N-able, Inc. (NYSE:NABL) Q4 2022 Earnings Call Transcript

N-able, Inc. (NYSE:NABL) Q4 2022 Earnings Call Transcript February 26, 2023

Operator: Hello, and welcome to the N-able Fourth Quarter and Full-Year 2022 Earnings Call. My name is Elliot, and I’ll be coordinating your call today. I’d like to hand over to Griffin Gyr, Investor Relations lead. The floor is yours. Please go ahead.

Griffin Gyr: Thanks, operator, and welcome, everyone, to N-able’s fourth quarter and full-year 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.nable.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, 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 in July 2021. 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 also 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 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.

John Pagliuca: Thank you, Griffin, and thank you all for joining us today. As we close out our first full-year as a stand-alone company and welcome in the new year, I want to reflect on our accomplishments and tremendous progress we’ve made. We started 2022 with our rally cry, earned more fans, which is a broad-reaching aspiration that goes from our employees, who are the foundation of our success to our MSP partners, who are the primary focus of our business to industry stakeholders and investors. Through the solid execution of our strategy by our across the globe, we believe we are successfully delivering on this mission. We achieved strong financial results, executed important initiatives across all product categories, and enhanced our broader platform experience for our partners.

And we did all of this while laying the groundwork for future success. In the fourth quarter, we delivered strong profits, while simultaneously driving revenue growth, another clear proof point of the strength of our model and the robust demand for the mission-critical platforms and services we provide. In Q4, we exceeded the high-end of our top and bottom-line guidance ranges, delivering revenue of $95.8 million and adjusted EBITDA of $31.2 million, respectively. This equates to constant currency revenue growth of 13% and an adjusted EBITDA margin of 32.6%. And for the full-year, we achieved constant currency revenue growth of approximately 13% and an adjusted EBITDA margin of 30.9%. We are pleased to deliver these results amidst an uncertain macroeconomic environment.

Our MSP partners and their small and medium enterprise customers continue to deal with industry-specific headwinds of labor scarcity, increasing IT complexity in the move to the cloud, as well as the relentless growth of cybersecurity threats. Here at N-able, we believe we operate a resilient business model to deliver both growth and profit and provide core must-have software and services through an efficient platform experience and a genuinely partner-first approach. Our software is high in the IT priority stack, and customers have generally sought monitoring, data protection and security solutions regardless of the economic environment. We exist to make our partners more efficient, more effective and more secure or as we have said before, turning industry headwinds into tailwinds for both our MSP partners and for us.

With regards to labor scarcity, the IT Trade Group CompTIA in December 2022 reported that the U.S. unemployment rate for technology occupations in all sectors stood at 1.8%, roughly half the national average. The difficulty SMEs have in hiring talent is compounded by the fact that IT is getting more complex and more mission-critical to business operations. SMEs face application and vendors sprawl, network challenges of hybrid work environments and moving workloads to the cloud. And cybersecurity continues to drive spending as well. Analysis Mason predicts that SMB security spending via MSPs will grow from $25 billion in 2022 to $48 billion in 2027 at a CAGR of 14%. Together, these dynamics drive spending on managed services and software solutions.

And as we are a premier software provider to MSPs, these trends directly fuel our business. Gartner observes these same market trends. In their IT spending worldwide report from December 2022, Gartner predicts that in every industry, IT spending on services will grow more quickly than spending on internal IT capabilities. Our product strategy is focused on creating tools that enable MSPs to solve technology pain points for their SME customers simply and securely. And importantly, in 2022, we executed this mission. Starting with monitoring and management, we listened to the needs of our market and adjusted our strategy to take advantage of the unique segmentation opportunity we found in tiering our offerings. We launched N-sight, which is our all-in-one offering aimed at early growth MSPs that include three major components of our platform.

Our cloud-based RMM for monitoring and management, our N-able take control for remote support and MSP manager for professional services automation, plus our full suite of onboarding, support and community resources to help them build their businesses. As a testament to the success of N-sight, on a currency-neutral basis contribution from new N-sight customers was up approximately 30% in 2022, compared to 2021. We also delivered additional Apple management capabilities to the N-sight platform to align with the growth of Apple devices. To give you an example of the increased customer value of this offering, in the fourth quarter, a European MSP was looking for an RMM platform. Two critical customer criteria, which are to realize a short time to value, specifically that their technicians could be up and running quickly, and that the RMM tool could integrate cleanly with other software they use.

After a competitive bake-off, the customer felt N-sight was the best fit for their needs and signed a $50,000 ARR deal. While N-sight focuses on the smaller end of the market, we have also reinvigorated our push on N-central, our RMM offering aimed at seasoned, larger MSP partners. In 2022, we added features and functionality to N-central, including new Apple management capabilities. We have seen strong proof of the power of N-central’s orchestrate at scale, allowing MSPs to take on large workloads to manage devices, users and assets with a minimal amount of labor. We believe we lead the MSP market in enabling MSPs to manage Windows, Linux and Apple devices from one consolidated dashboard. As a result of our continued investment in growing our market leadership with N-central, our gross retention is up almost 2% year-over-year.

Our Cove Data Protection offering launched in 2022 has also made considerable strides. Cove, which combined our already successful backup solutions with innovations such as our standby image feature, our true Delta technology and Mac document backup is no longer the best kept secret in data protection. As a cloud-first, enterprise-grade and truly SaaS offering, Cove is fast being recognized as a leader with MSPs and is starting to make inroads in the corporate IT space as well. A deal we closed in the fourth quarter of 2022 demonstrates the efficacy of Cove. One partner, who is working with a mid-market enterprise that was about to begin migrating its Microsoft 365 from on-prem to the cloud. We worked closely with the MSP to demonstrate Cove’s ease-of-use and cloud-first approach.

As a result, they decided to move a large portion of their Microsoft 365 estate to Cove. This deal represented a nearly $100,000 ARR deal for N-able. Our data protection as a service approach seems to be resonating. On a currency-neutral basis, the contribution from new customer cohorts was up approximately 40% in 2022, compared to 2021. And we now have over 12,000 total partners using Cove Data Protection. In addition, Cove was recently recognized with the SEC Backup and Archive Innovation of the Year Award. Our security offerings also shined in 2022. As our suite of solutions has grown, we are now covering a broad spectrum of market needs, ranging from enterprise-grade EDR to traditional antivirus solutions, to password management and e-mail protection.

Demand from SMEs grew as they sought security software during uncertain times in 2022, and many MSPs turn to us to meet that demand, so they could stack our enterprise-grade, fully integrated tools and grow their wallet share with their customers. We launched DNS filtering earlier in €˜22 and just announced the general availability of our managed EDR offering, which we soft launched in Q4. Managed EDR supplements the N-able EDR solution with dedicated management security services. With continued labor shortages and typically high cost of building and maintaining a SOC, managed EDR allows MSPs to affordably reinforce and extend their IT security teams powered by SentinelOne’s 24/7 security operations center. This means they can more quickly investigate and resolve threat events for their SME customers, attractive always-on model.

A great example of the appeal of our security solutions and the strength of our go-to-market motion was a deal we closed in the fourth quarter. A health care-focused MSP was having compatibility issues with their antivirus software and seeking to upgrade their security posture. Once we showed the MSP the benefits of EDR, integrated with N-central and the advantages of the enterprise-grade technology deployed simply, they signed a more than $100,000 ARR deal. This partner has been with us since 2017 and has consulted with us on how to price, package and market their business over the years. As I’ve discussed before, we take the word partner seriously. It is a distinction that must be earned and something we feel is a differentiator. We understand deeply that when our partners grow, we grow, something I call the snowball effect.

Photo by Alex Mihis on Unsplash

So we are continuing to invest in the areas to help our partners better understand the nuances of their business and how to leverage the opportunities this sector holds. We will keep that focus because we believe it is paramount to our mutual success. Now as I have said before and will again, the focused execution of our strategy by N-able is across the organization is the root of our success. To recap 2022 highlights across the business. Our marketing teams packaged and launched our Cove Data Protection and N-sight platforms. Our fourth quarter total bookings were high for the year and exceeded our Q4 €˜21 figures. We earned our partner fandom every day, and it showed up as we increased our dollar-based gross revenue retention across the business by 130 basis points on a constant currency basis.

Our R&D and service teams brought six new products and billable services to market, including N-sight, Cove standby image, managed EDR, DNS filtering, cloud user hub and enhanced services. We opened our Warsaw Poland office with more than 70 employees currently based there, expanding our presence in Europe. And our business development efforts brought us key strategic capabilities, including the Spinpanel acquisition that we completed in July. We are laser-focused on delivering on our mission to empower the success of MSPs across the globe. Thank you to more than the 1,400 N-ablelites, who tirelessly personified are rally cry, earning more fans every day. Turning to 2023. We are still committed to earn more fans. We believe we are well positioned to take it to another level.

This year, we will focus on raising the bar and our quest to become the vendor of choice for MSPs across all sizes across the globe. We expect to continue to elevate our go-to-market efforts, earn new partners and grow our brand presence and awareness. We are also leveling up our commitment to improving our partner success resources and services in driving new product launches and enhancements throughout the year to help our partners win and grow their customer base. The elevating force behind our strategy in 2023 continues to be the industry tailwinds that we believe are still firmly in our favor. Our focus will be on raising the bar in three key areas. The first is what we call manage everything. As our partners are looking to help their SMEs navigate the ever-changing technology landscape, we are focused on enhancing our solutions to give them the tools to become even more mission-critical.

In 2023, we will look to augment cloud monitoring and management capabilities, extending into Azure management and broadening our Microsoft 365 management. This will help MSPs bridge the divide between server-based and cloud assets. And just as customers need help with Azure and Microsoft 365, they need help managing their Microsoft licenses. Cloud user hub based on Spinpanel technology, which we acquired last year, does just that. Increasing our capabilities for Apple device management is another important avenue of growth. With Mac market share gains far outpacing PCs, the ability to manage and monitor Apple environment is a strong value add to our MSP partners. We believe this added functionality will make us the single vendor for end-to-end Apple and Microsoft coverage for monitoring, data protection and endpoint security.

And as we go through 2023, I look forward to updating you on our journey to manage everything. As we all know, managing IT assets is critical but not enough. And that’s why the second focus area for our MSPs is protect and secure. In 2023, we plan to further execute on the full potential of Cove Data Protection, expanding into broader Azure and Microsoft 365 use cases, along with continued investment in underlying product functionality. These investments will better position us to ride the wave of demand for enterprise-grade, cloud-first, integrated data protection solutions. Protection and security go hand-in-hand. And this drives the trend we see with Cove as an entry point for many prospective MSP partners. And a delighted Cove customer has often turned into N-able for other solutions as well.

Recently, we were talking with a top 10 partner about security in the MSP business, and we thought they summed it up perfectly when they said, we love what you have, but give us more. We intend just to do just that. We see a growing convergence in endpoint management and security and are working on adding new solutions to identify security risks in the environments we already manage. Look to hear more from us in 2023 on the security front. And finally, the key area is what we refer to as operational efficiency, which is helping our partners through automation and standardization with N-able as their one-stop shop for fulfilling their business goals. Standardization for the MSP mean software cost consolidation, improved technician efficiency and significant time savings.

As we work with our partners to automate their processes using our tools, they can accelerate their customers transition to the cloud, stack more solutions to increase the value they provide and scale their growth in efficiency seamlessly. For us, this implies a significant cross-sell opportunity within our existing base, but also the potential for growing our market share. Once again, as our partners grow, we grow. Our market is resilient. Our positioning and strategy are on target, and our focus is clear. We look forward to delivering updates on our strategic initiatives within these focus areas throughout the year. And I will now like to turn the call over to Tim to discuss our financial results and outlook.

Tim O’Brien: Thank you, John. and thanks to all of you for joining us on the call today. I want to start by recognizing the many accomplishments of our team in 2022, including enhancing our product capabilities, bringing new offerings to market and successfully operating in an evolving macroeconomic environment throughout the year. I look forward to building on this foundation in 2023. Now I will review our fourth quarter and full-year 2022 results. Total revenue in the fourth quarter was $95.8 million, representing 7% year-over-year growth or 13% on a constant currency basis. Subscription revenue was $93.4 million, representing approximately 7% year-over-year growth or 13% on a constant currency basis. Other revenue, which primarily represents maintenance revenue from our discontinued perpetual license model was $2.4 million, up 5% year-over-year.

We ended the quarter with 1,898 partners that represent $50,000 or more of ARR, a 13% year-over-year increase. Partners with over $50,000 of ARR now represent 51% of our total ARR, up from 47% a year ago. Dollar-based net revenue retention, which is calculated on a trailing 12-month basis was 103%. On a constant currency basis, dollar-based net retention held steady quarter-over-quarter at 108%. For the full-year, we finished 2022 ahead of our outlook with total revenue of $371.8 million, representing approximately 7% year-over-year growth or 13% on a constant currency basis. Subscription revenue was $362.6 million, representing approximately 98% of total revenue and growing approximately 8% year-over-year or 13% on a constant currency basis.

Turning to profit and margins. Note that unless otherwise stated, all references to profit measures and expenses are calculated on a non-GAAP basis and exclude the items outlined in the GAAP to non-GAAP reconciliations provided in today’s press release. Also note that historical financials for the period prior to the effective spin-off date of July 19, 2021, included operating expenses that were prepared using our carve-out allocation methodology while we were still a part of SolarWinds. While the allocations and estimates in these carve-out financials are based on assumptions that we believe are reasonable, our stand-alone financials are not necessarily directly comparable to those prepared prior to the effective spin-off date. Fourth quarter adjusted EBITDA was $31.3 million coming in well ahead of the high-end of our outlook, representing 32.6% adjusted EBITDA margin.

Full-year 2022 adjusted EBITDA was $114.7 million, which represents an adjusted EBITDA margin of 30.9%. Fourth quarter gross margin was 85%, compared to 86.6% in the fourth quarter of 2021. Full-year 2022 gross margin was 85.2%, compared to 86.8% in 2021. The key drivers of the decline are changes in foreign exchange rates, product mix and new product investments. Unlevered free cash flow was $74.9 million in 2022 and $17.6 million in the fourth quarter. Unlevered free cash flow for the year represented 65% conversion from adjusted EBITDA. CapEx was $21 million or 5.7% of revenue for the full-year and $7.8 million or 8.2% of revenue in the fourth quarter. CapEx in the fourth quarter included the impact from a strategic asset purchase. Non-GAAP earnings per share was $0.10 in the fourth quarter based on 182 million weighted average diluted shares and $0.34 for the full-year based on 181 million weighted average diluted shares.

We ended the year with $98.8 million of cash and had an outstanding loan principal balance of $345.6 million, representing net leverage of approximately 2.2 times based on trailing 12-month EBITDA. Before turning to our 2023 outlook, I want to give some commentary on our fourth quarter and full-year results, as well as share some thoughts about the state of our business. The fourth quarter beat on revenue was driven by strong demand for solutions across all categories. Relative to our stated guidance rates, we also saw FX favorability in the quarter, which drove approximately half of the $2 million beat. The strong adjusted EBITDA output in the quarter is a function of the flow-through of the revenue beat to the bottom line, some seasonal fluctuations in spending and a reduction in force that represented less than 5% of our workforce.

The decision to take this action was a difficult one to make, was done across the company and not focused on any particular function or location. As we came to year-end, we wanted to ensure our business and teams were best positioned for future growth and success in 2023 and beyond with the right levels of investment in resources. Now I will provide our financial outlook for the first quarter and full-year 2023. For the first quarter of 2023, we expect total revenue in the range of $97.5 million to $98 million, representing approximately 7% to 8% year-over-year growth or approximately 11% to 12% on a constant currency basis. We expect first quarter adjusted EBITDA in the range of $29 million to $29.5 million, representing approximately 30% margin at midpoint.

For the full-year 2023, we expect total revenue of $408 million to $412 million, representing 10% to 11% year-over-year growth or 11% to 12% growth on a constant currency basis. We expect full-year adjusted EBITDA in the range of $122 million to $126 million or approximately 30% to 31% margin. With the continued macro uncertainty and variability we saw in 2022, we are assuming FX rates for the remainder of 2023 of 1.04 for the euro and 1.17 for the pound. For full-year 2023, we expect CapEx to be approximately 6% of revenue and adjusted EBITDA conversion to unlevered free cash flow to be approximately 65%, both in line with 2022. As a reminder, our debt is floating and currently fixed to LIBOR. We will transition to SOFR in 2023, and we anticipate approximately $30 million of 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 183 million for the first quarter and approximately 184 million for the full-year. Finally, we expect our non-GAAP tax rate to be approximately 27% to 28% in both the first quarter and the full-year. To recap, we saw strong market demand in Q4, and we are confident in our strategy and positioning as we enter 2023. We believe the outlook we provided for the first quarter and full-year account for the current macro environment. As a reminder, our model has many different growth vectors, including new customer acquisition, cross-sell of our existing product suite into our partner base, launching new product offerings and capacity growth. We will continue to monitor the performance of all aspects of the model.

Our 2023 operating plan calls for continued investment in our growth and it is important to reiterate that our business model allows us to be nimble and adapt to these plans if we see changes in the demand environment. We believe strongly in the long-term secular trend of SME IT spend and managed services growth, and we intend to continue to invest in important strategic areas outlined by John earlier in a profitable and sustainable manner. Now I’ll turn it over to John for closing remarks.

John Pagliuca: Thank you, Tim. As we dive into 2023, the leadership team and our fellow N-ablelites are energized by the potential we have to make a real impact for our partners and for their SME customers. We will raise the bar to deliver solutions and services that are purpose built for the MSP market. And as previously mentioned, we are focused on enabling MSPs to manage everything, protect and secure, and elevate their operational efficiency. We believe we have positioned ourselves optimally to provide the solutions that MSPs need to alleviate the pain points for SMEs to grow as they grow and to continue to adapt ahead of the curve, riding these industry trends well into the future. We believe that we have an all-weather business model to deliver both growth and profit, and we will continue to provide core, must-have software and services to MSPs through an efficient platform experience.

Our focus is sharp, and we look forward to continuing to execute on our vision. With that, operator, we are ready to take questions.

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Q&A Session

Operator: Thank you. Our first question is taken from Mike Cikos from Needham & Company. Your line is open.

Mike Cikos: Hey, thanks for taking the questions, guys. And I guess first topic I wanted to delve into would really be the guidance that we have here for calendar €˜23 with the 11% to 12% constant currency revenue growth. Can you help us think through like what gives you the confidence to guide to that 11% to 12% FX-neutral revenue growth? And then the second, like really what I’m trying to dig at is, as some of the puts and takes that the team weighed in deriving that growth forecast. Can you help us think through that?

John Pagliuca: Yes, sure. Hey Mike, how are you? This is John. So the — Tim outlined the dynamics of our business model nicely in the prepared remarks, right? And it starts with that gross retention number and those 25,000 MSPs that continue to be part of that snowball as I like to say. So the start of the foundation there is on that gross retention. We continue to see the strength in our platform and the dependency, frankly, that our MSPs have on the mission-critical platform that they use service their customers. So the base there is that our gross retention is on the uptick and that the customer satisfaction continues to be high. And that gives us our base. If you think about our revenue snowball, it’s in the mid-90% of our business comes from our existing base, the retention of the customer base and then the expansion there.

And we continue to see the second leg of our MSP partners buying more services from us. Our data protection, we noted the penetration that we’re getting at the MSP level. There continues to be a lot of white space as they continue to adopt Cove across their base. Our MSPs are continuing to add on our security services, and we’ve got really good traction. But again, there’s continued significant white space in our endpoint security and our DNS filtering and our mail security. So we look at the traction and success of our cross-sell motion and the white space that’s not just for us, but also our MSPs. And that’s really the base of our revenue and the base of the forecast. We have strong views into each of the cohorts and the consistency of the cohorts, and that’s the foundation.

And then, of course, Mike, like every business, we take a look at the velocity and the demand for new customer acquisition. And I think we did a good job being prudent along that line and not necessarily leaning forward as far as new customer acquisition. But again, that’s not as significant part of our snowball revenue there. So that’s — those are the different dimensions, and that’s how we looked at the year. And that’s how we always look at the year, Mike. And it starts with looking at the customers by geo, by segment as we talked about the smaller end, the larger end and building based on the cohort growth from there.

Mike Cikos: That’s great. And if I could just build on that for a second. Like I know you were talking about the gross retention, and we got the fact that the net revenue retention, again, on an FX-neutral basis was consistent quarter-to-quarter at that 108%, right? So as we look at calendar €˜23, are you assuming improvements in either that net retention rate or that gross retention rate?

Tim O’Brien: No, Mike, I wouldn’t say the guidance assumes that we hold both fairly steady in the 2023 outlook.