Q4 2022 N-Able Inc Earnings Call
Ladies and gentlemen, thank you for your patience and April 4th quarter earnings call within shortly.
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Gentlemen, thank you for your patience <unk> a couple of minutes time.
[music].
Hello, and welcome enabled four course that I'm full yeah 2022.
My name is Elliot that'd be cool with 19 your cold state.
If you'd like to register a question during the presentation.
By pressing star one on your telephone keypad.
I'd like to have it <unk>.
License plate.
Please go ahead.
Thanks, operator.
Everyone to enables fourth quarter.
Full year 2022 earnings call.
With me today are John Kelly Yoga enables president and C E O.
Tim O'brien, CVP and CFO .
Following are prepared remarks, you will open the line for a question and answer session.
This call is being simultaneously webcast on our Investor relations website and investors dot enable dotcom.
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 include.
Including those concerning our financial outlook our market opportunities.
Our continued expectation spelling to spin off of our business from solar winds in July of 2021.
And the impact of the global economic environment on our business.
These statements are based on currently available information and assumptions when.
When 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 spinoff transaction completed in July of 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 Web site.
Furthermore, we will discuss various non-GAAP financial measures today's call.
Unless otherwise specified when we refer to financial measures, we will be referring to the non-GAAP financial measures Ah.
A reconciliation of certain gap to non-GAAP financial measures discussed on today's call is available in our earnings press release on our Investor Relations Web site.
And now I will turn the call over to John .
Thank you Griffin.
Thank you all for joining us today.
As we closed out our first full year as a Standalone company.
And welcome in the new year.
I want to reflect on our accomplishments in tremendous progress we've made.
We started 2022 with our rally cry earn more fans, which is a broad reaching aspiration.
Goes from our employees, who are the foundation of our success.
Who are MSP partners, who are the primary focus of our business.
The industry stakeholders and investors.
Through the solid execution of our strategy bio enabled lights 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.
And the fourth quarter, we delivered strong profits, while simultaneously driving revenue growth.
Another clear proof point of the strength of our model and the robot robust demand for the mission critical platforms and services we provide.
Thank you for.
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 it 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 39%.
We are pleased to deliver these results are missing uncertain macroeconomic environment.
Our MSB partners.
And they're small and medium enterprise customers continued to deal with industry specific headwinds.
I believe a scarcity.
Increasing complexity in the move to the cloud.
As well as the relentless growth of cyber security threats.
Here to enable.
We believe we operated resilient business model to deliver both growth and profit.
And provide core must have software and services.
<unk> efficient platform experience and the genuinely partner first approach.
Our software is high on the 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.
Alright.
1.8%.
Roughly half the national average.
The difficulty sme's have in hiring talent is compounded by the fact that it is getting more complex and more mission critical to business operations.
SME space application and vendors sprawl network challenges hybrid work environments, and moving workloads to the cloud.
And cyber security continues to drive spending as well.
Analysis Mason predicts that SMB security spending via Msp's will grow from $25 billion in 2000 $22 billion to $48 billion in 2027 at.
At a keg of 14%.
Together.
These dynamics stripes spending on managed services and software solutions.
And as we are a premier software provider to Msp's.
Our cloud based R&M for monitoring and management.
Take control remote support.
And MSP manager for professional services automation.
Plus.
Onboarding support and community resources to help them build their businesses.
As a testament to the success of insight on our currency neutral basis contribution from new customers.
Approximately 30 per cent in 2022 compared to 2021.
We also delivered additional apple manageable capabilities.
Sigh platform to the line with the growth of Apple devices.
To give you an example for the increase customer value of this offering.
Fourth quarter of European MSP was looking for an iron man platform.
Two critical customer criteria, which realize a short time to value.
Specifically technicians could be up and running quickly.
The iron them to integrate cleanly with other software they use.
After a competitive Baker.
The customer called N site, where the best fit for their needs.
$50000.
While inside focuses on the smaller end of the market.
Also reinvigorated are pushed unintentional.
Offering aimed at seasoned larger MSP partners.
In 2022.
We added features and functionality two in central including New Apple management capabilities, we have some strong proof of the power of been central to orchestrate it scale.
Msp's click on large workloads tomatoes devices.
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With the minimum amount of labor.
We believe.
We lead the MSP market, enabling msp's to manage Windows, Linux and Apple devices from one consolidated dashboard.
As a result of our continued investment and growing our market leadership within central.
Gross retention is up almost 2% year over year.
Data protection offering launched in 2022 is also made considerable strides.
Cove, which combined are already successful backup solutions with innovations such as our standby image feature.
The technology.
Document backup is no longer the best kept secret data protection.
As a cloud first enterprise grade and truly sass offering.
This back being recognized as a leader with Msp's.
To make inroads in the corporate I T space as well.
A jail, we close in the fourth quarter of 2022 demonstrates the efficacy of Cove.
One partner, who was working with a mid market enterprise that was about to begin migrating it's Microsoft 365 from on Prem to the cloud.
We worked closely with the MSP demonstrates close ease of use and cloud first approach.
A result, they decided to move a large portion of the Microsoft 65 estate pickles.
This deal representative nearly $100000 deal for enabled.
Our data protection as a service approach seems to be resonating.
On our currency neutral basis.
The contribution from new customer cohorts was up approximately 40% in 2022 compared to 2021.
We now have over 12000 total partners using co data protection.
In addition.
Was recently recognized with the S. D C backup and archive innovation of the year Award.
Our security offers also shined in 2022.
Or suite of solutions has grown we are now covering a broad spectrum of market needs.
Ranging from enterprise, Great Edr Judy.
Traditional anti virus solutions.
The password management and email protection.
Demand from SA Assamese group.
Thought security software during uncertain times of 2022.
And many msp's turned to us to meet that demand so that gets back our enterprise grade fully integrated tools and grow their wallets here with their customers.
We launched DNS filtering earlier and 22.
Just announced the general availability of our manager UDR offering, which we soft launched in Q4.
Manage DDR supplements enable edr solution with dedicated management security services.
With continued labor shortages, and typically high cost of building and maintaining a sock manner.
<unk> allows msp's to affordably reinforce and extend their security teams powered by Central 124 by seven security operations Center.
This means.
Quickly investigate and resolve threat events SME customers with a highly attractive always on a model.
A great example of the appeal of our security solutions and the strength of our go to market motion with a deal we close in the fourth quarter.
A healthcare focused MSP was having compatibility issues with their anti virus software and seeking to upgrade the security posture.
Once we showed the MSP the benefits of Edr integrated within central.
Vantages of the enterprise grade technology deployed simply.
I signed up more than $100000.
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 discussed before we take the word partner seriously.
It is a distinction there must be earned.
Something we feel is a differentiator.
We understand deeply that when our partners grow.
So.
Something I call the snowball effect.
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 strategy by enable it's across the organization is the root of our success.
To recap 20 twenty-two highlights across the business.
Our marketing teams package and launched data protection and inside platforms.
Our fourth quarter total bookings were high for the year.
<unk> R Q4, 21 figures.
We turned our partner every day.
And it showed up as we increased our dollar based gross revenue attention across the business by 130 basis points on a constant currency basis.
Our R&D in service teams right six new products available services to market include.
Including insight.
Co standby image.
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Cloud user hub and enhanced services.
We opened our Warsaw, Poland office with more than 70 employees currently based they're expanding our presence in Europe .
And our business development efforts brought us key strategic capabilities, including the spin panel acquisition that we completed in July .
We are laser focused on delivering on our mission.
To empower the success of Msp's across the globe.
Thank you to more than 1400 Navy whites, who tirelessly personified a 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 in our quest to become the vendor of choice for Msp's across all sizes across the globe.
We expect to continue to elevate our go to market efforts.
New partners and grow our brand presence and awareness.
We're also leveling up our commitment to improving our partner success resources and services and driving new product launches and enhancements throughout the year help our partners win and grow their customer base.
The elevating force behind our strategy in 2023 continues to be the industry tailwind 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.
Cause our partners are looking to help navigate the ever changing technology landscape, we're 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 brought it in our Microsoft 65 management.
This will help Msp's bridge the divide between server based in cloud assets.
And just as customers need help with asthma and Microsoft 365.
Managing that Microsoft licenses.
Cloud user hub.
Based on spin panel 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 gaining Gaines final pacing P. C's the ability to manage and monitor Apple environment is a strong value add to our MSP partners.
We believe this added functionality.
Make us the single vendor.
And 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 assets is critical but not enough.
And that's why the second focus area for our Msp's is protect insecure.
In 2023, we played the further execute on the full potential of data protection expanding into broader Azure and Microsoft 365 use cases, along with continued investment and underlying product functionality.
These investments will better position us to ride the wave of demand for enterprise grade cloud first integrated data protection solutions.
Protected protection insecurity go hand in hand and.
And this drive the trend, we see with Covid, an entry point for many perspective MSP partners.
And are delighted cope customer is often turned into enable for other solutions as well.
Recently.
With a top 10 partner about security and 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 to do just that.
We see a growing convergence and endpoint management insecurity and are working on adding new solutions to identify security risks and 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 automation and standards standardization.
With enable is there one stop shop for fulfilling their business goals.
Standardization for the M S P.
Been 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 and efficiency inefficiency seamlessly.
For us this implies a significant krossel 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 Wheeler.
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.
Our financial results and outlook.
[noise]. Thank you Jonathan.
Thanks to all of you for joining us on the call to that.
I want to start by recognizing the many accomplishments of our team in 2022.
Including enhancing our product capabilities, bringing new offerings to market.
Absolutely operating in an evolving macroeconomic environment throughout the year.
I look forward to building on this foundation in 2023.
Now I'll 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 bottle was $2.4 million up 5% year over year.
We ended the quarter with 1898 partners that represent $50000 or more of a 13% year over year increase.
Partners with over $50000 of IRR now represent 51% of our total IRR up from 47% a year ago.
Dollar base net revenue retention, which is calculated on a trailing 12 month basis was 103 per cent.
On a constant currency basis dollar base net retention held steady quarter over quarter at 108 per cent.
For the full year. We finished 20 twenty-two 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 margins note that unless otherwise stated all references to private measures and expenses are calculated on a non-GAAP basis and <unk> the items outlined in the gap to non-GAAP reconciliation provided in today's press release.
Also note that historical financials for the period prior to the effective spin update of July 19th 2021.
Included operating expenses that were prepared using.
Ouch.
[noise] carve out allocation methodology, while we were still a part of solar Owens.
While the allocations in estimates and these product financial are based on assumptions that we believe are reasonable are standalone financials are not necessarily directly comparable to those prepared prior to the effective has been updated.
Fourth quarter, adjusted EBITDA was $31.2 million coming in while 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 39%.
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 or changes in foreign exchange rate 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.
Okay.
X was $21 million or 5.7% of revenue for the full year.
Seven $8 million or 8.2% of revenue in the fourth quarter.
Capex in the fourth quarter included the impact.
I'm a strategic asset purchase.
non-GAAP earnings per share with 10 cents in the fourth quarter based on 182 million weighted average diluted shares and 34 cents for the full year based on 181 million weighted average diluted shares.
We ended the year with $98 $8 million of cash and at an outstanding loan principal balance of $345.6 million, representing net leverage of approximately 2.2 times based on failing 12 month EBITDA.
Before turning to our 2000 twenty-three 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 B on revenue was driven by strong demand for solutions across all categories.
Relative to our stated guidance right. We also saw FX favor ability in the quarter, which drove approximately half of the 2 million dollar b.
The strong adjusted EBITDA output in the quarter is a function of the flow through of the revenue be to the bottom line some.
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 ear and 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 and resources.
Now, we 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 to 29, and a half million dollars, representing approximately 30% margin at the midpoint.
For the full year 2023, we expect total revenue of $408 million to $412 million, representing 10% to 11% year over year growth.
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 117 for the pond.
Two months.
For full year 2023, we expect capex to be approximately 6% of revenue and adjusted EBITDA conversion too unlevered free cash flow to be approximately 65% both in line with 2022.
As a reminder, or that is floating in currently fixed alive or.
We will transition to sofa, and 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, 28% in both the first quarter and the full year.
To recap we saw strong market demand in queue for and we are confident in our strategy and positioning as we entered 2023.
We believe the outlook, we provided for the first quarter and full year account for the current macro environment.
As a reminder, or model has many different growth factors, including new customer acquisition.
Cross-sell of our existing products sweet into our partner base.
Launching new product offerings.
And capacity growth.
We will continue to monitor the performance of all aspects of the mall.
R 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 and the demand environment.
We believe strongly in the long term secular trend of SMS span and managed services growth.
And we intend to continue to invest in important strategic areas outlined by John earlier, and a profitable and sustainable manner.
Now I'll turn it over to John for closing remarks.
Thank you Tim.
We dive into 2023, the leadership team and our fellow enable lights 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 enabled enabling msp's to manage everything.
Protect insecure and.
Elevate their operational efficiency.
We believe we have physicians ourselves optimally to provide the solutions that msp's need to alleviate the pain points, where sme's to grill as they grow and to continue to adapt ahead of the curve.
Writing these industry trends well into the future.
We believe that we have an all weather business model deliver both growth and profit.
And we will continue to provide core must have software and services to msp's 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.
If you would like to ask the question. Please press star followed by one on the telephone keypad.
Good luck to withdraw your question any special thoughtful about <unk>.
To ask the question, please and showing it to <unk>.
The first question that comes from.
Nathan company to launch cycling.
Hey, Thanks for taking my question guys and.
I guess first topic I wanted to delve into would really be that the guidance that we adhere per calendar twenty-three with the 11 or 12% constant currency revenue growth could you help.
Help us stinks like what what gives you the confidence to die to that 11% to 12%.
FX neutral revenue growth and then the second like really what I'm trying to dig that is some of the puts and takes that the teen weighed in deriving that growth forecasts can you help us think through that.
Yeah sure Hey.
Hey, Mike how are you this is John so.
Tim outlines the dynamics of our of our business model nicely in the prepared remarks right and.
And it starts with that gross retention number and that's one of those 25000 msp's that continue to.
Be part of that snowballs I'd like to say so.
Start of the foundation there is on that gross retention, we continue to see.
The strength and not in our platform and the dependency frankly that are msp's app on the mission critical platform that they use service their customers. So.
The base there is that our grocery attentions 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.
In the mid nineties percent 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.
M S P partners buying more services from us our data protection. We noted the penetration that we're getting at the MSP level.
Seems to be a lot of white space.
As they continue to adopt cove across their base.
Msp's are continuing to add on our security services and we got really good traction, but again next continued significant white space in our endpoint security in our DNS filtering in our in our mail security. So we look at the traction and success of our across sell motion and the <unk>.
White space, that's not just for us, but also our msp's and that's really the base.
Of our of our revenue in the base of the forecast we have we have strong views into each of the cohort and the consistency of the cohorts.
And that's the foundation and then of course, Michael every business, we take a look at the the velocity and the demand for new customer acquisition and I think we did a good job being prudent along along that line and not necessarily leaning forward as far as new customer acquisition, but again, that's not as significant part of our of our snow bottled revenue there.
Sure. So that's those are the different dimensions.
That's how we looked at the year and that's how we always look at the at the year make and it starts with looking at the customer's Bye Bye Bye segment, as we talked about the smaller and the larger and and.
And building based on on the cohort growth from there.
That's great and if I could just build on that for a second like I know you you were talking about the gross retention.
We got the the fact that the net revenue retention again on an FX neutral basis woods, which consistent quarter to quarter. It that went away right. So.
Look at the calendar twenty-three are you assuming improvements in either that retention rate of that gross retention rates.
No my <unk> I would say the guidance assumes that we hold those.
The study.
And the 2000 twenty-three outlook.
Got it got it.
And then one more if I could before I turn it over to my colleagues, but I know that I think it was closing out.
Under the guidance comments you guys had discussed this this sub 5% workforce reduction that you'd put in place.
<unk>, what the expected cost benefit to enable was as a result of that reduction.
And then the second question is I know that can be seen the company has spoken about.
Hiring.
Whether it's revenue generating sales folks.
Anything of that sort so is the company's still hiring post risks and like if you are aware of those more strategic areas, where you continue to build.
Okay I guess.
Build expertise and those different department functions.
Sure sure and again this is John .
Short answer.
As we continue to lean in and.
We're hiring and we're hiring in those key areas that you touched on quota carrying sales folks, but also in R&D, an alert where technology company and in the prepared remarks, we talked about staying at her ahead of the curve, providing msp's the ability in this ever changing technology landscape to have the tools that they can have to meet that that that.
Changing environment right. So we're leaning in and on R&D, we have Ah.
We continue to hire there unless by our highest area of recruiting effort right now as it relates to the reduction in force as Tim mentioned, we do take these things seriously, but you know.
Reminder.
We just concluded our first year as a public company. We just concluded our first year as a company.
In 2022, and when you do that you make some investments you make some hires you build for a certain bit and then when we came into our planning cycle. In 2023, we looked at areas that we wanted to invest in more we looked at some functions, where we had some scale and some efficiency and we made some difficult decisions, but overall, you'll see us net.
From a net point of view, adding heads in 2023, and we expect to be at a higher head count right at.
At the end of this year.
Then we did in 2022, so net net will be hiring more bringing moral enable lights pushing that technology agenda forward hopefully at a faster clip.
Then we even did in 2022, which was which is pretty impressive considering brought on 62 offerings and the last last year.
Got it got it and just the cycled back to the earlier comment on the on the roof. So did you guys quantify what the cost benefit of that Rick was and then I.
I guess when was that implemented or is there still more to come as far as communicating that to the affected folks.
Hi, Mike Yeah, I know.
We didn't communicate to savings, but I would say as John it on it was it was it was mostly done to shift where where some of our investments, whereas we as we went into 2023 that being said we did executed within Q4, and we did see some savings within the quarter that I would say perpetuated.
Some of the the profit.
Margin acceleration probably to the tune of about 50 to 100 basis points in quarter.
Got it. Thank you very much guys I'll turn it over to my colleagues.
X box.
We announcements and maps hedberg from obviously capital markets.
Great. Thanks, guys for the for the questions John .
In the past we've talked about R&M I think it's you know it's like one dollar to three maybe a couple of Bucks per device I think what <unk> is all of the innovation that you guys talked about six products.
Launched last year can.
Can you talk about what that potential is on a pro device basis as you should expand this broader platform.
Sure Yeah and the.
The economics of the business.
Goes to the root of the business model Gnats I appreciate the question and so you're right. Thanks, So the the remote monitoring peace, depending on the size and some of the the.
The scale of the MSB it can range from a buck to three bucks per month per device when you stack all of our offerings.
That that number gets closer to about a 15 $16 per device per months <unk>.
<unk> so to speak if you will within within our existing customer base right.
And so that by the way is pretty impressive number if we were to cross sell.
And get a 100 per cent adoption across every device, that's well over $1 billion of additional opportunity inside our existing base with our existing solutions today and.
And that's before Matt we added managed Edr.
And before we continue to add new offerings. So Edr is a good example, local increase our endpoint security historically endpoint security.
An anti virus that was.
Essentially as low as one dollar per month per device with Edr. That's a couple of dollars as we continue to add more goodness in helping msp's become more efficient and more secure with endpoint security that that revenue that ASP or device stacks to.
To as high as potentially $7 per device. So there's a pretenses a tremendous amount of white space. There and then security Msp's do a great job packaging that up installing that to the SME, we have compliance and cyber insurance companies mandating.
Services like Edr for companies that want to get underwritten and so we see that is a tremendous white space opportunity both for enable and for our MSP partners and that's that's the name of the game and we continue to add msp's. They add small medium enterprises, they keep adding to the well over half million.
<unk> well over 7 million devices that we have and then we add new services for them to cross onto their customers and grow that that cross cell number for enable and so does a good amount of I'd call. It very much early headings as far as our ability to keep continuing to cross onto our base.
Got it yeah no. Thanks, a lot for that yeah. It certainly seems like that the device.
Opportunity continues to go up which is great.
Maybe on the capital allocation side.
You talked a little bit about the risks.
As you approach twenty-three how do you take about capital allocation between.
Maybe continued to delever at the level that you need to be.
M&A.
Just sort of this general capital allocation philosophy entering there.
Yeah, Matt How're you doing.
Way, we think about it is.
Looking at the capital market today, I would say, we have we have favor ability compared to.
You know.
The current.
Raise environment, so based on that based on kind of our leverage right, we feel comfortable with where we're at.
As well as being able to.
Look at anything strategic.
As we go through 2023 as well How's, though our plan as of now is we're we're kind of comfortable with where we're at happy with where we're at continue to evaluate it as as market change.
But for 2023 based on kind of where we're at and where the markets are at I would say, we plan to kind of stay the course.
Got it thanks, guys congrats on will strong year round.
Thanks, Matt.
Now tendency <unk> either.
I'm glad you're lying in second.
Yeah, Thanks, Hey, guys.
I wanted to ask you first about the just the macro environment.
How's this period different than what we saw kind of post kind of early early days of Covid in terms of demand and and maybe just.
Some comments on on U S vs Europe .
Sure.
Jason that John here so.
Compared to Covid, there's some similarities that I'll touch on those and and tease out some of the differences so and Covid, what we saw as a msp's were logging into our platform at two at the rate. They were before COVID-19 begin that really spoke to how mission critical our platform is to these msp's and <unk>.
Helping them because that created a spike in helping them effectively pushed their their small medium enterprises into that remote work environment into that digital kind of evolution that we speak to and financially and from the business. We saw an uptick in strong demand from data protection and security is msp's prepared their customers for that new world.
During COVID-19, we saw slowdown a new customer acquisition.
R Msp's, whether they be enable msp's MSP broadly speaking focused on their customer base and not a new platform changes right now.
They didn't have the time for that.
Compared now to the environment that were and we continue to see really strong demand for our data protection and security services and as you mentioned the prepared remarks.
Relatively speaking security spend is.
As a resilient part of the industry as we continue to see a strong demand both and data protection security, but unlike COVID-19.
We're msp's didn't have the time to look at new platforms, we're seeing msp's look at.
New Ottoman platform. So we're compared to Covid, we're doing much better from the NCAA point of view as it relates to both platforms and you mentioned the prepared remarks and site, we repackaged and site in 2022 from.
From a pricing and packaging, but more importantly from a user experience point of view to help these msp's become more efficient and as a result, you saw that strong uptick in that cohort that I mentioned, we were landing that much more customers and that lower end than we did last year. So.
Relative to Covid I would say NCA is stronger and our cross-sell motion is as strong as it was in Covid and and the retention peace is stronger than what it was a COVID-19 and Covid, we saw maybe a little bit on the low end of the market.
Some some atrophy there were folks might have just been going out of business and we're not we're not really seeing that as we mentioned our prepared remarks gross retention is is stronger.
As it relates to G O.
While we said demand was strong across all service areas nothing really to call out from a geography point of view as well we continue to perform well in our Asia pack in Asia pack for US is primarily Australia New Zealand.
And and and and and our European markets as well, so nothing really to call out of the differentiator, it's been pretty consistent.
Quarter over quarter and year over year.
As it relates to queue for it was it was it was.
Strong and pointing to up into the right.
Great Great and then.
Just.
Unrelated follow up.
How do we think about the threat from Microsoft and tune to your RMM does now since you just are the RMM category has a whole.
Just seems like Microsoft is well positioned they're they're.
They're getting a tremendous amount of adoption of in tune.
Across the market I dunno, specifically as if there's something about it that wouldn't that wouldn't be.
<unk> well suited for <unk>, but how do we think just over the next like three to five years about the potential threat from in June .
Yeah, we have we have a good working relationship with Microsoft actually.
And <unk> is not an iron them.
You can talk to any MSP any technician actually that you can look at a red thread right now.
That's going on and in tune is not an iron them and Microsoft knows that we work closely with Microsoft because we.
We believe we provide an an experienced with the MSP, we always emphasized Matt. This concept of purpose built right that means it's architected in a way that msp's can look across they can look at one particular user.
Account, one small medium business across their entire account or they're at their entire estate and the fact that we're architected in a way that gives them a consolidated view and look across their entire environment and provide them with the alerts and automation to help them a new business as efficiently as where we stand up so we actually integrate within tune we actually.
Pull the in tune experience that Microsoft 365 experience and later this year the azure experience into our platform Microsoft as many clouds as you know and our job is to help integrate that for one experience. So that the msp's. If you think about it with his aggregator and whether there whether they're using Microsoft <unk>.
Rating systems, Linux operating system or Apple devices, we need to provide that single pane of glass at one standard and more importantly, a bunch of automation. So that they can rule out the rules and policies and alerting in in one single manner and so that's where we differentiate so our product teams in our depth teams work along with the Microsoft teams to help them and in addition.
As it relates to data protection and security Microsoft right in their terms and conditions suggests that customers use a third party cloud based.
Backup offering to back up their data as well for natural layer of security. So we have a good working relationship with them. We look at the relationship and the way, we can differentiate and help msp's get more efficient as the reason why they continue to use us in concert with the Microsoft cloud cloud offerings that they have.
Okay. Thanks, and then one quick one for 10 before I wrap up your Tim can you break down the product mix for us I know you've done that in the past.
Between.
And security and backup in PSA.
We never broken down the.
The Max at least what we've done is give color on.
Just kind of the the growth of those segments and I.
I would say that the story is kind of unchanged. There were both the data protection and security parts of the business there are growing faster than overall revenue.
Based on the demand we see.
Expect that trend to kind of continue into.
The beginning of the year here as well.
Great. Thanks, Good luck.
Thanks.
Oh next question comes from Brian <unk> from J P. Morgan.
Hi, Good morning, and thank you for taking my question I was wondering if I could maybe ask about your over 50000, Msp's. So I guess on the larger side, how should we think about.
The margin contribution from those MSP as you grow you looked.
It looks like you're adding them at a pretty good clip here, just maybe compared to the smaller ones that your service.
Yes that stat.
Is is a combination of a couple of things.
We continue to add large msp's, but the beauty in our model is we can also landed MSP, giving us, let's say $12000 of ACB and then as they are growing and adding more SME as they grow but then as we were talking about with with the previous question then will adding any additional additional services. So a lot of times when we're good.
That that increase in the numbers because in MSP, increasing their their ACB to us.
Successful cross-sell so when they add data protection when they add endpoint security the LTV of the customer.
Doubles, and sometimes triples as they keep adding these these important services to their business. So it really speaks to two things our ability to win and we continue to do quite.
Quite well at the high end of the market with our win right there, but it really speaks to the the success, we have at our partnership and growing.
And as they add more services and so it's a combination of those two things and why refer to it as a snowball and we are growing as growing from a contribution margin I'd say our cost to retain is is much better than the industry because of the stickiness in our in our model because its partner led growth a lot of our growth comes not from us selling.
Into the MSP, but from them, adding services and selling into the SME in some ways to think about it this way or 25000, Msp's and the 250000 technicians that are working for those msp's.
Actively become our sales force so as we give them goodness like manage DDR and our other or DNS filtering and help them package that now they go off and sell to the SME. These.
The security services.
Add add to their book of business with their existing customer base and as a result, they trip over that $50000 Mark So that that's an important number for us as it shows the health of the partnership and and that snowball effect growing.
Hopefully hopefully that helps.
Yeah now Super helpful makes a lotta sense I guess, how do we think about the profitability given the I guess higher tax rates of those over 50000, msp's relative to what the rest of the customer base looks like.
So I'm not sure there is.
So the the shape of the higher ones. So they actually have a higher initial sale the bigger msp's of a higher sales I'd say the breakeven period to the larger msp's is actually quicker than some of the smaller msp's like those inside customers that we talked about before they.
They come in and usually with the lower Aspie and their breakeven period is a little bit of us a longer slope.
Because of the power of the model because of the way that the technology works it really whether they're a small MSG or a large MSP the unit economics and quite strong.
And that's given off the strength of our of our low cost to retain which I think is evident in the fact that we have 30% EBITDA margins right, Yeah I'm Brian .
If you think of like an altimeter CAC ratio on that customer base is definitely more favorable than than the lower end of the market and also if you look at retention rates as you go up this back in our customer base.
Gross retention rates are higher with our larger customers they are higher within that cusp.
Customer segment of 50 K.
R and greater as well so that obviously it was a tale into the altimeter CAC ratio as well so.
Probably just a.
Additional information there.
To kind of think about the longer term about any of those customers.
Yeah. That's helpful. I'm just determined are you at some kind of an inflection point now that it makes that those those customers comprise more than 50 per cent of the area.
And then I guess.
With regard to the previous question on I guess the level of confidence in the guidance 442023, how much visibility can you get from your MSP customers in terms of what they are seeing for demand.
On their platform and and did they give you kind of inputs into what you're planning process looks like for 2023, just wondering at a level of communication.
So we have 25000 msp's all across the globe, we have I'd.
I'd say a high frequency from a contact point of view across the base. We've invested in partners success over the last couple of years.
To increase a little bit more of that that.
Hi touch relationship.
And bringing in growth specialists to help the msp's grow so I'd say we have.
A good sense.
From from the customer base with our with our partners success teams as far as what what their growth areas are and what I will tell you as the msp's.
Generally speaking of course is that exceptions are really focusing on growing their wallet sure that was true in 2022 as well, but what we're seeing is for Msp's. If you and if you think about it with Labour scarcity.
And MSP when in MSP ads customers. It typically means they'll need to add a technician right now we're not on a one to one but there are some linearity correlation there, but when it MSP add the service, especially if they're leveraging and enable service the growing the wallet share of their customer base growing their top line growing their profit and not necessarily dependent.
Adding labor that's why I've managed an example is important thing for them. They can grow their wallet share that can input that it'll help them with their efficiency. So.
I believe we will.
Continue to see strong demand from a security data protection point of view.
And that's a lot of the feedback that we got is that they are looking at focusing growing their wallet share as as as that but when I spoke to the Msp's I'd say a couple of quarters ago at one at that are in power ventures with our first lab event that we did in a coupla years due to COVID-19.
Demand is quite strong and in line with what I was talking about strong demand for data protection strong demand for security and their strategy aligned with either.
Growing their wallet share.
And or adding more security services.
Got it that's helpful. And then so I appreciate that and Navy last one for me to kind of <unk>.
Pivot off of that.
Auto wallet sure what what are you seeing out there in terms of NSP consolidation and how does that compare with prior trend and how might that impact your business going forward either as your customers.
Solid eight with other MSP.
Or or potential that Laura and maybe they get acquired by otherwise msp's.
Great question so.
I often say our team is not defined by the number of Msp's in the market.
Tim is truly defined by that.
At the <unk>.
And and when to Msp's consolidate really nothing happens to the Tam that's out there right and in fact, what usually happens.
Is that msp's the larger they get and we're seeing msp's now that over $1 billion in revenue somewhere publicly traded their backed by private equity backed by venture capital, they're getting I'd say much more mature in their business approach what's happening is the ceiling.
Of which the customers that they're selling into has gone higher over the last couple of years. So we're seeing msp's now selling into fortune 1000 companies.
And as a result, where it was until I got into this space 10 years ago. Msp's, We're primarily focused on small medium enterprises that were 50 employees and down but now that the industry has matured Dave mature the consolidation has forced a little bit more maturity. Our tech is allowed them to go up the stack and now they're selling into mid market.
They're selling in with a co managed to the fortune 1000, so actually if somewhat counterintuitive, but as a consolidation happens msp's are going up the stack raising that bar and potentially gaining access to bigger spend as they do that typically speaking.
And enable the larger the MSP the more are in central product stands up on our wind right actually is better at the higher end because of the power that it gives them the ability to orchestrate that scale.
And so.
I answered your second question first your first question do we continue to see consolidation Yeah. We continue to see you at like.
Like.
Your guess is as good as mine with with rising interest rates.
Obviously for MSP and for everyone buying power somewhat gets degradation right and so I.
I haven't seen a slowdown yet, but it's probably not crazy to assume that as with ratliff rising interest rates.
Put a little bit more pressure scrutiny on acquisition, but msp's continue to be inquisitive.
And they do so because there is sometimes they're buying <unk>, sometimes of buying a customer base or geography, and there's a bunch of goodness. When these msp's do that it helps them drive scale and help some drive efficiency ultimately drive their bottom line.
Great Super helpful. Fantastic color. Thank you very much I appreciate it.
Thanks, Brian .
This concludes all Q&A back to John <unk> for any closing remarks.
Hey, Thank you operator, and and thank you all for joining in listening into the fourth quarter results. We look forward to providing an update and another quarter or so thank you and have a great day.
Thanks, Paul has now completed thanks for your participation you may now disconnect your lines.
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