N-able Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 9 speakers on the call.

Operator

I'd now like to hand over to Griffin Gere, Investor Relations. The floor is yours. Please go ahead.

Speaker 1

Thanks, operator, and welcome everyone to Enable's Q2 2023 earnings call. With me today are John Palaiuca, Enable's President and CEO and Tim O'Brien, EVB and CFO. Following our prepared remarks, we will open the line for a question and answer session. This call is being simultaneously the 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, 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 filing with the SEC.

Speaker 1

Copies are available from the SEC or on our Investor Relations website. Furthermore, we will discuss various non GAAP financial measures on today's call. Unless otherwise specified, when we refer to financial measures, we will be referring to non GAAP financial measures. A reconciliation of certain GAAP to non GAAP financial measures discussed on today's call is available in our earnings press release on our Investor Relations website. And now, I will turn the call over to John.

Speaker 2

Thank you, Griffin. Welcome everyone and thank you for joining us today. From the moment we began discussing the Enable spin off, we believed we had a winning formula, an offering tailored to address a sustainable and rapidly growing market opportunity a customer base looking for a trusted partner that understands their business and can help them grow and a workforce driven by purpose and a passion to serve our customers who we call partners. Our business model, we grow as our partners grow, capitalizes on this formula. And our MSP partners tell us they appreciate the mutually beneficial relationship we have built with them.

Speaker 2

And today, As we pass our 2nd anniversary as an independent publicly traded company, our record breaking second quarter results further proof that our strategy is on the right track. Our revenue of $106,000,000 Exceeded the $100,000,000 quarterly milestone for the first time in our company's history. And our year over year constant currency revenue growth Of 17% was the strongest since we became a standalone company. Along with our strong bottom line results, With an adjusted EBITDA of approximately $35,000,000 representing an adjusted EBITDA margin of approximately 33%, We are executing our strategic initiatives and fulfilling our original promise. I'll talk later about our execution and upcoming milestones, 1.

Speaker 2

But I wanted to spend a minute on what we are seeing in the market. First, the demand environment is healthy. Our MSP partners serve over 500,000 small and medium enterprises worldwide across a variety of sectors, including healthcare, law, education and finance. And the services these SMEs rely on such as security, monitoring, Data protection, help desk and cloud migration are mission critical to these modern day enterprises. Industry analysts also project the strength of the SME IT market.

Speaker 2

With Gartner forecasting earlier this year that software spending by organizations with fewer than 1,000 employees will show the fastest growth of any other segment through 2026. 2nd, we are seeing that MSPs are increasingly going upmarket, managing the IT department of larger organizations or acting as co managed providers. Co managed IT services allow organizations to use MSPs to fill in knowledge, a question and answer session. For example, 71% of IT professionals find Patch Management overly complex and time consuming, with some reports stating that internal IT resources spend most of their time just managing patch on top of everything else on their to do list. Overseeing Patch Management is one of the many great examples of how MSPs add value through a co managed offering.

Speaker 2

MSPs are playing a trusted and vital role for these organizations, which in turn is powering demand for enabled software. Our strategy to capture this market demand is simple. Empower our MSP partners with enterprise grade technology to meet the needs of their SME customer base. Our multi tenanted platform, which integrates monitoring and management, data protection and security offerings in one dashboard It's purpose built for this. And our R and D teams have been busy, bringing new features and functionality across each of these categories.

Speaker 2

We continue to further the capability of our flagship RMM platforms, which have received best RMM honors by CRM for 3 years in a row. We launched Advanced Analytics, which provides powerful functionality that enhances MSP's ability to explore, visualize and report the value they deliver to their customers in order to differentiate their offerings. Apple Business Tools, We integrated device discovery, monitoring and mobile device management, giving MSPs the ability to centrally manage Windows, Linux and Apple Devices in 1 dashboard. This reduces tool sprawl and increases their profitability. With macro trends pointing toward growth in Apple Devices, we believe this helps us differentiate our value proposition.

Speaker 2

In addition, we are in a limited preview with Microsoft Azure Cloud Resource Management, which enables partners to discover and manage Azure resources, such as virtual machine and storage. As SMEs are moving IT assets out of server closets and into the cloud, We are now helping MSPs manage on premise and cloud resources from a unified management experience. An example of our RMM solutions value proposition is a deal in the Q2 where we engaged the customer using a well known RMM competitor. After demonstrating our powerful scripting and automation ability and the capability to support macOS, the customer signed a more than $100,000 ARR deal with us. IT technicians at MSPs are charged with managing the infrastructure of many different SMEs, which is a critical and often complicated task.

Speaker 2

We believe the depth of functionality within our RMM offering enables MSPs to provide these crucial IT management services efficiently and effectively. And that is why we are proud to say we matter the most where it's the messiest for our MSPs. Demand for our security offerings remains strong as well, With growth in revenue from our security business outpacing total company revenue growth, our managed EDR offering, which debuted in the Q1, is gaining traction, And we see a long runway for this advanced offering. Meanwhile, growth in our EDR solution, which we launched in 2019, remains robust. Also, our password management solution, Path Portal and our mail security product, Mail Assure, are steady contributors to our security business.

Speaker 2

Underlying this demand is the evolving compliance and regulatory landscape. We recently conducted a poll In which more than 2,000 MSPs said that the top reason their customers are adopting managed security services is compliance. Our teams are hearing this in their daily partner engagements as well. For example, we spent 2 days discussing how compliance shapes the industry At our highly rated Business of Security event attended by 65 plus elite partners, and we heard the same thing directly from some of our largest customers. Data protection is once again a bright spot in our product suite, also outpacing total company revenue growth.

Speaker 2

New customers on Cove, our powerful data protection as a service product, are up 28% year over year in Q2. The macro outlook for disaster recovery as a service category is strong with IDC projecting a CAGR of 18% through 2026. With favorable market tailwinds at our back, we intend to continue to build Cove into a trusted protector of 1 of enterprises most critical assets, And we do this through one word, innovation. And we have been delivering. We recently introduced on demand restore and standby image to Azure, giving MSPs the flexibility to spin up disaster recovery resources on demand in a much more cost effective manner than legacy backup vendors.

Speaker 2

We released functionality that accelerates incremental backups for Microsoft OneDrive by as much as 10 times. And we continue to extend our capabilities in the Microsoft ecosystem with Teams now in external preview. Our go to market team are focused on ensuring all this innovation reaches the eyes and ears of our partners. We are now live with the disaster recovery of the service marketing campaign, including an online total cost of ownership calculator on our website To help partners understand the value proposition of Cove, this newly released TCO tool Show savings of up to 60% for customers that use Cove versus other options, which validates Cove's value proposition. And while our overriding market focus is on MSP partners, our solutions also appeal to internal IT department And sales to these customers are an opportunistic area where we believe Cove is taking market share.

Speaker 2

Our mission is to provide tools for MSPs that enable them to deliver IT services efficiently and effectively, and our teams are delivering. Along these lines, I want to speak about our approach to harnessing new technologies within our products, particularly the opportunity we are seeing with generative AI. We are a technology company. Innovation is part of our DNA. We strive to deliver enterprise grade technology to the SME market.

Speaker 2

And in this pursuit, AI technology is employed in our offerings today. For example, Our monitoring and management solution leverages AI to automate tasks and our advanced EDR and mail solutions use AI to identify and block threats. This technology has a tangible benefit for our customers. Automated scripting, troubleshooting and patching save technician time and AI threat detection stops more bad actors. Looking forward, we see generative AI as another rung on the ladder of technological progress, and we are working on integrating further innovations and our product strategy deliver even greater customer value.

Speaker 2

Use cases, including productizing the latest developments in AI and machine learning, the effectiveness of our data protection offerings to name but a few. As we innovate, we believe we have a competitive advantage in the unique insights gained from our approximately 25,000 MSPs that will allow us to train more effective algorithmic models and create monetizable solutions to meet our customers' needs. As always, we are mindful of using technology in an ethical in a socially responsible manner while mitigating risk. And finally, all of this is a result the question and answer session. The efforts of my fellow Enableites across the globe, driven by our productive and positive work culture, which has earned external recognition.

Speaker 2

We have outlined those awards in our press releases throughout the first half of the year. But I want to call out that we received 4 Stevies at the 2023 American Business Awards for our product, internal teams, community efforts and our high achieving people. We also received rewards from Comparably for Best Company Global Culture and Best Company Career Growth. A couple of months ago, And inclusion in the workplace with over 2,400 signatories. At Enable, we have always prioritized diversity, equality and belonging.

Speaker 2

And this was another great step in our journey to reinforce our commitment to this focus area. 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 3

Ken? Thank you, John, and thank you all for joining us today. As John mentioned, this was a momentous quarter for Enable. We just celebrated our 2 year anniversary as a public company and achieved over $100,000,000 in revenue in the quarter, both exciting milestones. It is the culmination of investments we have made over the years to bring value to our MSP customers, including product innovation by our R and D organization, the brand building efforts and execution of our go to market teams, The development of our customer success team and more broadly, intentionally creating a culture of innovation For our more than 1500 Enableites across the globe.

Speaker 3

It's also a testament to the demand for IT services across the global SME market. For our Q2 results, total revenue was $106,100,000 representing approximately 16% Year over year growth or approximately 17% on a constant currency basis. Subscription revenue was $103,400,000 Representing approximately 16% year over year growth or approximately 17% 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 $2,700,000 up 21% year over year. We ended the quarter with 2,162 partners that contribute $50,000 or more of ARR, Which is up approximately 19% year over year.

Speaker 3

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 Q2, which is calculated on a trailing 12 month basis, dollar based net revenue retention with approximately 105% or 109% 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. 2nd quarter gross margin was 84.8% compared to 85.5% in the same period in 2022. 2nd quarter adjusted EBITDA was $34,900,000 up approximately 26% year over year, Representing approximately 33% adjusted EBITDA margin.

Speaker 3

Unlevered free cash flow With $23,600,000 in the 2nd quarter and CapEx was $6,000,000 or 5.7 percent of revenue. Non GAAP earnings per share was $0.09 in the quarter based on $186,000,000 weighted average diluted shares. We ended the quarter with approximately $109,000,000 of cash and an outstanding loan principal balance of approximately $344,000,000 representing net leverage of approximately 1.8 times. Approximately 45% of our revenue was outside of North America in the quarter. As I stated on our last earnings call, We pulled forward the timing of our annual pricing and packaging changes this year to align closer to our cadence pre COVID.

Speaker 3

While we usually do not call out pricing and packaging changes, we wanted to make sure we highlighted the impact on Q2 year over year comparisons. To reiterate, for the full year, we expect the magnitude of these changes relative to previous years to contribute about 1 1.5% on year over year growth. Given the timing change, the impact was more pronounced in the 2nd quarter, Contributing about 4% to year over year growth. We evaluate pricing and packaging decisions carefully, Taking a range of factors into account, such as product enhancements, the competitive environment and inflation. As we look across the market and our offerings, we believe our value proposition continues to be attractive.

Speaker 3

Turning to our financial outlook. For the Q3 of 2023, we expect total revenue in the range of $106,500,000 to $107,000,000 representing approximately 14% year over year growth or approximately 12% to 13 We expect 3rd quarter adjusted EBITDA in the range of 34.5 the $35,000,000 up 20% year over year at the midpoint and representing an adjusted EBITDA margin of approximately 32% to 33%. For the full year 2023, we are raising our revenue outlook and now expect total revenue of $419,500,000 to $421,000,000 Representing approximately 13% year over year growth on both our reported and constant currency basis. We are also raising our adjusted EBITDA outlook and now expect full year adjusted EBITDA of 135.5 1 $137,000,000 up approximately 19% year over year at the midpoint and representing an approximately 32% the 33% adjusted EBITDA margin. Regarding foreign exchange rates, we are assuming FX rates For the remainder of the year of €1,070,000,000 for the euro €1,250,000,000 for the pound.

Speaker 3

We reiterate that we expect CapEx will be approximately 6% of total revenue for 2023. We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 65%

Speaker 4

for the full year.

Speaker 3

We expect total weighted average diluted shares outstanding of approximately 187,000,000 for both the Q3 and the full year. Finally, we expect our non GAAP tax rate to be approximately 28% in the Q3 and for the full year. As we enter the back half of the year, we will continue to monitor the macro environment while we focus on executing initiatives that advance our strategy To efficiently deliver enterprise grade technology to MSPs, all while ensuring our costs are aligned with growth. We are also focused on driving return from the new offerings we have brought to market as these are key to our strategy of accelerating our top line growth Now I will turn it over to John for closing remarks.

Speaker 2

Thanks. A little more than 2 years ago, when Enable became an independent publicly traded company, the thesis was straightforward. Independent operations would unlock a higher level of focus and allow us to reach our true potential. We have seen the benefits of this enhanced focus across our business. We have filled out leadership positions across our organization and grown the company from 1300 employees at the time of the spin to over 1500 employees today.

Speaker 2

Our R and D teams have delivered a depth of features within our core product categories that empower our MSPs to scale and win. Our go to market teams have built the Enable brand and connected with MSPs at events across the globe. And our customer success organization Has established meaningful relationships with our customers. The spin off 2 years ago marked a new chapter in the Enable journey, and we continue to keep writing. IT spending remains a priority for organizations.

Speaker 2

We see healthy market demand for our integrated suite of monitoring and management, Data Protection and Security Solutions. While we are mindful of the macro environment, we believe strongly in the durability of the long term secular growth of SME IT Spending and the trend of outsourcing IT. We are executing important strategic initiatives and are invigorated by the opportunity ahead to innovate on behalf of our MSP customers and empower them with the tools they need to provide mission critical services. And with that, operator, we are ready for questions.

Operator

First question comes from Mike Sicos with Needham. Your line is open.

Speaker 4

Hey guys, thanks for taking the questions here and good quarter all around. I just wanted to circle back to the guidance that we have here. And I appreciate, Tim, you calling out those annual price changes. Can you help us think through Those price changes and really where I'm going with this is, if I look at the Q3 revenue guide, shouldn't we expect the pricing changes to continue to benefit Q3 at least on a year over year basis, just given the subscription model. And I'm just trying to tease out, is there anything more to how this guidance is constructed?

Speaker 4

The question. And why wouldn't we be seeing more of a benefit from those pricing changes in Q3?

Speaker 3

Yes, Mike, happy to take it. I think we spelled out the impact Pretty clearly on Q2 and the year and probably more acutely, just how we realize some of the price increases Due to the nature of some of the usage components of the business as well as the month to month components of the business is that The majority of it is felt at the time of the price increase, not over a 12 month period. So I think That's what I would say probably skewing your view of impact on Q3 and the rest of the year Versus more acutely in Q2. And just to reiterate the timing, historically, we've done pricing and packaging changes the In the June timeframe, before COVID, it was earlier in the year, and we pulled that in a couple of months this year into April, Just from a timing perspective.

Speaker 4

Got it. And then so appreciate the color. I guess the follow-up here. Again, like to see the beat in Q2 and then the obvious raise when I look at the calendar 2023 guide. Your EBITDA, if I look at just the pure dollars, the raise on EBITDA is ahead of the dollar raise we're seeing on revenues.

Speaker 4

And I just wanted to get a better sense, is the company is it improved cost discipline? Can you help us frame out, I guess, Where these I don't know if you want to turn on incremental savings or postponing on certain projects. How do we think about that EBITDA guide for calendar 2023 just because again the dollar volume raised on EBITDA guide is north of the raise that we're seeing on revenue and trying to determine where that's coming from in the model.

Speaker 3

Yes. Thanks, Mike. I'll be in touch there.

Speaker 5

Go ahead,

Speaker 4

John. Yes. I was going

Speaker 6

to say, Tim, I can start and then you can cover it in the back. And good morning, Mike. Strategically or I'd say philosophically, we're continuing to lean in. So to your question on, are we stopping or slowing back, I'd say no. In particular, we continue to focus on the R and D advancements.

Speaker 6

Hopefully, during the prepared remarks, you could hear or feel the momentum we're making on the product side. We're going to continue to lean in there. But that being said, we've now been public for 2 years and we had to do a lot at the beginning in

Speaker 3

sales and marketing to build that brand.

Speaker 6

And we've To build that brand and we've we're able to establish that brand and now we're looking a little bit more in sales and marketing and seeing, hey, what is efficient and what is not efficient. In every company, you probably have your lowest decile of spend in sales and marketing. So we're taking a little bit of a harder look of areas in sales and marketing that are not generating the best return, but we're continuing to lean in on revenue generating headcount and in R and D.

Speaker 4

Awesome. Thanks for the color, John, and thank you again for the comments, Tim as well.

Speaker 1

I'll turn it

Speaker 4

over to my colleagues. Appreciate it.

Operator

Our next question comes from Matt Hedberg with RBC. Your line is open.

Speaker 7

Great. Thanks guys for my questions as well. Congrats for me as well. John, I want to start with you. You said something at the start of your prepared remarks that found really the question.

Speaker 7

The MSPs are starting to move up larger into the enterprise. I think this has been a trend that's been kind of ongoing, but you brought it up here. And I'm just sort of curious, what do you think is ultimately driving that? Because that could certainly be a really big long term bullish trend for sort of the actual achievable TAM that you guys are going after.

Speaker 6

Sure. Yes. Thanks. It's a great question. Look, Tim and I have been in the space for 10 years.

Speaker 6

And in those 10 years, we're seeing TAM increased by an X and Y dimension,

Speaker 4

the Right.

Speaker 6

And the x dimension, if you will, Matt, is 10 years ago, MSPs were focusing on help desk. They were maybe dipping their toe in security. They really weren't necessarily helping on BI and some of this other stuff. Now we're seeing MSPs fully helping out with the help desk bits, but also a bunch of other bits like security, compliance, risk management, backup and disaster recovery. So they're doing a lot more for SMEs than they did 10 years ago.

Speaker 6

They're really showing up as that trusted partner. That's adding to our TAM because it's adding service area, so to speak. But the other dimension that you're calling out is they are going up stream. When we started, when I was in Scott in this business 10 years ago, on average MSPs were servicing SMEs There were about 50 employees on down. That's not true anymore.

Speaker 6

MSPs are helping out Fortune 1,000 companies. And there's two reasons for that. Number 1, we're seeing labor shortages in IT overall. So if you're a CIO or a VP of IT at 1,000 company and you're looking at all the work that you need to get done. You can now look at an MSP because the industry has grown up, they become more mature, tools or enterprise grade and leverage an MSP at a much more cost effective way so that your team can now go do something else, maybe a little bit more strategic.

Speaker 6

That's why we called out that Patch Management example in the prepared remarks. So we're seeing because of labor shortages, IT professionals are leveraging the MSP. That's number 1. The second reason is what I was talking about before in that surface area. MSPs Can now help out on the security front, the disaster recovery front.

Speaker 6

The industry has matured. The tools have gotten bigger. I'd like to think we have a good amount of help in there allowing these MSPs scale. And MSPs are now we have MSPs that are $1,000,000,000 in revenue. And so they're able now with their maturity level to service these bigger companies.

Speaker 6

So for us, We're getting the benefit of this X and Y expansion on our TAM, so to speak, and the MSPs are as well as they continue to go upstream. It's a bigger client. It's a better recurring revenue stream for them and they're able to charge for services that a Fortune 1,000 company or a mid market company can afford.

Speaker 7

That's really good to hear. I mean, it certainly feels like there's a long term benefit for that. And then Tim, for you, I had a question on the price increase as well. Obviously, it was star. It's a substantial Q2 beat.

Operator

I'm just sort

Speaker 7

of curious, when you built your Q2 guidance, how much did you sort of contemplate for a potential the benefit visavis the 4% benefit that you called out in your prepared remarks. Was it more than what you kind of thought? Or just sort of kind of curious on kind

Speaker 4

of the components of the beat. Yes.

Speaker 3

I would say we took a conservative approach to our Q2 guidance. I would say generally came in a little bit higher than we had probably baked into The Q2 guide, but I would say it was more lending to just a general conservative approach to guidance for the quarter.

Operator

We now turn to Jason Ader with William Blair. Your line is open.

Speaker 5

Just wanted to get a sense for how macro might be changing at all or maybe not, maybe it's the same as it's been. But we'd love just some color commentary What type of impact you're still seeing from macro? Is it new projects? Is it new customers? Just sort of a cautiousness, I guess, is pervading the economy right now.

Speaker 5

But Is this something that is noticeable? Do you feel like it's trending one way or the other? Just any comments on macro would be helpful.

Speaker 6

Good morning, Jason, and great question. Look, we take a look at demand and look at the macro trends and evaluate the question. From a short term and long term on a couple of different fronts, right, in a couple of different dimensions. Number 1, on our sales and marketing teams and what is their success rate as it relates to A, new customers and B, new SKUs. And so on that front, I would say things are performing Better than last year, and I'd say in all geographies.

Speaker 6

Europe has been a little bit softer, but by all accounts, whether it be Asia Pac, EMEA or North America. We're still seeing demand in our sales performance better than last year. So that's good. So the demand there is strong in particular for our data protection and our security offerings. The second way we look at demand and what's going on at the health of the MSP market is, are our SSPs adding small, medium enterprises.

Speaker 6

And what we've been telling you folks in the last couple of quarters is that's been, I'd say, moderate or moderating. Part of that is because MSPs can reach their both their revenue goal and their profit goal by expanding services and not necessarily adding a bunch of customers because they too are having a little bit of a labor shortage. So We're monitoring that. I'd say it's been consistent to what we've been seeing in other quarters. We'd love to see it a little bit stronger and having MSPs continue to add small, medium enterprises, But I'd say it's been consistent.

Speaker 5

Got you. Okay. So If we fast forward a few quarters a year or whatever and MSPs are adding more new customers, You review that as a tailwind.

Speaker 2

That's right. That's correct.

Speaker 5

Yes. Okay. All right. And then I guess the other question I had just on this pricing change. Tim, can you just give us a little more detail on the comments that you talked about in terms of having more of an immediate impact?

Speaker 5

I wasn't quite clear on why that would be.

Speaker 3

Yes. Just for customers from a contractual standpoint that are either usage based 2. Or in a month to month nature, is a good portion of just our business model. And I think we touched on that in the past, but the More the realization of that in real time versus over a 12 month period for A good portion of the business and that timing is just what drove That more acute impact to Q2. But generally on the year over year, it's consistent annually.

Speaker 3

So outside of that timing, star. We gave color last call in this call on the impact there of about a point to a point and a half of impact on the year. I think if you just look at it annually, it kind of stresses out the timing and the immediate impact nature.

Speaker 5

Is that fairly typical? I mean, do you normally have a 1 to 1.5 point tailwind from price changes?

Speaker 3

I would say no. That's the impact on 2023 compared to what we've done historically. Pricing and packaging changes are always Part of our equation, generally the impact is last week we leaned in a little bit more Due to some of the product enhancements we've made over the past 12 months as well as some of the inflationary environment that we've seen out there for 2023.

Speaker 5

Got you. Got you. Okay. And then last question just on customer priorities for you John. Do you feel like those are changing at all relative to, I don't know, 6 to 12 months ago?

Speaker 5

Obviously, security top of mind for everybody, Disaster recovery, but I don't know, is it like work from home, is that becoming sort of Less front and center just because everyone's already doing it, and there's other priorities that are bubbling up. Just any comments there would be helpful. Sure.

Speaker 6

I'd say it's sharpening. The work from home the noise or focus in the MSP, I'd say, is definitely lowered, especially we're coming out of the COVID quarters. That's definitely not, I would say, the In their top 5 right now. Really what we're seeing a lot is around compliance and how MSPs can help their customers be compliant with whatever governing agency or regulatory board that might be specific to their industry or their government and every market is a little bit different. So we're seeing MSPs looking To ask for our help, to make sure that they are compliant, number 1.

Speaker 6

But then number 2, to make sure that, that their customers can be reply. And that lands squarely with the different security offerings, with more of the advanced security offerings and the data protection pieces, right? So I'd say security a couple of years ago, and by the way, for us, this is a tailwind. Security was more around what the SME or the MSP's risk Tolerance was compliance goes from more like a land of gray to more of a binary 1 or 0 type of game. You either are compliant or you're not.

Speaker 6

And for those small medium enterprises that must be compliant in order for them to conduct business, they need to up level their security, hygiene and the layers of security around that, which is driving the MSPs to focus on helping them and be that trusted partner there. So that's top of mind. M and A in the MSP industry has been steady. I've not seen it really uptick. It's been consistent.

Speaker 6

And that's also a good positive sign for us as the MSPs continue to consolidate. They get larger, they're healthier, and they're able to go up market as well.

Operator

Our next question comes from Keith Bachman with Bank of Montreal. Your line is open.

Speaker 8

Hi, thank you. I had just a couple. On a broader basis, as you think about ongoing portfolio diversification of your offering. How are you thinking about the build versus partner scenario? Or how are investors should be thinking about the level of IP that you'll add through organic development versus the partner track versus even M and A.

Speaker 8

If you could just and how do you see that diversification unfolding over the next couple

Speaker 1

of years? In other words,

Speaker 8

You have a very robust offering, but how does that how do you think that expands over the next few years?

Speaker 6

Sure. Good morning, Keith, and great question. And just for the audience, just as a quick reminder, what Keith Who's touching on is core to our some of our product strategy. So here at Enable, we build a significant amount of the IP ourselves. But in a couple of different areas, we choose to partner with enterprise grade companies, Integrate that technology into our platform because we believe it's a better together experience for the MSP to do their jobs effectively and efficiently, and we'll go from there.

Speaker 6

And of course, the 3rd leg is M and A. And so, look, Keith, I think you know from our earlier We're very thoughtful as to what path we want we'd like to go through. A lot of times it has to do with the competitive landscape and the type of solution, right? So we've chosen with EDR as an example to partner with SentinelOne. Why?

Speaker 6

Well, that to be the best and to make sure that we have the best offering for our MSPs, we would need to have a level of R and D and research in development that doesn't necessarily fit our profile. And we believe through the partnership with SentinelOne, we can honor our mission and give our MSPs the best security. And what we do there is we integrate it into our remote monitoring platform and now MSPs can monitor, manage and secure in one dashboard in a very efficient way with policy. So wherever we can get that, what I call that quad win, a win for the small medium enterprise, a win for the MSP, a win for the, that partner, in this case, SentinelOne, and And when for enable, we do that. And a lot of times we look at what would be the long term level of R and D investment that we would need to make sure that we're competitive, that we're leading in the space and not lagging in the space.

Speaker 6

Looking ahead, security, depending on where we are in security is usually a a good vector where we'll either look to use an enterprise partner in OEM or potentially Look to acquire if it fits the profile. Where we typically build is where it's in our core DNA around monitoring it. And we talked about Azure Resource Management. We talked about our Apple capabilities. We'll be talking more about our cloud management capabilities in the future.

Speaker 6

That's core to our DNA and we'll continue to deliver the IP there. So it continues to be a 3 pronged approach as you outlined and I'd say that's the right strategy 2 because we're always putting the goal of the MSP first and each one of them have an opportunity and it's all about bringing to market something that the MSPs can leverage an integrated platform using our RMM as that cornerstone.

Speaker 8

Okay, great. Thank you. And then just one clarification for me. I Want to go back to the pricing. What percent of your contracts are month to month versus something longer?

Speaker 8

Because I'm just a little surprised that there wouldn't be a carryover benefit at least for the next couple 4 quarters on

Speaker 3

pricing. Hey, Keith. Yes, I would say about 2 thirds are a combination of usage or month to month Across the business. So it's a good portion and that point to a point and a half of impact is driven through The other third kind of coming to fruition over the course of the next 12 months.

Speaker 8

Okay, great. Many thanks.

Speaker 3

Yes.

Operator

This concludes our Q and A. I want to hand back to John Padayuca, CEO, for any closing remarks.

Speaker 6

Thank you, operator. Yes, sure. Just on behalf of all 1500 Enableites across the world, thank you for your ongoing interest in Enable and looking forward to talking to you in about a quarter's time.

Operator

Ladies and gentlemen, this call has now concluded. We'd like to thank you for your participation. You may now disconnect your

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Earnings Conference Call
N-able Q2 2023
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