N-able Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 8 speakers on the call.

Operator

Hello and welcome to the Enable 4th Quarter and Full Year 2023 Earnings Call. My name is Elliot, and I'll be coordinating your call today.

Operator

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

Speaker 1

Thanks, operator, and welcome everyone to Enable's 4th quarter 2023 earnings call. With me today are John Falajuca, 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 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 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, and welcome to everyone joining us on the call. Today, I want to discuss our 2023 results, Enable's strategy for meeting the evolving needs of the MSP market we serve and key components of our 2024 operating plan. Let's start with our results. We delivered strong performance in the 4th quarter and fiscal year 2023. 4th quarter revenue grew in constant currency 11% year over year and full year 2023 revenue grew 14% in constant currency.

Speaker 2

Our adjusted EBITDA in the 4th quarter was $39,200,000 reflecting a 36% margin and $143,400,000 for the full year, reflecting a 34% margin. Year over year, we expanded our annual adjusted EBITDA margin by over 300 basis points and unlevered free cash flow margin by over 400 basis points. We are driving profitable growth. We also made solid progress on initiatives across the company, laying the groundwork for what we believe will be a transformative 2024. And now I'll share some highlights from 2023.

Speaker 2

On the product front, we increased the depth and breadth of our offerings. The launch of Enable MDR in late Q4 widened the cybersecurity services market to both Enable and our customers. This paves the way for our partners to augment their teams and provide a differentiated level of security service. In RMM, we delivered analytics, Apple Management, AI generated script automation and other critical functional upgrades empowering IT technicians to better manage a broader scope of IT assets. We also delivered a host of enhancements to Cove, our cutting edge data protection offering, adding Teams coverage to our M365 backup and expanding our draft capabilities including enhancing standby image.

Speaker 2

Standby image helps our partners recover faster and more predictably so they can offer higher service levels to their customers, further differentiating Cove in the market. As a validation point, Cove was recently crowned a champion in the Canals managed backup and disaster recovery leadership matrix, heralding a change of guard in this space. Legacy vendors of the past, Cove is the future. Collectively, these the future. Collectively, these efforts drove a sharp expansion in our cross sell opportunity in the second half of twenty twenty three.

Speaker 2

Across our product portfolio, Enable's average monthly per device revenue opportunity is currently over $30 up from the low 20s in the beginning of 2022. With over 8,000,000 devices under management, the cross sell opportunity now sits at well over $2,000,000,000 We believe growing and filling our storefront with increasingly robust purpose built products is a winning strategy. In 2023, we delivered on this mission and in 2024, we'll begin to realize the opportunity this white space creates. Product innovation added fuel to our powerful go to market and partner success engines. In 2023, we hosted our main customer event in Power and dozens of global events including roadshows, business transformation sessions, peer groups and head nerd office hours.

Speaker 2

In total, we engaged thousands of our partners at these live events, enabling them to fully maximize their investment and achieve their goals. This partnered approach within the MSP community is crucial to our fabric and sets us apart from our competitors. Our customer win in the Q4 drives home how these touch points translate to customer value. Through active relationship management, an account executive uncovered an existing MSP's desire to grow the security operations center business. This MSP attended one of our business transformation events focused on building a security service.

Speaker 2

And even though the MSP had an existing MDR solution in place, the customer signed a multi SKU, multi year deal with us, including MDR for approximately $240,000 of ARR. Our product enhancements and brand momentum also had a real impact on prospective customers. Our 2023 new customer revenue cohort was the highest in 6 years. And given the snowball nature of our growth model, we believe this bodes well for future expansion opportunities. Despite an uncertain macro environment in 2023, MSPs chose to start and expand their relationship with Enable.

Speaker 2

To recap an exciting year, we expanded our white space opportunity, enhanced our product capabilities and deepened our presence in the MSP community, all while driving profitable growth. Let's now switch gears and look at the MSP market as it stands today, our plans for the future and our strategy for helping our MSP partners meet evolving SME needs. I'll start with key insights from our MSP Horizons report, a future focused piece of research we conducted with Canalys, a leading channel analyst firm. Packed with learnings from hundreds of MSPs across the globe, one highlight from the MSP horizon is the durability of the MSP market. 97% of MSP surveyed believe they will grow their managed services revenue this year, with roughly 2 thirds expecting double digit growth in 2024.

Speaker 2

Persistent tailwinds drive these forecasts. Rising IT costs, increasing security threats, intensifying compliance standards, staffing headaches and staying ahead of the fast changing technology landscape create considerable challenges for SMEs who are trying to manage their IT operations. MSPs provide the help and critical expertise SMEs need. With these durable forces powering demand, we steadfastly believe and enable strategic positioning as a provider of purpose built software to MSPs. There is an abundance of opportunity.

Speaker 2

While the market is strong, MSPs also face challenges. Their SME customers continue to operate tight budgets. This tighter environment heightens MSPs need for proven solutions that grow their top line and protect their bottom line. Enable empowers both. Our security, data protection and RMM solutions are integral components of MSP's offerings, driving the top line revenue.

Speaker 2

Our software solutions are also scalable, unlike labor, and our platform approach drives consolidation of disparate point solutions. This improves technician efficiency and profitability, helping MSPs protect and grow their bottom line. We enable MSPs to play both offense and defense. The MSPs Horizon's report also showed the areas in which MSPs are looking to differentiate their offerings to accelerate growth. Cloud Infrastructure Management and Managed Security ranked as top priorities.

Speaker 2

I'll now double click into each. MSP's desire for cloud management reflects a simple reality. Businesses are running their operations in hybrid environments with 63% of SME workloads anticipated to be run-in the public cloud in 2024. So MSPs need tools that can operate in the cloud as well as physical networks, servers and devices. Enable has excellent answers for this hybrid world.

Speaker 2

Our security solutions are industry leading and delivered seamlessly to the cloud. Cove, our data protection solution is also delivered in the cloud and protects both on prem and cloud environments. And critically, in monitoring and management, we recently introduced marketing leading market leading innovation with the launch of Cloud Commander. Cloud Commander solves a simple problem statement for MSPs. Navigating the cloud is a headache.

Speaker 2

The current paradigm forces MSPs to operate disjointed administrative portals across multiple Microsoft Clouds. This is time consuming, manually intensive and the stake prone. Cloud Commander leapfrogs this approach, allowing MSPs to navigate the cloud through a single console. Our solution empowers IT technicians to manage workloads, onboard and offboard users and apply access and security policies to users and devices with point and click ease. This is a clear win for the MSP.

Speaker 2

Eliminating dashboard sprawl generates better technician efficiency. Cloud and on premise capabilities expand MSP service capacity And we believe combining Cloud Commander's cloud management capabilities with our historic strength in device management is a leap forward for Enable and the MSPs we serve. Security is also top of mind. Increased attack velocity, the pace of innovation by threat adversaries and growing compliance standards have elevated the security discussion from the IT department to the C suite. The intensifying threat landscape has also eroded the line between SecOps and ITOps.

Speaker 2

Small and medium businesses do not want silos. They want protection. We've listened to the needs of the market and our product suite expansion in 2023 was concentrated in the security category highlighted by MDR. So zooming out momentarily, we feel great about our positioning. We play in a large growing market with durable secular tailwinds.

Speaker 2

Our offerings align with the business priorities of our customers and we are bringing products to market that align with market demand. This brings us to 2024. We have an ambitious plan guided by the following objectives. First, empowering MSPs with leading security and data protection solutions that give themselves and their SMB clients the peace of mind they deserve. 2nd, driving rapid innovation into our RMM platforms, enabling MSPs to better manage hybrid digital environments at scale.

Speaker 2

And third, doubling down on our customer engagement model, delivering a differentiated level of service to the MSP community. Let's start with our customer engagement. Today, we realize approximately $4 per device per month of our $30 plus white space opportunity. In 2024, we are focused on driving that number higher. With this in mind, our go to market teams are employing more sophisticated carrying and bespoke customer pathways, while engaging with our customers at in market events where we

Speaker 3

have seen high ROI.

Speaker 2

We have also seen continued opportunities to facilitate engagement and positive customer outcomes through our recently launched customer platform, which over 20,000 IT technicians have used since its inception last year. Bundled multi SKU offerings and longer term contracts are another area of opportunity. This flexibility holds mutual benefit for both Enable and our MSPs. Driving the success of our deep security suite is another 2024 focus point. We believe MDR is key to this initiative.

Speaker 2

The rising threat environment elevates the need for higher protection levels and adding MDR to our stack firmly cements Enable as a vendor of choice in security, unlocking a new growth avenue. In the past, we generally landed customers on RMM and our proverbial snowball would grow over time as MSPs added SKUs and rolled out our software across their SME customers. MDR fundamentally changed this equation. It is a powerful solution, offering a new entryway to enable, bolstering our new customer acquisition engine. It also significantly expands our cross sell opportunity with a per device price point several times higher than with RMA.

Speaker 2

In short, MDR creates more snowballs at larger sizes. Our optimism is underscored by the deep pain point MDR meets. Specifically, SME demand for enhanced security services is considerable, but providing these services generally requires a substantial staffing. This leads to unfavorable unit economics, particularly for smaller MSPs. A recent $30,000 ARR deal illustrates how Enable can solve this problem.

Speaker 2

And MSP told us he was seeing strong client demand for security services. But as the only person running his business, he didn't have the time or resources to deliver the intensive protection services requested. By utilizing external security personnel to enable MDR, the MSP was able to deliver the security outcomes his clients desired, while also achieving profitable growth for his own business. We believe we can profitably replicate the success at scale and provide a tech enabled staff augmentation pathway for MSPs, which will allow them to land additional customers, expand their scope of service and sleep easier at night. We see particularly strong opportunity to expand our LTV at the low end of the market where MDR tends to be more of a greenfield opportunity for MSPs.

Speaker 2

Cove also aligns with companies' need to be secure. Implementing mechanisms to stop the breach is critical, but not sufficient. Cove acted as a stalwart fail safe related to quickly restore data in case of a breach. In 2024, we are energized by the prospect of continuing to take market share in this fast growing space. Our ambitious roadmap aims to enhance Cove's ease of use through improved integrations with popular PSA systems, broaden the scope of IT environments where Cove can restore data and further ensure backup copies are clean and safe.

Speaker 2

Cove also enjoys up to 60% of the total cost of ownership compared to well known competitors. And we continue to develop Cove with an eye on maintaining our pricing advantage. Over half of our MSPs use Cove, supporting our view that great economics and strong capabilities are a winning value proposition. When an MSP needs to protect data, Cove is the answer. Lastly, in 2024, we plan to take additional steps to modernize our RMM platforms, provide MSPs the ability to connect to 3rd party software in a more secure and automated way via APIs and bring innovation to MSPs in the form of Cloud Commander and other hybrid focused solutions.

Speaker 2

With hybrid devices, operating systems, cloud environments and workforce playability making SME environments even messier, We believe our roadmap and solutions will resonate and enable our MSPs to manage the increasingly digital SME. With clear customer use cases and a path to value insight, we are relentlessly focused on continuing the modernization of our RMM platforms. Have covered a lot of ground today. And while Tim will go into more detail, I want to outline what all this means for our 2024 financials. Looking ahead to 2024, our assessment of the demand environment reflects strong growth from a resilient market, tempered by a tight operating environment for SMEs and MSPs.

Speaker 2

We expect full year gross retention in line with 4th quarter results near 86%, continued healthy contribution from new customers and accelerated cross selling of our growing product suite. However, we also expect that SME budgetary constraints will lead to slower device additions, which will have a moderating impact on our overall growth this year. Net net, we expect to operate in line with broader MSP market growth of low double digits in 2024, while investing and executing with rigor position ourselves for growth acceleration in the mid to long term. And with that, I'll turn the call over to our CFO, Tim O'Brien to discuss our financial results and outlook. And then I'll circle back for some closing remarks.

Speaker 2

Tim?

Speaker 3

Thank you, John, and thank you all for joining us today. Our strong Q4 and full year results are a testament to our compelling value proposition, business model and resilient market. We advanced our product roadmaps, expanded our cross sell opportunity and drove profitable growth, expanding our annual adjusted EBITDA margin by over 300 basis points year over year. 2023 was an excellent step forward on our goal of driving a sustained Rule of 50 company substantiating the power of our model. The progress we made in 2023 is a solid foundation for us to build on in 2024 and beyond.

Speaker 3

Now I'll review our Q4 and full year 2023 results. Total revenue in the Q4 was $108,400,000 representing 13% year over year growth or 11% on a constant currency basis. Subscription revenue was $106,100,000 representing approximately 14% year over year growth or 12% on a constant currency basis. Other revenue, which primarily represents maintenance revenue from our discontinued perpetual license model, was $2,300,000 down 1% year over year. We ended the quarter with 2,196 partners contributing $50,000 or more of ARR, which is up approximately 16% year over year.

Speaker 3

Partners with over $50,000 of ARR now represent 56% of our total ARR, up from 51% a year ago. Dollar based net revenue retention, which is calculated on a trailing 12 month basis, was approximately 110% on both a reported and constant currency basis. For the full year, we finished 2023 ahead of our outlook with total revenue of $421,900,000 representing year over year growth of 13.5% on both a reported and constant currency basis.

Speaker 2

Subscription revenue was $412,100,000

Speaker 3

representing approximately 98% of total revenue and growing approximately 14% year over year on both a reported and 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. 4th quarter adjusted EBITDA was $39,200,000 up approximately 26% year over year and coming in well ahead of the high end of our outlook, representing a 36.2% adjusted EBITDA margin. Full year 2023 adjusted EBITDA was $143,400,000 up approximately 25% year over year, representing an adjusted EBITDA margin of 34%.

Speaker 3

4th quarter gross margin was 84.5% compared to 85% in the Q4 of 2022. Full year 2023 gross margin was 84.6% compared to 85.2% in 2022. Unlevered free cash flow was $102,300,000 in 2023 $34,600,000 in the 4th quarter. 2023 unlevered free cash flow grew 37% year over year. CapEx was $22,300,000 inclusive of $8,600,000 of capitalized software development costs or 5.3 percent of revenue for the full year.

Speaker 3

CapEx was $5,200,000 inclusive of $1,900,000 of capitalized software development costs or 4.8 percent of revenue in the 4th quarter. Non GAAP earnings per share was $0.11 in the 4th quarter based on 186,000,000 weighted average diluted shares and $0.37 for the full year based on 186,000,000 weighted average diluted shares. We ended the year with $153,000,000 of cash and equivalents and had an outstanding loan principal balance of $342,100,000 representing net leverage of approximately 1.3 times based on trailing 12 month EBITDA. Approximately 46% of our revenue was outside of North America in the quarter and the full year. Before turning to our 2024 outlook, I will give commentary on our Q4 and full year results.

Speaker 3

4th quarter revenue came in above the high end of our guidance range and was attributable to continued strong demand for our products coupled with positive FX impact relative to expectations. Adjusted EBITDA also exceeded expectations. Key drivers of this profit outperformance were the flow through of the revenue beat to the bottom line and continued strong cost management across the P and L. This brings us to our Q1 and full year 2024 guidance. There are several points to consider regarding the building blocks of our guidance for the year.

Speaker 3

First, our guidance assumes FX rates of 1.07 for the euro and 1.25 for the pound for the remainder of 2024. Given that nearly half of our revenue is generated outside of North America, I want to update the guidelines around the impact of FX movements on revenue. As a proxy, every point of the euro is approximately $1,100,000 of annual revenue impact, while every point on the pound is about $375,000 of annual revenue impact for 2024. 2nd, our revenue guidance reflects our assessment of a stable but cost conscious environment. We see encouraging demand indicators for our software solutions, buoyed by enduring market tailwinds and our expanded product suite.

Speaker 3

We are excited about the cross sell opportunity that exists within our current customer base inclusive of the new product additions we have brought to market. That said, we expect to continue to observe tightened budgetary conditions at the SME level, which we believe will result in slower growth in the rate of SME device additions. As SME device growth helps feed our model, we expect this component of our growth algorithm to continue to be muted. 3rd, our revenue guidance reflects our planned 2024 contract pricing and packaging changes and the grow over headwind from our higher than typical changes in 2023 given the inflationary environment. Regarding expenses and profit, our guidance demonstrates a continued balanced approach.

Speaker 3

We believe it is important to maintain a steady hand and fund initiatives to drive business growth in 2024 and beyond. We are investing and operating with a growing TAM in mind. These propelling forces are balanced by our desire to align cost with growth. As we've stated consistently, we aim to operate within a Rule of 50 framework. On the whole, we believe our 2024 operating plan positions us to advance initiatives necessary to achieve future growth acceleration, while also delivering profit levels that align with our goal of driving towards a sustainable Rule of 50 profile for the long term.

Speaker 3

Now I'll provide our financial outlook for the Q1 and full year 2024. Q1 2024, we expect total revenue in the range of $111,000,000 to $111,500,000 representing approximately 11% to 12% year over year growth on both a reported and constant currency basis. We expect 1st quarter adjusted EBITDA in the range of $37,500,000 to $38,000,000 representing approximately 34% margin. For the full year of 2024, we expect total revenue of $460,000,000 to $465,000,000 representing 9% to 10% year over year growth or 9% to 11% growth on a constant currency basis. We expect full year adjusted EBITDA in the range of $158,000,000 to $162,000,000 representing an approximately 34% to 35% margin.

Speaker 3

For the full year 2024, we expect CapEx, which includes capitalized software development costs to be approximately 5% of revenue and adjusted EBITDA conversion to unlevered free cash flow to be approximately 67%. As a reminder, our debt is floating and currently fixed to SOFR. In 2024, we anticipate approximately $30,000,000 in interest expense for the full year, which assumes an effective interest rate of approximately 8%. We expect total weighted average diluted shares outstanding of approximately 187,000,000 to 188,000,000 for the Q1 and approximately $188,000,000 to $189,000,000 for the full year. Finally, we expect our non GAAP tax rate to be approximately 28% to 29% in both the Q1 and the full year.

Speaker 3

Now I'll hand it back over to John for closing remarks. John?

Speaker 2

Thanks, Tim. A year ago, we were faced with a rising inflationary market and uncertain economic conditions. In 2023, we believe our model proved to be resilient, increasing net retention and landing the most promising cohort of customers in the past 6 years, all while increasing profits and cash flow meaningfully. We believe there is significant wind in our sales as we enter 2024. With a clear strategy, focused operating plan and exciting market prospects, our commitment to delivering critical IT solutions for MSPs and SMEs across the globe is resolute.

Speaker 2

We look forward to a transformative 2024 and are determined to deliver for our customers and stakeholders. And with that, we will open up the line for questions. Operator?

Operator

Thank The first question comes from Mike Sicos with Needham. Your line is open. Please go ahead.

Speaker 4

Hey, guys. Thanks for taking the question here. I was looking to see if I could get a little bit more color as far as your outlook for calendar 2024. And there's 2 dynamics here. I think both would probably be good for Tim, but John, feel free to chime in as well.

Speaker 4

Tim, the first I'm trying to think about the growth algorithm here. I know you guys are calling out that muted device count, But is there a way to think about what the net retention is that you guys are assuming? And let's say, ballpark figures, if you're assuming, I don't know, 110 on a constant currency basis, what's the composition of that? Is it 7 to 8 points from this cross sell, maybe a point from device count and then another point above the new, I guess, NRR coming from new customer acquisition? Like how do we think about those different pieces playing out over the course of 2024?

Speaker 4

And then I just have a quick follow-up.

Speaker 3

Yes, absolutely, Mike. Thanks for the question. Overall, our 2024 guide philosophy is unchanged. We continue to guide prudently and responsibly accounting for a bunch of different range of outcomes. But we touched on a couple of other kind of moving pieces to think about as you kind of unpack 2024.

Speaker 3

One part is on retention. So John touched on gross retention. We continue to see very steady retention at the from a dollar base perspective at the MSP level, where we've seen some impact and that's more touching on that device trend that you mentioned and we also mentioned is where we've some impact there more at the SME level. And then I also touched on kind of the grow over impact from a pricing and packaging standpoint in 2024 versus 2023. That grow over is in the range by 2 to 2.5 points year over year.

Speaker 3

And then as you think about the growth in net retention, so some impact on the gross retention due to that device growth at the SME level. We're expecting very steady cross sell and expansion sales across the portfolio. And one of the themes of that we touched on is how we've expanded the cross sell opportunity that exists within the base with some of the new offerings. That's a big focus area for us as we've entered 2024 here. And we're expecting to perform at a higher level on that aspect of the growth algorithm throughout the course of 2024.

Speaker 4

Got it. And you already I'll re architect the second question just because I was going to ask that grow over impact. So I'm happy you're citing that 2 to 2.5 point contribution at calendar 2023, which serves as a headwind to the 20 24 growth. I think the other question, I know that in the prepared remarks, John had cited, let's say, gross retention expectations in calendar 2024 of 86% versus the I think you guys just did 88% in calendar 2023. So what is it that's weighing on that gross retention that we're expecting that to decline 2 points on a year over year basis?

Speaker 4

Is it really the device count or is there anything else there?

Speaker 3

No, it's mostly there and I'll double back on kind of where we're seeing it. We're seeing very steady dollar based retention with our MSPs in total. It's more of atrophy at the SME level. So I think it's more macro driven from what's going on at the SME more broadly, and that is in our model where we see it, from a device expansion perspective.

Speaker 4

Got it. Thank you. I'll turn it over

Speaker 2

to my colleagues. Thanks, Mike.

Operator

We'll now turn to Matt Hedberg with RBC Capital Markets. Your line is open. Please go ahead.

Speaker 3

Great, guys. Thanks for taking

Speaker 5

my questions. Maybe as a follow-up to Tim, you were talking about the price increase from last year and appreciate that color. I'm just sort of curious, are there any sort of pricing increases that have been planned for this year? Or because I know last year was a little bigger than normal, but sort of wondering if there's anything embedded this year for additional price increases?

Speaker 3

Hey, Matt. Thanks for the question. Every year we kind of strategically plan kind of pricing packaging changes based on a number of different factors on value we brought to market from roadmap execution perspective, competition as well as kind of the inflationary environment. So annually, we always plan some form of pricing and packaging changes. So we do have that in 2024.

Speaker 3

The size compared to what we did in 2023 is kind of where I spoke to that impact year over year. So we are doing something in the same time frame as 2023 in the April, lens, but it's probably it's just not as impactful from a size perspective in 2024 versus 2023.

Speaker 5

So maybe just a quick one. So I think you said 2 to maybe 2.5 points. That's sort of net of this year's price increase too. So that's sort of like would be inclusive of this year plus last year's?

Speaker 2

Correct.

Speaker 5

Okay.

Speaker 2

Okay.

Speaker 3

That's the right way to think about it, yes. And then

Speaker 5

okay, got it. Very clear. And then John, understanding your guidance or I guess for Tim either, understanding your guidance includes expectations for slower device counts in 2024. Can you rank the opportunities to accelerate growth beyond that initial target? You went through a number of them on the call.

Speaker 5

It feels like cross sell is big, MDR could be big. But just sort of wondering, how do you think about like ranking those opportunities?

Speaker 2

Sure. The what we really achieved in 2023 was a pretty material uptick in our white space opportunity that we created, right. As I mentioned in the prepared remarks, not too long ago, we were in the mid-20s or low-20s per device. And now with the addition to a couple of key SKUs and really an opening of, I'd say, adjacent markets, we've really ratcheted up that opportunity to $30 plus per device. And that's significant, right?

Speaker 2

And so what we'll see and what we're really focusing on is the ability to begin to realize that white space opportunity from a couple of different ways. And the increase in the white space opportunity also allows us now to go to market with a couple of more creative bundled type of packages that will help, not just on the large end of the MSP market, but in the small side. And we're starting to see small indicators of success in the early days from that. So I'd say by far and away the number one opportunity here is for us to begin to realize that enormous white space opportunity that is in our base. We have 25,000 MSPs and they're servicing well over $500,000 SMEs out there.

Speaker 2

And by giving them the opportunity in a platform way to leverage these multiple SKUs, helping them drive efficiency, helping them result, that will start driving that ASP per device up. And with 8,000,000 devices moving it even pennies or dollar has a significant impact on our business.

Speaker 4

Got it. Thanks a lot. Best of luck, guys.

Speaker 2

Thanks. Thanks, Matt. We now

Operator

turn to Keith Bachman with Bank of Montreal. Your line is open. Please go ahead.

Speaker 6

Hi, many thanks. And I want to offer congratulations. The results look pretty solid in what is sort of a challenging area and security I think broadly speaking, which leads me to my first question is I understand the pricing commentary. I actually want to go in a different direction. What is the risk that you'll need to take prices lower on a like for like basis?

Speaker 6

And Paolo, the other night, sort of threw cold water on the entire security market, including endpoint. And I understand Palo is an enterprise player and you're just the opposite, but certainly raised concerns about pricing being more aggressive across, A, the spectrum of customers and B, a number of different security areas, including endpoint. And so just wanted to understand,

Speaker 5

how are you thinking about the risk on a like for like basis of having to be more aggressive in pricing? Or do you not see that a risk within the SMB community?

Speaker 2

Great question. And I will not tend to be an expert on the Apollo results. But from my understanding and listening to Nikesh, he was clear, the demand for security and security services remains quite strong and quite robust. And my understanding, it was he more moving his business more toward platform play as opposed to a point solution play. Well, we're already a platform play.

Speaker 2

And so it's the combination of those different offerings and not a point solution that gives us the strength in our packaging to our customers, right? And it also provides a technical, but also an economic moat around that offering. And so as an example, what we're giving our MSPs is the ability to monitor and manage and provide endpoint security offerings in one platform and one view so they can manage their businesses effectively. It's that combination and really that's why we exist. We really exist to allow our MSPs to monitor, manage and secure in a highly effective way.

Speaker 2

And that provides that again that economic and technical moat. So we're mindful of what's going on in the market, but we believe that the value that we bring in this combination, this better together monitoring and management and security is a differentiator that allows us to price in a way that is very profitable for our MSPs. And we know that our MSPs and their growth algorithm are driving a lot of top line and bottom line results via this combination of monitoring and management and security. So we're mindful of it. We're always keeping an eye on what's going on in the market, but it's that killer combination that we believe gives us that moat and some of that protection.

Speaker 6

Okay. Let me I'm not sure demand is robust across the spectrum, but we'll see how that plays out. But I wanted to transition to Cove for a second. And maybe if you could just address the competitive landscape there, how you guys are competing in Cove, how you're winning. Do you ever see in your market segment the rubrics and Cohesities or is that just are they targeting the larger customers?

Speaker 6

But just a little bit about kind of growth rates, competitive advantage, disadvantages, opportunities, that would be great. And that's it for me. Many thanks.

Speaker 2

Sure. So with our data protection offering and just a quick history lesson. Historically, we were really going to market with our backup offerings as a cross sell motion. And then in 2022, we really rebranded our Cove offering and because of the investment we made and the expansion of that offering with our data protection offering. So we began to go to market not just as a cross sell but also a new customer acquisition.

Speaker 2

And we win there. So we don't necessarily bump into the cohesities of Rubrik's so much of the world. There's a little bit more enterprise. Cove does win at the mid market. We have a team that's dedicated in selling our data protection offering into the mid market.

Speaker 2

But historically, where we see a lot of competition are companies like Aveeam or Datto, potentially even like an Accent or a StorageCraft. And we win there really because the product and technology is differentiated. We don't require an appliance. A lot of the other folks do require an appliance. Ours is directly to the cloud.

Speaker 2

The algorithm that we have in Cove really drives a better TCO up to 5 to 6 times less storage, up to 5 to 6 times less time required for technicians to back up because we use this true Delta technology where we're taking a snapshot of the image and then we're only really updating and pushing through the cloud changes on the either the virtual machine or the server or the workstation or the M365 a bit. And so that technology is a differentiator. Again, it saves the technicians time. It also allows us to price the offering at a disruptive bit. So the technology is ahead.

Speaker 2

The pricing is disruptive. And the validation points are there. As I mentioned in the prepared remarks with Canalys, we've now we're now in that category of leading the data protection offering, in particular for the mid market and definitely for the MSP. So it's a very much a powerful story with the technology and the price point and the overall TCO for our customers is just disruptive.

Speaker 6

Excellent. Any comments on how that business is growing? Sure.

Speaker 2

The demand remains quite strong. I'd say overall Cove is growing at a faster clip than Enable as a whole.

Speaker 6

Okay, perfect. Many thanks.

Operator

Our next question comes from Brian Essex with JPMorgan. Your line is open. Please go ahead.

Speaker 5

Hi, good morning and thank you for taking the question. I was wondering if you could talk a little bit about the launch of MDR. Is there do you see a substantial amount of pent up demand? How has the traction been so far? And kind of what are the expectations given the lift in price for contribution in 2024?

Speaker 2

Sure. Thanks for the question. With MDR, when we survey our MSPs in small shops or large shops, there's always 2 areas of demand that pop up. 1 is cloud management. The second is cybersecurity services.

Speaker 2

And what we're seeing with MSPs is the need to service their customers. The reason why security demand remains high has a lot to do with compliance and regulatory bodies, right? And so now small medium enterprises are looking to making sure that they're compliant with whatever regulatory body that they're servicing, whether it be a government or a particular vertical. And they're turning to MSPs to help them be compliant. And a lot of that requires a deeper level of protection and detection and response.

Speaker 2

And so that's where MDR really comes into play. So we're seeing it as probably the number 1 or 2 area of demand for managed service providers. The interesting thing or the exciting thing in my view is that that's not just for the large MSPs, it's also for the small MSPs. And if you're faced with this demand from your customers, you have two choices. You can go build a SOC, a security operations center, which is going to cost you 1,000,000 of dollars and you might not have the personnel to do so or you can partner augment and leverage technology like the Enable MDR offering and allow our teams and the technology to do some of that work for you and help you focus on servicing your customer while making sure that their customers are secure and running their businesses.

Speaker 2

So it's early days. You asked about we've only really gotten to market in January. We did a couple of pre things in Q4. But we've started really to market in earlier this quarter and so far so good. The pipeline has been growing, the demand, the story is resonating, the technology.

Speaker 1

It is

Speaker 2

in that spirit of making technology simple for our MSPs and they appreciate the transparency in the technology. So early days and look to give you more updates in the future on how that offering is tracking.

Speaker 5

Excellent. Thank you for that. And then maybe to follow-up on your response, I think it was the last question about the white space within the MSPs. How should we think about where the points of friction are for incremental adoption? Is it MSPs penetrating the Cove installed base and where there's already potentially some, I guess potential for ripe adoption with existing customers or is it this long tail of unpenetrated customers that they're focusing on penetrating and how are their incentives aligned with your ability for incremental penetration into their installed base?

Speaker 2

So the beauty of our model and what I'd want to remind everyone is that we're a sell to but also a sell through. And what I mean by that is whether it be endpoint security or data protection, our MSPs sometimes are faced with in their customer base managing 2, 3, 6, 10 different backup offerings, right? And so one of the big bits that we preach here at Enable is how our MSPs can standardize on a particular technology stack because that drives a bunch of efficiency from a software cost, but also from a labor cost. And that's typically the long pole, right, is that they'll need to go through some of their customers and standardize and flip their backup offering or flip their endpoint security offering. And I'd say our largest, more mature, the upper decile MSPs, maybe the upper quartile MSPs, do that a little bit more of an ease in some of our smaller shops.

Speaker 2

The smaller shops are a little reticent to go do that, and that takes a lot more time. So in the majority of the logos and that bottom 75% quartile, it takes time for them to standardize through their base. And that so we could win an account, we can win with Cove, but it only might reflect 5% of the MSPs estate and getting that MSP to push through to their entire SMB base to realize the efficiencies gained, just it's a little bit more of a journey, it's a little bit of education, and it requires the MSP to push through. So I'd say that's what takes the longest time. And what we really try to help them do is to automate that and push through that standardization process.

Speaker 5

Very helpful clarity. Thank you for that and thanks for taking the question.

Operator

Our final question today comes from Jason Ader with William Blair. Your line is open. Please go ahead.

Speaker 7

Yes, thanks. Good morning, guys. I want to just ask on the device commentary. I know you talked about pressure on device additions, but wondering if there's any pricing pressure in terms of the RMM kind of per device cost? I know that there's been competitors out there that have tried to use RMM as kind of a loss leader and just whether that's having an impact as well?

Speaker 2

Sure. Hey, A. J, thanks for the call and thanks for the question. That's the beauty of the expansion of the white space opportunity, Jason. So with the ability now from again, from going to that low-20s to the 30s, it gives us a little bit more play for the bundling and allowing us to present really for an LTV for the MSP.

Speaker 2

I know a lot of folks have always asked, hey, can you disclose your RMM revenue versus your backup revenue? As a business, as a leadership team, we really focus on the LTV of the customer. And so if that means incentivizing them on a particular SKU like RMM, that we can get our endpoint security and data protection SKU 1 from a customer point of view. A bigger white space opportunity allows us a little bit more freedom and a little bit more creative bundling. So that's one point.

Speaker 2

The expansion allows us a little bit more freedom in the bundling. The second point we mentioned on what we're focused on 2024 is around some of these committed contracts. And what we're doing that's somewhat different than we did last year is we're really giving MSPs a choice and we're saying, hey, look, in exchange for a committed contract, there's a potential to get better economic terms for you, but in exchange we want that long term commitment. And what we're finding is the MSPs prefer they prefer the choice there and it's helping them lock in the economics long term, which will give us much better visibility into our customer retention and allow us to focus on that white space opportunity. So that's what we're looking to do as it relates to some of the initiatives there for 2024.

Speaker 7

Got you. Okay. So you didn't exactly answer my question, but I think I get it. I mean, is it fair to say that there actually has been some broader sort of market pressure on R and M pricing, but that you're not too worried about it just because of the other opportunities that you talked about and the ability to kind of leverage your position there.

Speaker 2

Yes. So no, no, no, it's fair follow-up. We're winning in our RMM category. We're winning our Q4 is one of our strongest quarters as it relates to bookings and that NCA, that new customer acquisition and monitoring and management. So we're winning there.

Speaker 2

I don't really see a challenge on the price points for our RMM nodes. It's more of the flexibility as to what the price really is. Is the price the, we'll call it $2 to $3 on the monitoring and management node or is the price on the $30 on the entire state when you add the data protection and security. So we're trying to look at it a little bit more holistically. So I'm not seeing really a change in the market and an increase in competitive pricing on the node.

Speaker 2

No, we're not.

Speaker 7

Okay. Okay, good. And then just, Tim, on the January, February, we're almost done with February now. I know you gave guidance for Q1, but any kind of commentary color commentary on whether there's any changes in the 1st couple of months of this year versus, let's call it, the last 3 months of 2023? Demand wise,

Speaker 2

is there

Speaker 7

anything to call out?

Speaker 3

Yes. I mean, demand in Q4 was strong. It was our best booking month, our best booking quarter of the year. December was our best booking month of the year. And demand in pipe has been very solid and very steady as we've started 2024.

Speaker 3

I think some of that's on the heels of that white space expansion as well that John spoke to with some of the new product offerings beginning to build the pipeline around those with Cloud Commander and MDR and the combination of being able to put together more bundling and more multi SKU deals, I would say, has been a net positive to kind of pipe creation as we've entered 2024. But Q4 demand was strong and that's been very steady as we've gotten into the beginning parts of 2024 here.

Speaker 7

Okay. So growth rate in Q4 was the lowest of the year in terms of revenue on a year over year basis. It was 11%. But you're saying that if you looked at bookings, would it be a different story?

Speaker 3

Yes. Yes. And as a reminder, the impact of in quarter bookings on in quarter revenue is very, very minimal. A lot of the revenue generated from bookings shows up the next quarter from a revenue perspective.

Speaker 7

Got you. Okay. And then last question for me. Just on the free cash flow for 2024, what are some of the puts and takes there? It looks like you were about 16% free cash flow margin in 2023.

Speaker 7

Is there a plan to or is there expectation that it will be higher as a percentage of revenue in 2024? And just again, any of the things we should be thinking about as we build out our models?

Speaker 3

Yes. I think I expect free cash flow margin to increase similar to how kind of EBITDA margin is increasing. We continue to focus on optimizing and converting EBITDA to free cash flow at a higher rate. One of the wildcards for free cash flow for 2024 will be just what happens with the interest rate environment. But from an unlevered free cash flow standpoint, we've been able to drive pretty significant growth on that front, improved conversion.

Speaker 3

And we're looking at a couple of things to kind of optimize that from tax as well as just working capital perspective as we get into as we get through 2024 here. So I think there is room to improve, from an unlevered free cash flow margin as well as a free cash flow margin perspective as we kind of chart our way, through 2024. But focus is on continuing to grow that.

Speaker 7

If you get more committed contracts kind of longer term, does that help free cash flow because you have more deferred revenue? How does that work?

Speaker 3

I would not expect that to impact free cash flow. The model from like a monthly billing perspective, I would not expect to change via the long term commitment. The long term commitment will still drive a monthly billing model. So I wouldn't expect big swings in there's

Speaker 7

no deferred revenue impact from that?

Speaker 3

Yes, there won't be deferred revenue impact there. Okay. All right. Thank you.

Speaker 2

Thanks, Jason.

Operator

Ladies and gentlemen, this concludes our Q and A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.

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Earnings Conference Call
N-able Q4 2023
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