice results for the quarter. I was wondering maybe if we could start with managed EDR and Maybe adjacently kind of what you're seeing from the kind of host of new products that you've rolled out over the past Quarter or so. But specifically, I guess, for managed EDR, I'm interested to see or interested to learn what percentage of incremental new revenue You know, might be attributed to managed ADR. And do you have a sense of Obviously, it's still early stages, but any expectations for what that might represent in terms of revenue mix Over the next several years.

Speaker 2

Thanks, Brian. This is John. Yes, it's definitely Too early to start talking about managed GVR as a separate line item. And historically, we really don't break out our products by revenue line. It's early days, right?

Speaker 2

I think we launched it last quarter, and we've been getting good traction. We gave that anecdote In the prepared remarks where we upsold that one customer, and half of that was MDR. And so Why do we believe that we have such good traction? It's actually a couple of different angles. Number 1, for MSPs That field that EDR might be a little bit too complicated for their technicians or might be too time consuming.

Speaker 2

Adding this managed layer Where we're leverage where they're where they're able to leverage a an expert, to provide some of the the human in the loop, so to speak, is a great value prop them, right? For a couple of more bucks per device per month, they can now go add the service and relieve their team of that burden, and it helps their overall EBITDA, their overall efficiency and profitability. So for those folks, it's helpful. And then for the folks that are using EDR today, Again, it's an efficiency play. They can go they can scale and now grow their business in a couple of different ways.

Speaker 2

So we think it will help the low end of the market that might be a little bit Apprehensive to help manage endpoint detection and response. And then for those that are a little bit more sophisticated, they know that they can leverage this outsourced Expert and gain some time efficiencies. And so we expect that this will be a strong adoption. As far as offerings, we continue to work with SentinelOne on a couple of different things. We're looking at additional SKUs.

Speaker 2

And just to compare 20 23 with 2022, we didn't bring many new products to market in 2022. And in 2023 With vigilance and, excuse me, with the managed EDR offering and with disaster recovery with Cove and a couple of these other offerings, We believe that will help our MSPs add a layered security and help them drive more efficiency and it'll obviously help our growth algorithm, right? The more offerings we can bring to market, the Faster we can help our MSPs expand, the better that net retention number is, the better that overall growth story is.

Speaker 7

Got it. And how do you think about ADR going forward from a services perspective? I mean, is there do you get a lot of leverage out of the headcount that you have there? Do you might see a little bit of margin pressure from that or is this going to or do you is our initial indications that this might just be Kind of like a low single digit percentage of revenue going forward, so it may not really have that much of an impact to the hiring and margin front.

Speaker 1

So, look, I'd say we

Speaker 2

look at the overall margin From the portfolio view, and we know that certain offerings have a little bit stronger gross margin The others, but really it's about driving the LTV. And just to be clear, because we have a lot of 3 letter acronyms in this business. So EDR is the software, right? And then managed EDR is the service that we attach. And we're leveraging actually SentinelOne For both and we're leveraging their scale and their stock and their AI to drive an efficient solution to the MSPs.

Speaker 2

Then what we do is we integrate this in a way for our MSPs in our RM. So our MSPs now can To both do endpoint monitoring and management and endpoint security in one dashboard. And that's the value add, and that's why MSPs love Consuming the EDR offering through Enable because it's that RFM that is in that single pane of glass, That command and control instill that powerful EDR technology that SentinelOne leverages. And then we layer that on top with basically the SentinelOne Managed service to provide MSPs that little bit that extra level of control and comfort. So that's the mix and that's how we go to market it's been a success.

Speaker 2

And as we mentioned, I think we have well over 1,400,000 devices that are currently being protected with EDR today.

Speaker 7

Got it. Got it. That's helpful. And maybe on the OpEx side, I think an expected increase in R and D expense. How are you thinking it like how robust is the roadmap there?

Speaker 7

How might we anticipate ongoing hiring? It looks like you're getting leverage particularly out of like G and A. But with respect to R and D, just to kind of build an expectation there, is it kind of growing it up at a higher pace than revenue growth.

Speaker 2

Yes, sure. Sure, sure. So Tim and I, for years now, and I'm actually coming. I just passed my 10 year anniversary in the space. For years now, managed the business more from that rule of Type of approach, right, that aspiring to be that rule of 50.

Speaker 2

And where we can lean in and invest to drive Long term durable growth, that's what we're going to do it. And in our space, we have these MSPs and what they tell us Overwhelmingly, regardless of the country, regardless of the market that they're in, is they would love to consume and buy products from us. They trust our brand. They trust that if it's Built purpose built for them. It will help them scale.

Speaker 2

It will help them grow. And so for me, one of the best things we can do is continue whether it's our own IP, Like Cove or our mail offering or our password management offering or through integrations with enterprise grade software, bringing more products to market. We'll continue to lean in R and D as long as we see the opportunity. And we do see the opportunity. We've increased our R and D spending code.

Speaker 2

We've increased our R and D And monitoring, we've increased via acquisition and through internal investment in cloud and cloud management. And we believe those will have positive returns. So we're going to continue to lean in R and D. We believe it's a massive opportunity for the MSP. We believe We're still in early innings here and we'll continue to do that and we'll get scale and continue to drive our businesses.

Speaker 2

And as our collective revenue snowball gets bigger, We'll be able to get scale in some OpEx areas and R and D over time, we'll get scale just as we get more and more As that top line continues to grow.

Speaker 7

Got it. That's helpful. Maybe last one for me on Cove. So it sounds like great traction there, particularly with backup disaster recovery. What do you think You might have in terms of opportunity in adjacent markets like governance and data management or data migration, particularly as maybe The true endpoint, like the true end customers might be migrating from like on prem to cloud.

Speaker 7

Some peers like an AvePoint, for example, have migrated into some of those areas, but maybe that's because they're more enterprise focused. But I'm just wondering, what adjacencies Might you have on top of what or next to what you've already done on the co side?

Speaker 2

Sure. It's a good question. When we think adjacencies as it relates to Cove, Really what pops up is selling indirect to some of the mid market and small, medium enterprises directly. We have a, we don't talk about this this much, but we have a good part of our customer base come to us direct Saying that they're looking for a data protection offering or unified endpoint management offering direct because they're not using an MSP, Or they want a co manage option, which is also helpful for our MSPs. So one of the big areas that we're looking at for COVE in particular is around directly into those bid On a couple of quarters ago, we talked about winning large internal IT departments and a lot of times that's led with by Cove and The Cove solution fits very elegantly in that medium and midsize enterprise.

Speaker 2

And so that's an area that we're looking at a go to market and channel point of view to potentially lead in a little bit there and accelerate our Cove story there as well. Got it. Very helpful. Thank you.

Operator

Thank you. Our final question comes from Keith

Speaker 8

I wanted to ask About the growth algorithm that you're thinking about. And the first part of it is, if you think about over the next 2 years, organic or driving that R and D line versus acquisition versus Partners, so to speak, with SentinelOne or others. How do you think about the key drivers to expanding your portfolio? And the other side of that question, you mentioned your debt is at 2x. What's your comfort level in kind of going or what's your Strategy kind of going up or down on that, as we're interest rates are a little bit higher, but I just wanted to get Your feedback on how should we be thinking about the portfolio expansion over the next, call it, 2 years and the 3 levers of organic Partner in M and A and then the corollary again on debt.

Speaker 8

How do you see what's your comfort on either standing or contracting at that level? Thanks.

Speaker 2

Sure. Great question. And look, just to bring it up a level, right? The 3 verticals, if you will, that we continue The service that we provide to our MSPs are monitoring and management, data protection and security. And I'd say, we continue to look to expand on all three of those different verticals.

Speaker 2

And How we choose to and what the mix is really depends on where the offering is and it's what I'll call in its hype cycle. What is that best profile? And most importantly, what's the best way to service our NSPs? When we looked at endpoint management, Endpoint Security, this is now 5 or 6 years ago. We looked at back then we called it next generation AV.

Speaker 2

Today it's more commonly known as EDR. And we looked when we looked at that and where that was in a type cycle, we knew it was early days. We knew that there were companies across the globe investing 1,000,000 of dollars into research And development. And we knew we wouldn't be able to compete with that level of research investment. And we wanted to make sure that we're providing an elegant solution to our customers.

Speaker 2

And we decided to partner with SentinelOne. And so when we look at that, we're constantly looking at whether or not we can provide the best Solution for our customers. If we think it's right in our warehouse and our core competency, then that's obviously IP that we want to acquire or build ourselves. If it's something that's maybe better served where our North Star is to help make this more efficient for MSPs, then integrating and working with an enterprise grade software company is the best thing for our customers. So a lot of times, it's really what's out in the market, what's the best way that we can service our customers over the long term.

Speaker 2

And Keith, just as an example, We acquired Spinpanel because they're in the monitoring and management of cloud assets. So that monitoring and management is core now we're going to continue to invest. And as we look at different security offerings, we may choose to acquire if that fits our R and D kind of profile or investment thesis. But if not, this enterprise partnership is a tremendous success. I call it a quad win.

Speaker 2

It's a win for the MSP. It's a win for the small medium enterprise. They have an enterprise grade software. It's a win for our partner, in this case, as an example, SentinelOne, Because we've just opened up access to their TAM. They were not going after the small medium enterprise, and we gave them access via our 25,000 MSPs.

Speaker 2

And it's obviously a win for Enable. We got a richer LTV, a better relationship with our customers. We help them be secure. So if we can find a quad win like that, that fits our profile, we're going to do that. As far as the leverage, I think Tim and I are comfortable with where we're at.

Speaker 2

And if we would if we find A better use for our capital, I. E, via an acquisition that fits our thesis of servicing these MSPs and helping them whether it be monitoring and management, Security or data protection, that we believe it has a long term durable benefit for our customers. We're willing to make that acquisition. And if that means Increasing either using our balance sheet and the cash position we have or some debt, we have a revolver, we're willing to do that as well. Okay.

Speaker 8

Terrific. Let me just ask a follow on question. Sorry, go ahead.

Speaker 3

No, I was just going to add a little bit of color on that. I think from a leverage standpoint, like we're very comfortable on anything So it's of 3 times. But as John touched on for the right asset, the right strategic asset, I think we'd be comfortable kind of flexing above that For a shorter period of time. And then from a growth algorithm standpoint, As we look across the different vectors of retaining customers better, that's part of the strategy and we think there's room for improvement there on the gross retention bit. Looking at the net retention bit, John kind of touched on The different vectors of either building, buying or partnering and bringing new products to market.

Speaker 3

We've built and brought a bunch of new products to market in 2022. We Partnered, on the MDR front, we acquired from a spin panel perspective. So we're tapping on all three of those vectors From bringing new products to market and then continuing to expand and focus on market share on the new. So All three of those avenues from a growth perspective have opportunity for us to improve and accelerate growth.

Speaker 8

Okay, terrific. That was you just sort of led into my more specific question on How should we be thinking about the gross and net retention rate as we go through the year versus The 108one hundred and three that we reported this quarter.

Speaker 3

Yes. I think looking at where we're at from a constant currency growth perspective, where the guidance is at, I would expect things to stay Pretty steady from a constant currency perspective. Obviously, currency was more of a headwind from a reported standpoint in 2022 As there is a lot of fluctuation there, but focusing more on the constant currency bids, I would expect things to stay pretty consistent From a gross and net retention standpoint throughout the year as it relates to the guidance.

Operator

Okay. All

Speaker 8

right. Well, consistent is good in this Backdrop. So I appreciate the questions. Thanks very much. Cheers.

Speaker 2

Thank you.

Operator

Thank you. That is now the end of the Q and A session. So I'll now hand you back over to John Pagluka for closing remarks.

Speaker 2

Listen, thank you all for joining us on this quarterly earnings and we appreciate your ongoing interest in Enable And, signing off from Prague, so take care.

Operator

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

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Earnings Conference Call
N-able Q1 2023
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