Good morning. and a warm welcome to the N-able's Third Quarter 2022 Earnings Call. My name is Candice, and I will be your moderator for today's call. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to pass the conference over to our host, Jeff Magoma with N-able. Please go ahead.

Thank you, Candice, and welcome everyone to N-able's third quarter 2022 earnings call. With me today are John Pagliuca, N-able'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.n-able.com. There you can 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 from SolarWinds 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 related to the spin-off transaction completed last year. Additional information concerning these statements and the risks and uncertainties associated with them is noted in today's earnings release and in our filings with the SEC. 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 the non-GAAP financial measures. A reconciliation of the non-GAAP financial measures discussed on today's call to their GAAP equivalents is available in our earnings press release on our Investor Relations website. And now, I will turn the call over to John.

Thanks, Jeff. And welcome everyone to our third quarter earnings call. Once again, our Q3 results exceeded the high end of our outlook, with revenue of $93.5 million, growing year-over-year by 13% on a constant currency basis. We believe, this demonstrates the success of our purpose-built, mission-critical platforms and the leverage of our multiproduct sales approach, as we generated particularly strong growth in our security offerings and Data Protection as a Service. We also exceeded the high end of our adjusted EBITDA forecast coming in at $28.9 million, representing a 31% EBITDA margin. We entered this year proudly declaring our rally cry of earned more fans and during the third quarter, we made exciting progress on a number of fronts. To start, we welcomed more than 450 partners and 35 sponsors to our Empower Partner Conference in Las Vegas at the beginning of October. This is the first time we were able to host this event in person in over two years, and it was truly inspiring to bring together many of our Elite and Super Elite customers, as well as some of the top industry leaders to discuss and debate industry trends, best practices and opportunities with this highly engaged global audience. We entitled the event Own the Cloud and spent time in over 80 workshops, demonstrations and presentations with partners exploring the MSP's role in monitoring, managing and securing cloud workloads and SaaS applications. Cloud-based IT spend by small and medium enterprises is expected to grow from $600 billion in 2022 to $1 trillion by 2027, which we believe, represents a significant macro tailwind. However, while our partners want to master the Cloud, they need help, and Empower gave them the chance to seek guidance both from us and from each other, from Azure Resource Management to Microsoft…

Thank you Tim. We believe we are seeing the fruit of the strategic initiatives we set in place since before our spin-off, with a set of product offerings and services that are purpose-built to drive MSP partner success. As I mentioned, we have recently adjusted our product group alignment to a GM model to accelerate growth and ensure we are best addressing the needs of our partners. The goal is to build efficiencies to drive our business forward successfully, be better positioned to support our partners and products and to earn more fans. At the end of the day, we make it our mission to do two things for our partners. First, is to bring them enterprise-grade software that will grow their revenue and wallet share with their customers. Second, it's to design our software and programs to help them scale, standardized to be more efficient, and drive up their profitability. Simply put, we are focused on both their top line and bottom line. Helping our partners navigate this macroeconomic environment, and come out on the other side stronger than ever turning headwinds into tailwinds. With that, if we don't have an opportunity to speak sooner, I wish you all a great rest of the year, and look forward to talking with you on our next call in February. Operator, we're now ready to open the line for questions.

Thank you. [Operator Instructions] So our first question comes from the line of Mike Cikos of Needham & Co. Your line is now open. Please go ahead.

Hey, guys, Thanks for taking the questions here. I wanted to circle up to make sure I'm understanding a couple of different moving pieces. And congratulations on the strong, I guess, cost discipline that you guys were able to demonstrate this quarter. First, with respect to the partners generating north of $50,000 ARR, can you give me that metric again? I think was it $1,786 that you guys had cited on the -- in the prepared remarks? Tim O’Brien : Yes, it was Mike.

Okay. And so can you help us understand, I guess, what you're seeing from the MSPs that we closed this number to back up on a sequential basis? And maybe for a historical perspective like -- did we see a decline during COVID, or what seems to be different this go around that's causing maybe some of that quarter-to-quarter step-down that we're looking at? Tim O’Brien : Yes, Mike happy to give some color there. It's really primarily FX related. If I currently adjust out the customers they're continuing to grow sequentially. The decline is really just due to adjustments in FX rates across the globe.

I see. Okay. Thank you for calling it out. That makes much more sense to me… Tim O’Brien : Yes, it was -- nothing has changed. I would say from a macro standpoint as it relates to customers over that $50,000 threshold it's still very healthy and John touched on a bunch of points around some of the MSP aggregators. And I would say there's a lot of strong momentum there and we're continuing to see success with our approach and strategy around that segment of the market.

And I do just want to firm up my understanding with respect to gross margins and the sales and marketing specifically so on the gross margins I know that you guys had cited new products has probably been a little bit of a drag this quarter versus a year ago. And I'm just trying to get for or a magnitude given you guys have had some newer product releases this year. I guess, where are we in scaling those newer products? And so should we expect that drag from new products to I guess atrophy in Q4 and beyond? And then the second question would be on the sales and marketing expense. I was surprised to see the downtick sequentially and just wanted to see is there anything specific this quarter that would have cause that quarter-to-quarter decline on the sales and marketing? Tim O’Brien : Yes, Mike happy to give color on both of those. On the gross margin front, you hit on new products that's I would say investment upfront for some things like the new Spinpanel offering as well as our tech services offerings as well. We had to get some infrastructure and some people built out prior to launching and leaning into the growth of those new products. So I would expect to get some scale on both of those fronts as we go through 2023. In the quarter as well, there's also FX pressure on -- on the gross margin line as well. If I frame it out it's about a third new products, a third FX and a third on some data center investments to help scalability in the future. And then on the sales and marketing front in terms of the sequential decline, I would say it's more seasonality with some of the marketing in the summer months as well as just timing there. And that -- a little bit of FX as well as rates came down there.

Okay. And just to clarify on that latter point I know you had said that some of it is timing, right? So should we expect I guess we're -- when I think about the timing of those expenses are you guys deferring some of those expenses to calendar 2023? Will it show up in Q4? Did it come out in Q2? Like again I just want to make sure I'm crystal clear on what closes the decline there. Tim O’Brien : Yes. The decline in Q3 was part seasonality also part cost management as we looked at some inefficient parts of our spend and tighten that up in Q3. I think you see that more in the -- as part of the profit beat in the quarter. But it's a combination of seasonality in Q3 for marketing spend as well as just I would say some tighter cost management.

Got it. Thank you very much. Yeah. Okay. Terrific. Thank you.

[Operator Instructions] Our next question comes from the line of Jason Ader of William Blair. Your line is now open. Please go ahead.

Yeah. Thanks. Hi, guys. Just a couple of questions for me. Just on the OpEx front, you talked about some tightening going on. Can you give us more specifics on where you are kind of tightening the belt?

Yes sure. Jason, it's John. So when we look at our spend, if we back up on OpEx right we continue to lean in as Tim mentioned in R&D in our products, right? We're a technology company. We'll continue to lean in and push that agenda forward. On sales and marketing, as you can imagine there are certain motions that are less - a lower ROI than others. And when we took a look at our marketing spend in Q3, there are certain motions that just have a much lower payback and a longer tail. And that's where we pulled back, and I'll give you some examples. So in a couple of like less than profitable geos in particular in some of the international emerging markets, where it's more about building brand and you're not seeing an immediate return, we pulled back on really some of what I'll call toppled funnel initiatives in some of those smaller markets as an example. The other thing, we looked at more of our high LTV products and leaned in there. That's why you see the uptick and the continued success in Cove, right? So we're getting a little bit more focused in geos. We're getting a little bit more focused in motions more that it's more middle of the funnel, and lower funnel and focusing on our high LTV bids, where historically we might have spent in some tools that had a lower LTV to kind of cap or payback period. We've been really focused on some of that. And the last bit overall, and you're probably seeing across the universe cross-sell where we're focusing more on our installed base and marketing and selling into our installed base. That has a higher win rate obviously and a lower cost to acquire and to grow those accounts. So we've shifted somewhat into making sure we can grow that customer base as customers in a recession lean in more to their existing vendors and not necessarily new vendors.

All right. Very helpful. Thanks. And then just John do you have a – can you give us a sense of how this period compares to sort of March, April, May, June of 2020? Is it similar, or is it fairly different?

I think, it's different at least from our perspective. So, and what we refer to as the COVID quarter, we saw MSPs leaning in heavy on security and data protection. And we saw them really stop adding new customers, because they had to focus on their customer base and secure them for the pandemic, which are MSPs that a job of doing and we are right there to help and support them. So what we saw there was that MSPs were very reluctant to shift our own platforms, and a slowdown on MCA. We're not seeing that drop off and anecdotally speaking Jason at Empower, when I was in a room with some of our super leads and asking them what they're seeing I think 75% of the room are not experiencing any split down. Remember, what the MSPs provide to their customers are mission-critical business-critical bit. And so what we're seeing is probably depending on the vertical MSPs that are focusing in the hospitality vertical or some retail are seeing a little bit more of a elongated sales cycle, but the other MSPs in fintech and healthcare and logistics and all these other areas they're not seeing a slowdown at all. So I would say, it's the demand on data protection and security are very similar and that they're both white hot in both periods but we're not seeing that slowdown in new customer acquisition – to the same extent we saw on pandemic.

Yeah. Okay. So it's kind of vertical specific of it. What about geos? Are you seeing divergence in demand across the geos?

Not really. In North America and EMEA and in Asia Pac, we're seeing strong year-over-year demand compared to last year. So, no I'm not seeing really any degradation or anything to call out geographically.

Perfect. And then one for, Tim, Tim what's the plan going forward on the debt? Tim O’Brien: Yeah. We've got about $345 million of debt. And I would say we're kind of holding that at this point. We paid out about 1% a year. We're looking at rates and our cash balance and determining how best to apply that cash, but at this point there's no change in our plan from a debt perspective even with the rising interest rates.

Okay. Thanks guys. Good luck.

Thanks, Jason.

Thank you. Our next question comes from Keith Bachman of BMO Capital Markets. Your line is now open. Please go ahead.

Hi. This is Adam on for Keith. So first, thanks for taking my question and congrats on the quarter, but so I was wondering if you can provide some more color on the macro headwinds you guys are seeing now in your business? I know you mentioned elongated sales cycles. But last quarter you called out the potential for lower device adds? Just wondering, if you're actually seeing that? And then going forward for next quarter do you expect that to continue? And then what's going on with down-selling churn rates as well?

Thanks Adam. This is John. So when I think about the industry and the way I communicate this to our MSP partners and here internally I often break it down between climate and weather, right? And the climate is quite strong, right? Those three tailwinds that we keep talking about cyber security the move to Cloud labor scarcity and that's probably counterintuitive are all tailwinds that continue to push and why we're seeing better demand and better growth than we did last year, right? So those are all the positives. And the reference to climate and weather I think we're mindful that it's somewhat cloudy or a little bit less clear in the macro environment. And where we're seeing that most -- I'd say, most notably is in device ads. I think at the macro level, it's well understood that PC shipments are flat year-over-year. That has an impact on the MSP environment that has an impact on our model to some extent. So that's probably that's part of the area there. We continue to see strong data protection and security offerings -- continue in that cross-sell. And we're also seeing a little bit of a slowdown where MSP is adding new customers and again that's a little bit more -- a little bit more vertical sensitive. And the anecdotes and stories the MSP share with me is that some of their end customers are just a little -- have a little bit of trepidation before they go and add or switch in MSP. So we're seeing a little bit of a slowdown for the MSPs adding new customers on their side. You had a second part of that question, but I -- yeah, it sound great.

Yeah.

Our retention rates continue to be strong. And in fact I'd say as a cohort overall improving. So we're seeing no degradation in retention rates.

Okay. That's helpful. And then I was just going to follow up with -- so for Q4 do you assume these trends continue at the current rate, or do you assume any degradation?

Yeah. I think our forecast suggests a level of prudent conservatism baked in. And we're mindful that there is a level of certain uncertainty there. So I think we really took a prudent kind of conservative approach. But there's nothing in the business that indicates any type of change in slower trajectory.

Right. Got it. Thank you. Very helpful.

Thank you. As there are no more questions registered at this time. I'd like to hand the conference call back over to John Pagliuca, for closing remarks.

Well, thank you all for joining us today for this third quarter earnings call. We look forward to talking to you in February. And we do appreciate your ongoing interest and investment in N-able. Thank you.

Ladies and gentlemen, that concludes today's conference call. Have a great day ahead. You may now disconnect your lines.