Hello, and welcome to the N-able Fourth Quarter and Full Year 2023 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to Griffin Gyr, Investor Relations Manager. The floor is yours. Please go ahead.

Thanks, operator. And welcome, everyone to N-able's fourth quarter 2023 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 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. Copies are available from the SEC or on our Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures on today's call. Unless otherwise specified, when we refer to financial measures, we will be referring to non-GAAP financial measures. A reconciliation of certain GAAP to non-GAAP financial measures discussed on today's call is available in our earnings press release on our Investor Relations website. And now I will turn the call over to John.

Thank you, Griffin, and welcome to everyone joining us on the call. Today, I want to discuss our 2023 result, N-able'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 fourth quarter and fiscal year '23. Fourth quarter revenue grew in constant currency, 11% year-over-year. And full year 2023 revenue grew 14% in constant currency. Our adjusted EBITDA in the fourth quarter was $39.2 million, reflecting a 36% margin and $143.4 million 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. On the product front, we increased the depth and breadth of our offerings. The launch of N-able MDR in late Q4 and widened the cybersecurity services market to both N-able 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. 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,…

Thank you, John, and thank you all for joining us today. Our strong fourth quarter 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. Now I'll review our fourth quarter and full year 2023 results. Total revenue in the fourth quarter was $108.4 million, representing 13% year-over-year growth or 11% on a constant currency basis. Subscription revenue was $106.1 million, 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 $2.3 million, 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. 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 $421.9 million, representing year-over-year growth of 13.5% on both a reported and constant currency basis. Subscription revenue was $412.1 million, 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…

Thanks, Tim. A year ago, we were faced with the 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 six years, all while increasing profit and cash flow meaningfully. We believe there was significant wind in our sales as we enter 2024 with the 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. 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 Instructions] The first question comes from Mike Cikos with Needham. Your line is open. Please go ahead.

Hi guys, thanks for taking the question here. We're looking to see if I could get a little bit more color as far as your outlook for calendar '24. And there's two dynamics here. I think both would probably be good for Tim, but John, feel free to chime in as well. 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 acquisitions? Like how do we think about those different pieces playing out over the course of '24? And then I just have a quick follow-up.

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 the kind of moving pieces to think about as you kind of unpack 2024. One part is on retention. So John touched on gross retention. We continue to see very steady retention at the -- from a dollar-based 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 seen 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 '24 versus '23. That grow-over is in the range probably 2 to 2.5 points year-over-year. 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.

Got it. And you already -- I'll rearchitect the second question 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 '23, which serves as a headwind to the '24 growth. I think the other question, I know that in the prepared remarks, John incited, let's say, gross retention expectations in calendar '24 to 86% versus the -- I think you guys just did 88% in calendar '23. 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? Is it really the device count? Or is there anything else there?

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.

Got it. Thank you. I'll turn it over to my colleagues.

Thanks Mike.

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

Great guys, thanks for taking my question. Maybe as a follow-up to Tim, you were talking about the price increase from last year, and I 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 just sort of wondering if there's anything embedded this year for additional price increases?

Matt, thanks for the question. Every year, we kind of strategically plan kind of pricing and 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, 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 April lens, but it's probably -- it's just not as impactful from a size perspective in '24 versus '23.

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.

Right. Correct. That's the right way to think about it.

Okay. 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, 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?

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 of a couple of key SKUs and really an opening of, I'd say, adjacent markets, we really ratcheted up that opportunity to $30-plus per device. And that's significant, right? And so 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 on 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 $0.5 million -- 0.5 million, excuse me, SMEs out there. And by giving them the opportunity in a platform way to leverage these multiple SKUs, helping them drive efficiency, helping them drive their top line. That's where our focus is. And by -- as a result, that will start driving that ASP per device up. And with 8 million devices, moving it even pennies or a dollar has a significant impact on our business.

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

Thanks, Ben.

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

Hi. Many thanks. I want to offer congratulations. The results look pretty solid in what is sort of a challenging area in 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? And Paolo, the other night, sort of through 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 raise 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 -- 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 unit?

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

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 Rubriks and Cohesity? Or is that just -- are they targeting the larger customers, 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.

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 in new customer acquisition. And we win there. So we don't necessarily bump into the Cohesity or Rubrik so much of the world. There was 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. But historically, where we see a lot of competition are companies like a [Veeam 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 required appliance. Ours is directly to the cloud. The algorithm that we have in Cove really drives a better TCO. Up to 5x to 6x less storage, up to 5x to 6x less time required for technicians to backup because we use this TrueDelta technology, where we're taking a snapshot of the image and then we're only really updating and pushing through the cloud changes on 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 technician's time. It also allows us to price the offering at a disruptive bit. So the technology is ahead. 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.

Excellent. Any comments on how that business is growing?

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

Okay. Many thanks.

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

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?

Sure. Thanks for the question. With MDR, when we survey our MSPs and small shops or large shops, there's always two areas of demand that pop up. One is cloud management. The second is cybersecurity services. 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. And so that's where MDR really comes into play. So we're seeing it as probably the number one or two 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 millions of dollars, and you might not have the personnel to do so. Or you can partner or augment and leverage technology like the N-able 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 or making sure that their customers are secure and running their businesses. 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 a really good market in earlier this quarter. And so far so good. The pipeline has been growing. The demand, the story is resonating, the technology. It is 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.

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, I guess, potential for right 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 the installed base?

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 N-able 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 pull, 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. 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.

Very helpful clarity, thank you for that. And thanks for taking the question.

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

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?

Sure. Jason, 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 go into that low 20s to 30s, it gives us a little bit more play for the bundling and allowing us to present really for an LTV for the MSP. 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 so that we can get our endpoint security and data protection SKU one 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. The expansion allows us a little bit more freedom on 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.

Got you. Okay. So you didn't exactly answer my question, but I think I get it. I mean it's -- is it fair to say that there actually has been some broader sort of market pressure on 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?

Yes. So. No, no, no. It's a 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. 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 prize really is. Is the price the, we'll call it, $2 to $3 on the monitoring and management node, or is the prize on the $30 on the entire estate 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. No, we're not.

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 first couple of months of this year versus, let's call it, the last three months of 2023? Demand-wise, anything to call out?

Yes. I mean demand in Q4 was strong and 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. 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 -- the new product offerings kind of coming into the fold and 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.

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?

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 in the next quarter from a revenue perspective.

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 '23. Is there a plan -- or is there expectation that it will be higher as a percentage of revenue in '24? And just again, any of the things we should be thinking about as we build out our models?

Yes. I think I'd 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 '24 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. And we're looking at a couple of things to kind of optimize that from a tax as well as just a working capital perspective as we get into -- as we get through 2024 here. So I think there's 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.

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?

I would not expect that to impact free cash flow. But 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 additional deferred revenue.

So there's no deferred revenue impact from that.

Yes, there won't be deferred revenue impact there.

All right. Thank you.

Thanks Jason.

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