N-able Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 9 speakers on the call.

Operator

Hello, everyone, and welcome to the Enable Third Quarter 2024 Earnings Call. My name is Chach, and I'll be coordinating your call today.

Operator

After the presentation, there will be a Q and A session. I'd now like to hand over to your host, Griffin Geer, Investor Relations Manager, to begin. Please go ahead.

Speaker 1

Thanks, operator, and welcome, everyone, to Enable's Q3 2024 Earnings Call. With me today are John Faliecke, 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 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.

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 non GAAP financial measures discussed on today's call to their most directly comparable GAAP measures 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 everyone for joining us this morning. Today, I will discuss our Q3 results, Enable's strategy for driving short and long term success, and product and business highlights for the quarter. Starting with our 3rd quarter results. Revenue was $116,400,000 representing 8% year over year growth on a reported basis and 7% on a constant currency basis. Adjusted EBITDA was $44,800,000 representing an approximately 39% adjusted EBITDA margin.

Speaker 2

We once again exceeded our quarterly guidance. We are growing the business because our mission is on target. We strive to make MSPs and smallmedium sized businesses cyber resilient. Our IT management software ensures their systems are safe and functioning. Our data protection software creates a safety net they need to restore data in the event of data loss.

Speaker 2

And our security software protects their businesses from attackers. We manage, backup and secure. We believe we make them resilient and this resiliency matters. IT systems keep the world running and our software keeps IT systems running. Looking at the different layers of our cyber resiliency platform, industry demand is strongest for cloud data protection, followed by security, then IT management.

Speaker 2

We see this echoed in what underlies our results. In the quarter, our strongest tailwinds were in data protection. Demand for business continuity fuels this momentum. Businesses depend on protected data and functioning IT systems. When those systems fail or are compromised, the business faces a potential extinction event.

Speaker 2

The stakes are high and the risks are numerous. Our customers want a solution to this problem, a reliable way to restore their digital operation and minimize downtime in case of an outage, breach or data loss. They want resilience and Cove Data Protection answers the call. We are pleased to announce that Cove, which is once again our fastest growing product solution, is now also our largest recurring revenue product group. And the architecture is our differentiator.

Speaker 2

With our proven product market fit, disruptive technological moat and market growth rates for cloud backup projected to grow in the double digits, we see considerable opportunity to continue winning in this attractive category. We've also seen steady demand with our security suite. The depth and breadth of our suite creates compelling value for top tier end to end cyber resilience. Our protective offerings encompass EDR, endpoint antivirus, email protection, password management, patching, device monitoring, remote device take control and the tech enabled services. We don't just defend one entry point like the front door or window.

Speaker 2

We aim to protect the entire house. Our tech enabled human assisted managed detection and response services, MDR, which is powered by extended detection and response software known as XDR stands out within our security portfolio. Brought to life via our 3rd party partnership, the strength of these combined solutions is resonating as they distinctly solve pressing security challenges. 1st, XDR provides the ability to see and act broadly across the IT estate. This enables comprehensive risk mapping and focused remediation efforts.

Speaker 2

Without the ability to see and interact cleanly with the entire IT estate, technicians are playing a losing game of whack a mole. They are left trying to piece together where they have coverage gaps between their multi vendor, multi product software stacks and waste time struggling to manually correlate data and respond to events. Our XDR ingest data from the network, cloud, endpoints and users. This creates the complete and actionable insights technicians need. And second, the MDR feature provides human interpretation of security events without breaking the bank.

Speaker 2

The shortage of skilled cybersecurity labor has persistently been a major industry challenge. Even when the right human talent is found, it can be cost prohibitive to small and medium businesses. We address this by providing outsourced experts, which allows MSPs to augment their operations efficiently. This human element is particularly salient at the low end of the MSP market, where businesses often face the most significant challenges in profitably adding staff and where we have seen considerable greenfield opportunities. Empowering our MSPs with leading security solutions is one of the 3 fiscal year 2024 transformative strategic pillars.

Speaker 2

And with XDR and MDR representing one of our fastest growing SKUs at this stage of the development, we are delivering on this pillar. We also looked at fiscal year 2024 to transform the customer relationship and leverage industry trends to better position ourselves for the long term. While I'm pleased with the overall trajectory of this transformation, this initiative has also generated a near term headwind. As mentioned in our prior calls, we started offering customers long term contracts at the beginning of the year. Reception has been strong.

Speaker 2

Over 50% of our MRR is now under long term contract. The thesis behind the initiative is straightforward. We believe customers with long term commitments will build a stronger connection with Enable, especially as they benefit from our extensive and growing product portfolio and award winning customer support. This deeper relationship is expected to drive higher retention and expansion over time. Our belief is also supported by the simple fact that customers asked us to start offering longer term contracts as they wanted the predictability long term commitments would bring to their operations.

Speaker 2

We continue to have full conviction that this initiative is the right move. That said, customers have sought to optimize their estate for entering long term deals, placing short term pressure on our financials. As the bulk of the state optimization occurred in first half twenty twenty four, we expect this headwind to subside in second half twenty twenty five. Pricing is another discussion point. Largely due to the inflationary environment in 2023, we implemented higher than typical pricing changes, with 2024 price increases reflecting a more normalized state, growing comparisons in 2024 challenged relative to 2023.

Speaker 2

We expect both the state optimization and pricing headwinds to be transitory. Now let's take a step back and look at broader market trends to understand where Enable is placing its bets and why. We remain steadfast in our mission of providing top tier technology to small and medium sized enterprises with a focus on delivering these solutions through managed service providers with a heavy lean on cyber resilience that is baked into everything we do. With rising IT complexity pushing SMEs to use MSPs for IT support, we believe there's a significant opportunity for Enable. This opportunity is validated by market analyst firm Canals, who projects the MSU market to grow by at least 12% in 2024.

Speaker 2

We are also optimistically expanding within resellers and direct sales to SMEs. These are natural adjacencies where we see product market fit and alignment with existing go to market operations that will allow for efficient expansion. Simply put, we believe we are operating in large markets with robust tailwinds. This favorable backdrop gives us confidence in our positioning and investment strategy. Clicking in further, we see the strongest demand for solutions that enhance resiliency, namely security and data protection.

Speaker 2

We have strategically invested in these priority categories through Cove and our XDR partnership, positioning our customers and enable to grow. RMM also delivers resiliency and remains a core focus. Our award winning RMM solutions include a robust set of features to help fuel protection, including proven patch capabilities, monitoring built with security in mind and business continuity as a fundamental value proposition. Our RMM solutions also drive greater efficiencies into our customers' businesses. A consistent theme we've observed in our over 20 years of service to the MSP community is that the MSPs often struggle to achieve their profitability potential.

Speaker 2

One reason is that technicians, often the largest expense on the MSPs P and L, are burdened with managing multiple environments and software sprawl. This is difficult to do efficiently. Our multi tenant RMM platforms address this by streamlining technician workflows, improving labor efficiency and ultimately raising MSU profitability. Our investment in the Ecoverse, the ongoing transformation of RMMs into a next generation open ecosystem IT management platform aims to further these customer outcomes. With our high conviction that delivering resiliency and efficiency to our customers is a winning proposition, the Ecoverse stands alongside Cove and XDR as a foundational strategic investment that positions our customers and enable to grow.

Speaker 2

So bringing it all together, we believe that we are well positioned and that there is substantial market opportunity. And so we are placing clear strategic bets on top customer priorities. With that, let's look at the key execution we delivered in the Q3. From a product perspective, we made strides forward. As part of our open RMM platform strategy, we've expanded our API and data analytics capabilities.

Speaker 2

With new APIs, in September alone, we reached over 15,000,000 API calls across 25% of our in central SaaS customers. Our growing analytics capabilities now track over 9.50 unique attributes with data from over 4,000,000 devices and 1,000 monthly active users. These capabilities allow customers to collect and analyze data quickly with greater fidelity, allowing for faster insights, response and remediation. Also as part of our Ecoverse vision, we now have over a 1000000 devices activated with our new unified agent, enabling the collection of real time metrics for faster insight and remediation. Cove also delivered significant progress.

Speaker 2

We updated our data retention model to dramatically simplify the creation of data protection policies to allow customers to meet compliance requirements. We also made Microsoft 365 backup enhancements, including the ability to restore to an alternate user, boosting technician efficiency and compliance. Lastly, we implemented up to 30% better backup speeds and delivered key usability improvements. Another impressive list for the team and more benefit for our customers. We continue to turn complexity into simplicity for technicians.

Speaker 2

On the security front, we announced our global compliance initiative, including cybersecurity maturity model certification, and we achieved our SOC 2 audit, ensuring that service providers can operate in increasingly regulated federal civilian and federal defense supply chain. And to further enhance our focus on protecting user identities, we delivered robust encryption and our PaaS portal service protecting over 5,000,000 credentials that are stored and used by 74,000 users. The channel response to all this is encouraging. At our major distributor conference in Dubai, we shared our Ecoverse vision, significant product updates and channel commitments. The feedback was overwhelmingly positive with over 90% of our international channel revenue represented.

Speaker 2

A strong presence at in person events like this distributor conference is an important element of our highly effective go to market strategy, which has enabled us to penetrate the fragmented SME market, while maintaining adjusted EBITDA margins of over 30%. This quarter, we implemented strategic refinements as part of our ongoing mission to efficiently deliver world class software throughout the IT Services channel. One highlight is a further investment in our brand and market awareness. With resiliency as a top customer priority, we made targeted investments in Cove. Cove has demonstrated a right to win with solid conversion rates at each final stage, including strong performance and head to head product payoffs.

Speaker 2

With proof that we can capitalize on opportunities, we want to get more at bats. Our website is a vital tool for visibility and opportunity generation. So we significantly revamped the Cove section, ensuring the world knows exactly why 14,000 MSPs and 180,000 businesses trust Cove and why Cove might be the right business for them too. We're also refining our security positioning. While we are pleased with the security products, portfolio and penetration, we also see promising upsell opportunities within the category.

Speaker 2

Exploratory bundling concepts have been well received, and we are further exploring pricing and packaging changes to seize the security opportunity and fully realize enables true power in safeguarding customers. 2 customer wins in the quarter illustrate our success in executing our mission. In an effort to save time and money, a roughly 300 employee small business was looking to centralize its tech stack and move away from segregated tools and process. This internal IT customer purchased RMM, Cove and EDR and a $40,000 ARR deal, representing about $15 per device per month. With products built for small to medium enterprise use cases, a go to market strategy that efficiently capitalizes on this market and a partner success organization instructed to focus on their needs, this one is exactly the value we strive to deliver to SMEs everywhere.

Speaker 2

In another customer example, representing approximately $90,000 of ARR, an MSP cited our EcoBris open ecosystem as a deciding factor in signing a deal. Sliked 2 other ecosystem vendors and wanted to keep them as part of their IT stack. Our RMM had robust integrations with both of them, ensuring that they could run operations and workflows as desired, giving them the confidence to switch to enable RMM, AV and DNS. It is an honor to be trusted with these and thousands of other customers' IT management and security needs and through our open ecosystem contribute to the success of the global IT channel. To conclude, our model has continued to deliver growth and profit.

Speaker 2

We are executing on critical initiatives, and we are more focused than ever on building cyber resilience for MSPs and underserved small and medium sized businesses. Will now hand it over to Tim and circle back for closing remarks. Tim? Thank you, John, and thank you all for joining us today.

Speaker 3

As our results demonstrate, Enable continues to execute our strategy of delivering robust software to small and medium enterprises. Performance in data protection and security, strong MSP level retention and our highest ever year to date ARR from new customers give us confidence in our approach and provide a solid foundation for future growth. For our Q3 results, total revenue was $116,400,000 representing approximately 8% year over year growth on a reported basis and 7% on a constant currency basis. Subscription revenue was $115,000,000 representing approximately 9% year over year growth on a reported basis and 8% 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 $1,400,000 We ended the quarter with 2,275 partners contributing $50,000 or more of ARR, which is up approximately 7% year over year.

Speaker 3

Partners with over $50,000 of ARR now represent approximately 57% of our total ARR, up from approximately 55% a year ago. Dollar based net revenue retention, which is calculated on a trailing 12 month basis, was approximately 105% or 104% 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. 3rd quarter gross margin was 83.7% compared to 84.6% in the same period in 2023. 3rd quarter adjusted EBITDA was $44,800,000 up approximately 23% year over year, representing approximately 39% adjusted EBITDA margin.

Speaker 3

Unlevered free cash flow was $27,000,000 in the 3rd quarter. CapEx inclusive of $1,600,000 of capitalized software development costs was $5,300,000 or 4.6 percent of revenue. Non GAAP earnings per share was $0.13 in the quarter based on 188,000,000 weighted average diluted shares. We ended the quarter with approximately $174,000,000 of cash and an outstanding loan principal balance of approximately $340,000,000 representing net leverage of approximately one time. Approximately 47% of our revenue was outside of North America in the quarter.

Speaker 3

Before turning to our financial outlook, I will give commentary on our Q3 results. Revenue recognition in accordance with ASC 606 triggered by signing of long term contracts drove approximately 4 points of growth in the quarter. This positive impact flowed through to our adjusted EBITDA driving roughly 4 points of margin. As John mentioned, pricing and packaging changes compared to 2023 and estate optimization from our long term contract initiative acted as headwinds. These drove approximately 6% of negative impact in the Q3 of 2024 compared to the Q3 of 2023.

Speaker 3

As it relates to our previous guidance, we experienced a positive FX impact of approximately $1,300,000 relative to expectations. Turning to our financial outlook, our guidance accounts for the following elements. First, we are assuming FX rates of 1.07 for the euro and 1.28 for the pound for the remainder of 2024, along with updates to other currencies to more closely reflect the current rate environment. These updated rates drive approximately $300,000 of negative revenue impact for the Q4 relative to our FX assumptions during the August call. 2nd, we anticipate the net impact of revenue recognition in accordance with ASC 606 to be slightly negative to revenue and adjusted EBITDA in the Q4.

Speaker 3

We expect the impact of pricing and packaging headwinds and estate optimization to persist through the first half of twenty twenty five. With that in mind, for the Q4 of 2024, we expect total revenue in the range of $111,500,000 to $113,000,000 representing 3% to 4% year over year growth on a reported and constant currency basis. We expect 4th quarter adjusted EBITDA in the range of $38,000,000 to $38,500,000 representing an adjusted EBITDA margin of approximately 34%. For the full year of 2024, we now expect total revenue of $461,200,000 to $462,700,000 representing approximately 9% to 10% year over year growth on a reported basis and 9% growth on a constant currency basis. We are raising our adjusted EBITDA outlook and now expect full year adjusted EBITDA of $169,300,000 to $169,800,000 up approximately 18% year over year at the midpoint and representing an approximately 37% adjusted EBITDA margin.

Speaker 3

Our updated guidance reflects our moderated assumptions for customers entering long term contracts and the associated impact from ASC 606 revenue recognition. The impact from these updated assumptions is approximately $3,000,000 of negative impact relative to our expectations during the August call. We reiterate that CapEx, which includes capitalized software development costs, will be approximately 5% of total revenue for 2024. We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 62% for the full year. We expect total weighted average diluted shares outstanding of approximately $188,000,000 to $189,000,000 for the Q4 and $187,000,000 to $188,000,000 for the full year.

Speaker 3

Finally, we expect our non GAAP tax rate to be approximately 33% in the 4th quarter and 25% for the full year.

Speaker 2

Thanks, Tim. We made considerable progress in the quarter as we strive to deliver the resiliency and efficiency our partners need. We aim to continue to build on this progress and advance our position as a vendor of choice for small and medium sized enterprises and MSPs everywhere. And with that, operator, we'll turn it over to questions.

Operator

The first question today comes from Brian Essex from JPMorgan. Your line is now open.

Speaker 4

Hi, good morning and thank you for taking the question. Maybe John, I was wondering if you could start with what you're seeing from a macro perspective in your installed base. If I think about MSPs that are largely in the smaller end of the spectrum, are they able to maintain healthy business in this environment? Or are you seeing more consolidation with larger MSPs? And how does that affect your business?

Speaker 5

Thanks, Brian. Good morning and thanks for the question. On the macro side, we conducted a survey a little bit ago to a bunch of MSPs across North America for the most part. And resoundingly, the feedback was quite positive. The channel is quite healthy.

Speaker 5

The vast majority of MSPs are planning to grow. I think like in the 90% MSPs are planning to grow next year. And I think even the vast majority are planning to grow double digits. So the demand is there. Why is the demand there?

Speaker 5

They're seeing a lot more demand on the security front and the disaster recovery front. The other interesting dynamic here on MSPs are actually being pulled into larger enterprises as well. So this concept of co managed where if you're an IT director inside a mid market or even a Fortune 1,000 company, you're looking to augment your staff and we're seeing MSPs as they're getting more and more sophisticated going more there. So overall in the channel, we're finding a pretty healthy environment. Folks are planning on growing.

Speaker 5

They'll grow this year and they're planning on growing next year.

Speaker 2

Got it. That's helpful.

Speaker 4

Maybe to follow-up with Tim, on the cost side, nice cost rationalization, cost control this quarter, but particularly for sales and marketing and G and A that declined pretty materially year over year and sequentially, how sustainable is any cost rationalization there? And how should we think about the way that you're shifting the focus on investing in the business given the shifting growth rate?

Speaker 3

Yes, absolutely. I think the G

Speaker 5

and A spend is definitely sustainable. That's been an area that we've highlighted as the area that kind of had the most flex in the model historically. And then on the sales and marketing front, I think as we evolve and bring new things to market like that will ebb and flow a little bit. I think we've optimized that to the right level at more in a point in time. But I would expect us that to kind of grow in line with revenue as we look forward into 2025 and beyond.

Speaker 5

And we've obviously been investing on the R and D front from a product and roadmap perspective. And we've had some things come to market this year. We expect to bring things to market 2 to 3 things new to market on an annual basis. And we're starting to see some tailwinds there

Speaker 3

from

Speaker 5

some of the new offerings in 2024 and would expect that to be more material in 2025. Hey, Brian, just to add. Yes. If you think about the equation, the expand part is always going to be a more cost effective part for sales and marketing. So as Tim mentioned, we'll lean in on our R and D to bring more products to market.

Speaker 5

And with the strategy there that it feeds into the platform, it makes our customers stickier, but then that sales and marketing engine is much more efficient on the expand. So that's a little bit of the strategy there. We'll lean in R and D, add more products and then that expand motion is more cost effective, which will drive the EBITDA that we continue to enjoy.

Speaker 3

Yes. And Brian, just to note

Speaker 5

that the sales and marketing does include some capitalized commissions in Q3 versus this year versus last year. So that's part of the reduction year over year to the tune of about $1,000,000 or so.

Speaker 4

Very helpful.

Speaker 6

Thank you. I appreciate it. Yes.

Operator

Thank you. The next question is from Matthew Hedberg from RBC Capital Markets. Please go ahead.

Speaker 7

Hey, good morning, guys. This is Mike Richards here on for Matt Hedberg. Thanks for taking the question. I guess just my first one is a point of clarification. Just on the updated guidance and the moderated assumptions for the long term contracts, Is that you're expecting less customers to enter into these long term contracts than 90 days ago, so you're getting less of that upfront rev rec?

Speaker 7

Or are you seeing more optimizations than you saw 90 days ago when these customers are entering into these contracts?

Speaker 5

Thanks for the question. I'll give some color there. It's really related to customers entering contracts that are on premise in nature. So it's not a product of less people entering them. It's not a product of optimization.

Speaker 5

From what we guided last quarter, it's really around

Speaker 3

we convert new customers into these contracts and we convert existing customers

Speaker 5

in these contracts. On the new front, what we're seeing is a higher mix of customers going on to hosted and SaaS offerings versus on premise. So it's not that there's less people going into long term contracts. It's the mix is more on the SaaS front, which does not have any material impact on revenue. On the and then on the existing customer front, that's where we're seeing an expected conversion on the on premise bit to be lower than we had, packed into our guidance last quarter and that net effect we quantified at about $3,000,000

Speaker 6

quarter over quarter.

Speaker 7

Got it. Thank you. And then last quarter you called out 20% bookings growth. So I'm just curious if that momentum sort of continued into Q3 and like what you're seeing from a new business and expansion perspective? Thanks guys.

Speaker 5

Demand continues to be strong. The top of the funnel, the opportunities were up double digits year over year. Bookings were up in the teens year over year. So in Q3, it typically is a little bit of a seasonality slowdown just given the diverse customer base. We have a lot of as you know a lot of our customers are international.

Speaker 5

So we typically see it from a quarter over quarter basis a little bit of a slowdown, but that's typical with the summer months. But no, I'd say it's very much the same themes that you've been hearing from us. Data protection, security continue to be quite strong and we continue to see bookings growth in the at least in the teens and for Q3.

Speaker 7

Thanks

Speaker 2

guys. Thank you.

Operator

The next question is from Jason Ader from William Blair. Your line is now open.

Speaker 8

Yes, thanks. Good morning, guys. I guess just on the last or one of the previous questions. Can you just talk about the mix today in the business between on prem and SaaS? I guess I'm not super familiar with that distinction.

Speaker 8

I guess I assume that all of your business is basically monthly recurring SaaS revenue, but I guess that was wrong. Can you talk through the distinction there and the mix today and where it's standing, where it's going?

Speaker 5

Yes, sure, Jason. The business is primarily 100% monthly recurring revenue, but there is a mix of SaaS revenue and on premise revenue. The on premise revenue is about 15% of the overall business and that's been trending downward over time and we would expect it to trend downward over time as well, especially with the mix of where new customers are landing and some of the strategic product work that's going on within the business. We've historically disclosed that. It's in our Q and K.

Speaker 5

We disclosed point in time revenue versus overtime revenue. That's the distinction between on premise customers and SaaS customers. So you'll be able to kind of see the trend line there and the impact of the committed contracts there that we have from a rev rec perspective. Yes. So Jason, it's all subscription.

Speaker 5

It's just that if they're and they're if they're hosted or in our cloud environments or just completely SaaS, that's going to be just ratable. And if they're subscription and there but it's an on prem, in other words, the MSP has the software on their premise, then that's where the revenue gets a little bit more accelerated. And this is limited to our in central customer base, Our Cove data protection offering, our insight offerings, our security offerings, they're all 100 percent. SaaS and cloud based, the in central based is a percentage of those customers that are on prem. By the way, some of that's just a legacy bit.

Speaker 5

They've been on prem customers for 8, 10 years type of thing. Some of them have requirements that they prefer to be walled off and not necessarily in a hosted environment. And where I believe the fact that we're giving customers choice there actually allows a little bit of a better differentiation in the market and allows us to win in some of those environments where they might have customers that demand a little bit more of an on prem type of requirement or need type of thing.

Speaker 8

Okay. All right. That's clear. So then for the new customers, you talked about a higher mix of new customers basically going into SaaS, which is affecting your revenue, right? That's what you just talked about.

Speaker 8

Is that correct?

Speaker 5

Yes. Coupled with, I would say we expect to convert existing customers at a lower rate than we previously had assumed in Q4 as well on converting existing customers, more specifically on the on prem part of the equation.

Speaker 8

Got you. Okay. So is that a separate issue from the estate optimization? Just trying to understand, is that that seems like a separate issue from like the long term contract initiatives, which is impacting estate optimization?

Speaker 5

It is, yes. And I think the nuance there is what you see in our net retention rate. So the estate optimization impacts, net retention in a negative fashion, conversion or non conversion of customers into long term contracts, both hosted or sorry, both SaaS and on prem will not impact that. So as it does impact revenue, it won't impact net retention. And just for clarity, Jason, we're actually quite pleased that more and more of our customers are going to the cloud offerings.

Speaker 5

It's actually a proof point on all the things that we're delivering. And so in the prepared remarks, we talked about the Ecoverse and the modernization of the RMs and these the asset views that we have there, the analytics that we have there. Frankly, we're pushing more and more value to our cloud environments and the market is picking that up. So the fact that we're shifting and seeing more of our customers going toward our more modernized offering is more of a proof point that what we're doing is resonating in the marketplace. Our 2024 cohorts are the best they've been in 5 years, another proof point that what we're bringing to market is delivering.

Speaker 5

So I don't want anyone to take that the mix is a negative thing. In fact, this is what we're hoping to do. As we deliver more and more of our goodness from our engineering teams into those environments, we were expecting to see more and more of that shift in. It's frankly, it's a better it's an overall better experience for our customers. They don't have to maintain the server.

Speaker 5

It's a better TCO for them and it allows us to scale. What we're seeing in the market larger and larger MSPs is more private equity money coming into this industry from our customer base and we're seeing larger and larger companies merge. And when those companies now are managing 100,000 devices, they're looking for a solution that can scale. And what we've done with a lot of the microservice that we've done is we've effectively kind of delivered more of an infinite scale kind of model so that these larger MSPs now can pick our cloud offering with this ability to kind of scale in a way that might not have been done so easily. And we believe this will be a differentiator in the market as well because some of the legacy stuff that others have that might be still on prem, their servers may start to shake so to speak and don't have the level of scale that we have.

Speaker 5

So these are all overall good things and proof points and that what we're delivering is actually resonating as more and more of these customers are pushing to our cloud offering.

Speaker 8

Okay. And then just one final clarification. So just when you are seeing lower conversion to SaaS for existing customers than expected, that is a revenue headwind because SaaS has an uplift versus on prem. Is that the right way to think about the revenue headwind there?

Speaker 5

No, it's the inverse. The conversion of on prem customers is has the impact on revenue, and a lower conversion there is a product of the updated outlook.

Speaker 8

Lower conversion of on prem to SaaS?

Speaker 5

Lower conversion of on prem from month to month to long term contract.

Speaker 8

Got you. Okay. Thank you.

Operator

Thank you. The next question is from Mike Sicos from Needham. Please go

Speaker 6

ahead. Hey, thanks for taking the questions guys. I just had 2 on my side. And the first was just cleaning up my understanding a little bit off of Jason's question, but have you guys quantified or do you have handy what that upfront portion of the subscription revenue was for those on prem customers?

Speaker 3

Yes. We quantified in

Speaker 5

the prepared remarks. It was about 4 points of impact from a growth perspective on Q3, Mike. And the way to do that math is VR disclosure on point in time revenue versus overtime revenue, which is in the queue. I'm happy to point you guys there as a follow-up, if that's helpful.

Speaker 6

Okay. And then just

Speaker 3

And then for Q4 Yes,

Speaker 6

go ahead.

Speaker 5

For Q4, it's a slight headwind to our outlook from a growth perspective, where it was a tailwind in Q3. It was a tailwind in all three quarters of 24, and it's a slight headwind in Q4.

Speaker 6

Understood. Okay. And if I'm thinking about, let's say, state optimization or some of the pricing headwinds are seen as more transitory here, Are any of those headwinds expected to bleed into 2025 from where we sit today or does this kind of flush out over the course of the December quarter?

Speaker 5

Yes, I would expect that headwinds to persist through the first half of twenty twenty five. That was also in the prepared remarks. You might not be able to jump on. It's just a byproduct, right? So if they a lot of the optimization happened in the first half of twenty twenty four, So you just need that will just carry through for the following 12 months.

Speaker 5

So once we get into the that will dissipate as we get into the second half.

Speaker 6

Got it. Thank you, guys. I appreciate it.

Speaker 3

Thanks, Mike.

Operator

We currently have no further questions. So I'd like to hand back to John Pagliuca for closing remarks.

Speaker 5

Thank you all for joining us today and looking forward to providing you another update shortly. See you in a quarter.

Operator

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

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Earnings Conference Call
N-able Q3 2024
00:00 / 00:00