N-able Inc. Q1 2023 Earnings Call
[music].
Hello, and welcome to the <unk> first quarter 2023 earnings call.
My name is Loren I know, which would make you could die.
If you would like to ask a question. During your presentation you may decide by pressing star one on your telephone keypad.
I'll now hand, you over to hoist Christian get Investor Relations lead to begin. Please go ahead.
Thanks, operator.
And welcome everyone to enable us first quarter 2023 earnings call.
With me today are John Kelly, you got enables 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 not enable dot 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.
Excluding those concerning our financial outlook.
Opportunities are continued expectations following the spin off of our business in July 2021.
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 spinoff transaction completed in July 2021.
Additional information concerning these statements and the risks and uncertainties associated with them.
As 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 the non-GAAP financial measures.
A reconciliation of certain GAAP.
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 Christian.
And thank you all for joining us today.
Our Q1 results resonated with clear takeaways.
Demand for our purpose built solutions is strong.
Our business model, which we believe is both durable and differentiate it.
To deliver growth and profit.
And we are executing our strategic initiatives to drive value for our customers.
We solidly beat our Q1 expectations on both the top and bottom line with revenue of $99 8 million or 13% year over year growth on a constant currency basis.
And adjusted EBITDA of $32 $7 million.
Representing an adjusted EBITDA margin of approximately 33%.
On a constant currency net revenue retention held steady at 108%.
And as Tim will tell you shortly.
We are raising revenue and adjusted EBITDA guidance for the year.
The MSP market, we serve remains healthy.
Driven by persistent tailwind.
Management continues to increase in complexity.
Cyber threats are escalating and becoming more insidious.
And it remains the case that small and medium sized businesses are challenged to hire technicians in a tight labor market.
These dynamics push Smes to use outsourced providers, such as our MSP partners.
Then.
MSP has used enables software to manage and monitor the SME as it environments.
Protect them against cyber attacks.
And backup and restore their data in the event of a cyber attack or some other disaster.
With a business model aimed at delivering enterprise grade software to the underserved SME market.
We believe we are uniquely positioned to benefit from the long term secular growth of SME spending.
And the trend of outsourcing needs to our MSP partners.
Earlier today I gave a keynote address on stage at our annual customer event in product called empower.
Attended by Msp's distributors and vendors from across the globe.
The empowered conference as an eventful of educational content.
<unk> speakers.
And programming tracks geared toward helping MSP scale and grow their business.
During my keynote.
I reminded the audience that the rate of innovation is accelerating.
And as technologists.
MSP as much uncertainty and change into assurance for their customers by keeping them informed and equipped not merely just survived the rapid pace of change.
But to make new technologies, a competitive differentiator in their markets.
Now more than ever small and medium businesses look to MSP to be that trusted technology and business adviser.
And while changes become constant with the right strategy and focus.
I reminded our MSP partners that the opportunities are massive.
I also stress to our MSP partners that managing and securing the cloud is no longer optional.
SME spending in the cloud as ryzen and market analysts are forecasting continued demand growth.
According to Gartner projections, 95% of new digital workloads will be deployed on cloud native platform is by 2025.
And we are making significant investments to enable our partners to address this growing demand.
We do this in several ways.
First we deliver our solutions in the cloud.
For example, our RMS solutions and central and insight.
With our MSP partners and allow device management across several operating systems from one dashboard delivered seamlessly through the cloud.
For Cove, our cloud first data protection as a service solution we.
We just announced that we're strengthening disaster recovery as a service.
By combining our highly efficient.
Cloud first multi tenant architecture.
With the convenience of recovery directly into Azure.
Further standardizing business continuity for our partners.
And allowing MSP is to utilize their azure instances versus investing in infrastructure or private cloud offerings.
The benefit of this near instant approach on restore combined.
Combined with the benefits of the public cloud, including availability scalability, cyber resilience and Geo redundancy.
As of the end of the first quarter, our cloud based Microsoft 365 backup offering was deployed for over $1 4 million unique users.
From about 900000 in the first quarter of 2022.
And on our layered security front.
Our edr solution.
Also cloud based.
Is gaining traction in the market with approximately $1 4 million devices protected.
Second.
We deliver solutions that help our partners manage the cloud.
Our cloud user hub.
Enables our partners to automate and manage their Microsoft 365, and Azure licenses and a consolidated platform.
We continue to evolve our cloud monitoring and management capabilities across our portfolio.
And as Smes demand for the cloud grows enable is committed to providing solutions, our MSP partners need to help satisfy that demand.
Meeting with partners today at empower.
That they value the way we go beyond technology we.
We are not just in the software business, we are in the relationship business.
And our relationship does not and when we complete a sale to our MSP partners.
It begins.
To name, but a few of our partner programs, we have a dedicated global partners' success team.
And our head nerds, who collectively spent hundreds of hours a month and one on one sessions with our partners.
In addition, we host events like empower.
Focus on peer to peer networking and education.
We constantly work with our partners to help them automate their business. So they can be efficient with their technician time.
And we train them and best practices and give them materials to help them price package and market their services.
We do this because our MSP success is our success.
Our MSP that are effectively an extension of our sales force.
This intertwined relationship is a critical component of our profitable business model by.
By enabling msp's to grow we.
We efficiently penetrate the fragmented SMB market, which helps us grow our 30% adjusted EBITDA margins.
Enable is committed to being the partner of choice for MSP is of all sizes around the world.
And we will continue to raise the bar in 2023, but delivering purpose built solutions that meet the growing needs of MSP to keep them ahead of the technology curve.
And though we believe demand is healthy and the trends point in our favor that.
That alone does not guarantee our success.
We must also continue to execute and earn more fans.
During our Q4 earnings call, we spoke about our key focus areas for the year.
Number one manage everything.
Number two protect and secure and number three operational efficiency.
And I wanted to share updates on these strategic strategic initiatives.
Looking first at our managed everything initiative.
In the first quarter.
We began rolling out updates to our management platform to offer MSP is the ability to manage windows Linux and Apple devices from one dashboard.
We believe the addition of these powerful new Apple management capabilities is a strategic differentiator that can expand our Tam and put a side by side in competition with pure plays Mac vendors.
An example of our value proposition for integrated management capabilities as our first quarter, new customer deal for more than $140000 of IRR.
The initial conversation centered around this msp's existing RMM product.
Which they felt lack the automation customization and flexibility they needed.
After showing them that in central will more than satisfy what they were missing from their legacy RMM the conversation turned to Cove and Edr.
They realized they could both save money and game functionality by switching to Cove and were impressed by the updated protection Edr offered compared to legacy anti virus.
Our customer service capability sealed the deal and we completed a sale of <unk> Central Cove and Edr.
We're pleased to see continued traction in new customer logos in our RMM platforms.
We also made progress on our second focus area protect and secure.
A number of market factors are driving our focus on this initiative <unk>.
Including evolving compliance and regulatory standards.
Companies of all sizes based growing regulatory pressure to ensure data is adequate adequately protected from bad actors, putting MSP squarely in the compliance business.
On top of that we are seeing insurance providers effectively mandate that Smes must have qualifying cyber security solutions in place before the underwriting policy.
This along with the growing sophistication of attacks has helped shift security from a nice to have to a must have for the small and medium enterprise.
We saw this firsthand during the security Roadshows, we did this past quarter.
Across four countries and three continents.
The message from our partners was clear.
They need security software that can effectively protect them and their customers from attacks and be easily deployed across the endpoints they manage.
And we believe that our security offerings meet these market needs.
MSP conversion from legacy anti virus Edr production, including our recently launched managing Dr. Offering is a significant opportunity for us to help our partners, who want to ensure ongoing endpoint monitoring and immediate mitigation of bullishness events.
On the data protection front.
Our new capability to utilize <unk> standby image for restore and the Azure public cloud across multiple regions as an elegant approach for service providers to drive to deliver enterprise grade disaster recovery as a service to their customers flexibly.
And affordably.
And our security and data protection offerings continue to outpace enables total company revenue growth.
And our last focus area operational efficiency.
We continue to improve our partners efficiency through automation and standardization.
You can see the evidence of our success here and our trailing 12 month dollar based constant currency net retention, which remains strong at 108%.
And in fact that partners are layering more solutions across our product suite.
One Great example of partners seeking to standardizing the enabled tech stack is an edr deal with more than $300000 of IRR, we signed in the first quarter.
The MSP started this relationship with enable using our central product in early 2022.
After working with us for the past year.
They understood how more products from enable could benefit their operational efficiency.
As a result, we ended the Edr business.
<unk> over 50% of this deal was from the managed Edr solution I mentioned a minute ago.
This deal is one of the largest single deals enable company history and it perfectly represents the value proposition, we can offer partners, who standardize their tech stack with us.
It is important to emphasize that none of this happens without the effort of enable us across the globe.
In the first quarter, we were delighted to receive recognition by a great place to work in the U S for the second year in a row, a comparably global Cultural award.
And we were included on built in 2023 best places to work.
We're also proud to note that we recently published our inaugural ESG report.
And look forward to discussing our ESG efforts in the future.
With that I would.
Like to turn the call over to Tim to discuss our financial results and outlook and then I'll circle back for some closing remarks.
Tim.
Thank you John and thanks to all of you for joining us on the call today.
We delivered strong results in the first quarter, beating the high end of our revenue and adjusted EBITDA guidance.
The overall value of the enabled platform.
Our strategy aimed at capturing the long term secular trend of SME spending and managed services growth.
The multiple vectors.
Growth in our business and disciplined cost management, all helped drive our performance.
We aim to operate an all weather business model that drives continued revenue and profit growth.
Now, let's review, our first quarter financial results and then discuss our financial outlook for the remainder of 2023.
The revenue in the first quarter with $99 8 million, representing 10% year over year growth or 13% on a constant currency basis.
Subscription revenue was $97 $4 million also.
Presenting approximately 10% year over year growth or 13% on a constant currency basis.
Other revenue, which primarily represents maintenance revenue from our discontinued perpetual license model with $2 $4 million up 7% year over year.
FX favorability contributed approximately $600000 to the revenue beat in Q1 versus our guidance.
We ended the quarter with 1936 partners that contribute $50000 or more of IRR, a 12% year over year increase.
Partners with over $50000 of IRR now represent 52% of our total IRR up from 48% a year ago.
Looking at net retention for the first quarter, which is calculated on a trailing 12 month basis.
Color based net revenue retention was 103% or 108% 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 reconciliation provided in today's press release.
First quarter gross margin was 84, 6% compared to 85, 7% in the same period in 2022.
First quarter, adjusted EBITDA was $32 $7 million, representing approximately 33% EBITDA margin.
The profit beat was driven by strong cost management and the benefit of the revenue outperformance to the bottom line.
Unlevered free cash flow was $13 9 million in the first quarter.
Capex was $5 6 million or approximately five 6% of revenue.
non-GAAP earnings per share was <unk> in the quarter based on 183 million weighted average diluted shares.
We ended the quarter with approximately $98 million of cash and an outstanding loan principal balance of approximately $345 million.
<unk> net leverage of approximately 2.0 times.
Approximately 46% of our revenue was outside of North America.
Turning to our financial outlook.
For the second quarter of 2023, we expect total revenue in the range of 102 $5 million to $103 million, representing approximately 12% year over year growth or approximately 14% on a constant currency basis.
The constant currency revenue growth guidance factors in the strength, we've seen across the business and the timing of our annual price increases, which increases our second quarter year over year growth expectations.
We expect second quarter adjusted EBITDA in the range of 32 to $32 $5 million representing.
Approximately 31% to 32% margin.
For the full year 2023, we are raising our revenue outlook and now expect total revenue of $414 million to $417 million, representing 11% to 12% year over year growth or 12% to 13% growth on a constant currency basis.
We are also raising our adjusted EBITDA outlook and now expect full year, adjusted EBITDA of $127 million to $130 million, representing approximately 31% margin.
Regarding foreign exchange rate, we are assuming FX rates for the remainder of the year of 1.06 for the Euro and $1 two one for the pound.
Which is a positive incremental impact of approximately $2 million of revenue on our updated full year outlook.
Regarding profit the adjusted EBITDA raise for the full year is driven by the impact of the incremental revenue to the bottom line and our efficient operational execution.
We reiterate.
That we expect Capex will be approximately 6% of total revenue for 2023 and.
And we also expect adjusted EBITDA conversion to Unlevered free cash flow to be approximately 65% for the full year.
We expect total weighted average diluted shares outstanding of approximately $185 million for both the second quarter and the full year.
Finally, we expect our non-GAAP tax rate to be approximately 28% in the second quarter and for the full year.
Now I will turn it over to John for closing remarks.
Thank you Tim.
The new normal in our market is that we along with our MSP partners must constantly adapt to the ever changing nature of the macro environment.
And while the external circumstances may change our strategy.
He remains on target.
We believe we are well positioned as a critical infrastructure components to help our MSP.
Take advantage of the durable secular trends that exists regardless of the economic cycle.
The healthy demand we see.
Which industry observers Echo <unk>.
Give us confidence we have the right strategy with the right business model to address the complexities cyber threats and labor challenges that face the industry.
So as Tim told you, we are executing efficiently and investing strategically as we aim to deliver both profitability and growth.
And our teams are laser focused on keeping ourselves and our partners ahead of the technology curve able to manage everything protect and secure their customers and grow and operate their businesses efficiently.
Thank you all for your interest in enable and with that operator, we are ready to take questions.
Thank you.
If you'd like to ask a question please questions.
One on your telephone keypad.
If you change your mind. Please questions. Please please.
Hey.
Paris ask your questions. Please ensure that you will find some muted Lea county.
Our first question comes from Mike CK to meet him and Mike. Please go ahead.
Hey, guys. Thanks, Thanks for taking the questions here.
I wanted to start off with with Brian and purchase looking.
Looking at the guidance good to see the strong results here in Q1 as well as the the acceleration that you guys are looking for on a constant currency basis.
Basis with the 14% for <unk>.
Was just hoping could you provide a little bit more clarity, especially on that constant currency first what are some of the puts and takes here. We're looking at on the on the product front, especially.
I know you guys have been talking more about let's say to cope with the success in the traction at sea as well as the comment that you had in your prepared remarks.
On the the outlook, reflecting the timing of annual price increases can you give us a sense of are the price increases.
They tend to be the same each year. How is that you guys are thinking about it especially in this current environment.
Hey, Mike. Thanks for the question this is Tim.
I'll take a step back and give a little bit of color just on how we approach price increases each year.
We really look at a combination of unwinding discounts as well as reviewing kind of list prices across the portfolio.
Historically, we've done at our price increases.
In the March timeframe and through Covid and other circumstances that have gotten pushed out to June over the last year or two.
And we pulled those back into the April timeframe. This year to kind of try to get back towards more of a regular cadence. So that's the more acute impact on.
The price increase timing.
From a Q2 perspective on on Q2 more specifically.
And then as we think about the overall price increases for the year.
This year is a little bit higher than we've done historically more acutely due to some of the inflationary environment that we've seen over the past.
12.
12 to 18 months or so now.
So overall for the year there is about a one 5% impact from the size of the price increase this year versus last year.
Got it thank you for calling that out.
And it makes sense to I mean, we've seen it across our coverage is for the company pushing some of these price increases given the inflationary environment.
Second the second part of the question is more of a.
I guess geared towards as Jon, but a two quarter if you will.
First again just on coal.
Is there any way to think about the traction that you guys are seeing is there a particular customer or profile or do they need to have a certain maturity curve.
Four cold starts to really resonate or what is it you guys are seeing on that front just given.
Given the consistent messaging and traction for that product and then.
Currently, but this goes back to your your opening remarks.
There is a lot of hype around.
Jenny right now, obviously and I know that you guys are talking about the consistent drumbeat of <unk>.
Cyber security threats I would think that the cyber.
<unk> continues to become more advanced because of what generative AI is actually unlocking and if anything I think it's probably fair to assume.
That almost pushes Smes in MSP is more in your direction.
Wanted to see how you guys are using gen AI.
On your side to ensure that you are helping your MSP as they navigate these cross currents. So a lot to unpack there, but if you could shed any light.
It would be helpful. Yeah sure sure Mike.
This is John it yes, a lot to unpack, let's do it let's do it step by step so on Cove.
Kohl's is is disruptive.
For the for the MSP and for US it's disruptive because of the architecture. It's cloud first which means number one on the security front, there's not an appliance or objected to attack from the bad guys number two because of our approach with <unk> Delta technology in other words, we're only looking at the change and not necessarily having a backup the risk.
Sure the amount of storage that we that we require as much less than our competitors.
Therefore, the process time to backup time is much less overall, Mike it's just a better tcl for the MSP. The MSP, they're spending less dollars last time spending less on software and it's a better solution. The solution appeals to all levels of maturity of the MSP. Okay. Now what do we announced today today, we announced advancement in our disaster recovery as a service.
And as I mentioned in my prepared remarks, I'm in Prague with about.
400, other folks in the MSP ecosystem and so by my answers will be somewhat bias to the conversations ive been having in the last couple of days earlier today I had a conversation with an MSP from Scotland. They have about 1200 servers in virtual machines 300 of which are on coke so they're using coal.
For.
A quarter of their installed base and when I asked why is it that they're not using coke completely he said they would dependent on us building out our more of our standby image and disaster recovery offering and now that we're continuing on that journey and developing more of a disaster recovery a continuity plan for these MSP.
I expect that we will get better standardization among our MSP. So for US the growth algorithm is twofold with KOB, one want to continue to plant the cold flag and a bunch of MSP or across the globe and those can be MSP.
Our RMM are those MSP that do not have our iron that last year, we began leading with code because it's such a disruptive technology and then number two is through standardization and disaster recovery as a big component of that giving our MSP is now the comfort and confidence that they know everything that they are covered with coke that can be office 365.
C by the traction in our prepared remarks, thats been a success and that was the disaster recovery I'm expecting to get better standardization across the footprint. So that's on code look on security that's another big Hot topic here in product right.
<unk>.
Story's changed I talked about this a little bit my prepared remarks.
What's happening more and more is that MSP and their customers.
And their customers customers are now because of compliance of regulatory reasons needing to make sure that they have a layered security bps and the prescription so to speak about good cyber hygiene is being dictated to these small medium enterprises and all these different verticals what that means for the MSP as they no longer needing to sell.
The security you know now it just needs to help their MSP excuse me their customers their SME be compliant.
And that is that continues to be a big a big tailwind we're seeing the need.
For Smes to retain their logs maintain better files, making sure. They have a cloud based backup things like Edr and now part of that compliance checklist that msp's need things like MFA. So that the hygiene has gotten much higher it's creating a bigger a bigger tailwind.
As it relates to AI and how we use it look the name of our game is all about automation and efficiency and what we tried to do is help MSP is we've been we've been in the automation game in the scripting game really from the very beginning and we hope to MSP, we provide them our own scripting and our own automation and we also provide them.
Our scripting with powershell in our automation managers that can go build that.
And their own automation excuse me. So we continue to push on that front, we look at <unk> and machine learning, we use data science and ml and machine learning some of our products today.
In particular in our in some of our mail and other security offering. So it's a part of our DNA will continue to invest and lean in there and we'll continue to leverage the technology to better serve our MSP.
That's great. Thanks, Thanks for the color John .
And just one correction on my side, Tim O'brien, sorry, I haven't had enough coffee today, and I guess I'm just crossed the wire I called earlier, so apologies for that we'll turn it over to my colleague Mike.
Okay.
Thank you.
Our next question comes from Jason at the William Blair. Jason. Please go ahead.
Yes. Thank you. Good morning, guys just wanted to get first a sense of how macro is manifesting in the business right now.
It affecting expansion new customer ads is there anything kind of geographically going on just any kind of broader commentary on the macro impact on the business.
Hey, Jason. Thank you for the question look and again I'll use a little bit by recency bias, but its a great heat.
Heat map of what's going on here at <unk>, we have.
Msp's from 18 different countries.
<unk> North America.
Obviously, the U S and Canada, and as far away as New Zealand and Australia.
Australia, and South Africa, so a bunch of different continents, a bunch of different countries and honestly the sentiment is pretty consistent.
The MSP as a growing both organically and Inorganically the growth algorithm is a healthy mix between adding new customers and adding services that the heat map here is whether adding services continues to be around security and data protection and so that that roughly really aligns with where we're seeing.
Seeing our growth data protection and our security offerings continue to outpace our overall debt and so I'd say overall the demand for the MSP. The MSP World is quite high.
Unlike a lot of other industries Jason.
Where there might be some headwinds.
End markets things related to labor shortage, or a cyber security or even even cloud optimization for MSP that that's an opportunity one MSP that's in the U K with what they told me earlier today was that there are projects in Q4 of last year began to slow down and so the second half of last year from a.
<unk> base.
Road down, but the recurring revenue and the recurring service was strong and now they've seen an uptick in projects being initiated in the first half of 'twenty three and those projects usually are good feeding ground for ongoing managed services. So the recurring revenue continued to be strong in 2023, the project seemed to slow from a couple of different NSP side.
I spoke to but now that theyre seeing that demand and uptick as well. So that's some of the anecdotes that have been on the floor over the last couple of days here and project.
Okay, I guess I guess, what I was getting at just in terms of the macro is.
Theres been obviously credit tightening and I was wondering if that's impacted I don't know new MSP starts.
Or expansions or MMA I don't know just it seems like credit tightening should be having an impact on the timing.
SMB market and just I mean, it doesn't sound like it's material for you but.
That's what I was getting at.
Okay sure so on the.
On the debt side.
It's not that material, what we are hearing a little bit as the number of M&A deals beginning to slow slightly as far as the MSP.
From some of the conversation for the same with the quality of the deal remaining theyre seeing valuations.
Maintain so it's not really having that much of an impact and Jason remembered the servicing these MSP provider mission critical so.
These are not shop that get over leveraged right. These are not small medium enterprises and MSP in general Theyre not theyre not using that maybe as much as some of the hyper hyper type of businesses that are hyper growth type of businesses. So.
I'd say, it's seen that I'm sure that.
Failing that if they have any type of variables.
But by and large without seeing any impact on our demand on their demand.
Okay, Great and then.
The second question just is on competitive landscape.
And I'm sure, there's some kind of cross currents there.
If you could just talk us through especially on whether yes.
Thank you are gaining share.
Relative to both.
Some of the incumbents the bigger players and you and then some of the newer and trends where we've heard some some momentum from some of these.
Up and coming players and so maybe just.
Paint the picture for us.
Sure with.
With our rebrand of code that we did about a year ago, we're getting much.
We are definitely improving our share of voice in the market and we're seeing that whether it be in <unk>.
I'll read it for them or different type of marketplace and we're seeing it in our numbers. So.
Cove customer acquisition is definitely on the rise we are definitely taking market share from some of the bigger players both traditional MSP vendors, Jason but also.
Backup and disaster recovery vendors that are not focus on the MSP. So we're winning.
On both fronts in the MSP focused guys and on the generalists.
That's where backup our endpoint detection and our Edr continues to war on R&M.
There is two halves of the market. There is the low end and to your point on some of the new players.
We are little bit over I think we mentioned this to you guys before but it maybe about a year and a half ago, we're seeing a slowdown in our new customer acquisition at the low end and we repackaged with insight. So we did a bunch of improvements on our workflows and brought in three solutions into one and so with the packaging and the repricing and the work that we've done.
We actually saw a pretty immediate reversal and we're now winning market share in the low end and on the high end. We continue to do well there are in central platform services. The large MSP is quite well we win because of our breadth and depth of our offering we win because of our automation and we win because of our latest security integrated approach. So we continue to see.
The strong market share results there I would say no new news on the high end of our App. We continue to make the progress that we want to make and continue to gain the market share.
Okay, great. Thank you.
Thank you.
Question comes from Matt Hedberg from RBC capital markets. Please go ahead.
Thanks, Good morning, guys. Thanks for the question.
Strong results obviously.
John your comments on strong demand environment I think certainly it's.
That's great to hear I guess, Tim.
A question for you is on the guide you raised the full year revenue guidance by more than the Q1 beat.
Which is great, but I'm just kind of curious.
What kind of gives you the confidence to take that full year range up even more than what you would be versus just a passing that through or another company took a sort of maintaining a full year. After Q1, maybe a little bit of comment on.
The thought process on the full year guidance.
Yeah, absolutely Matt.
It's a combination of two things.
One is the strong demand environment that John touched on that we've continued to see.
In the market and the other piece and I touched on in this script is as the FX rates, we've assumed higher FX rate.
For the remainder of the year than we did at the onset when we gave our original full year guide that impact is about $2 million on the on the updated full year outlook and the balance of that is due to.
The demand environment that we're seeing from an operational perspective.
Got it okay helpful. And then obviously the profitability is great as well.
Thoughts on hiring.
Easy to find talent these days.
How are you trying to balance.
The sort of historical growth with with obviously, a very profitable model.
We are progressive.
Yeah, absolutely I would say we've had more success probably more acutely in the.
And the R&D higher.
Hiring part of the equation I would say that that was a more challenging spot.
18 to 24 months ago, we've seen that improve.
As we look to lean in and invest heavier.
In engineering and <unk>.
Throughout 2023, so I would say we have seen an improved environment from a hiring perspective.
And we've touched on kind of where where our investment focus is as we go into 2023 and that that is more acutely in the.
In the R&D part.
Of the P&L from from our perspective.
Got it thanks guys.
Yeah.
Thank you.
Our next question comes from Brian Essex from Jpmorgan, Brian . Please go ahead.
Hi, Yes, good morning, and thank you for taking the question and nice results for the quarter.
I was wondering maybe if we could start.
With.
Managed edr and.
Maybe adjacent only kind of what youre seeing from the kind of a host of new products that you've rolled out over the past.
Quarter, or so, but specifically I guess for managed Edr.
Interesting to see are interested to learn what percentage of incremental new revenue.
Mike might be attributed to manage managed Edr and do you have a sense of.
Obviously, it's still early stages, but any expectations for what that might represent in terms of revenue mix over the next several years.
Thanks, Brian This is John yes. It is.
Definitely too early to start talking about <unk> as a separate line item and historically, we really don't breakout.
Our products by by revenue line.
Early days right I think we launched it last quarter.
And we've been getting good traction we gave that anecdote.
In the in the prepared remarks, where we up sold that one customer.
Half of that was with MTR and so why do we believe and we have such good traction that's actually a couple of different a couple of different angles number one.
MSP that feel that and that edr might be a little bit too complicated for their technicians or it might be too time consuming adding this manage layer.
Our leverage where they are where they are able to leverage an expert to provide some of the human in the loop. So to speak is of great value prop for them for a couple of a couple of more bucks per device per month. They can now go add this service to relieve their team of that burden and it helps their overall EBITDA their overall efficiency and profitability.
So for those folks that's helpful. And then for the folks that are using edr today again, it's an efficiency play that can go they can scale and now and now grow their business in a couple of different ways. So we think it will help the low end of the market that might be a little bit.
Apprehensive to help manage endpoint detection and response.
And then for those that are a little bit more sophisticated they know that they can that they can leverage this outsourced expert.
And gain some time efficiencies and so we expect that this will be a.
Strong adoption as far as offerings, we continue to work with Sentinel won a couple of different things where.
We're looking at additional Skus and just to compare 2023 with 2022, and we didn't bring many new products to market.
2022, and 2023 with with Vigilance excuse me with the managed Edr offering.
And.
With disaster recovery with Cove in a couple of these other offerings. We believe that will help our EMS pes at a layered security and help them drive more efficiency and will obviously help our growth algorithm right more offerings, we can bring to market faster. We can help our MSP is expand the better that net retention number is the better that overall growth story is.
Got it and how do you think about Edr going forward from a services perspective, I mean is there.
You get a lot of leverage out of the head count that you have there do you anticipate you might see a little bit of margin pressure from that or is this is.
As our initial indication that alright, this might just be.
Kind of like a low single digit percentage of revenue going forward. So it may not really have that much of an impact to the hiring and margin front.
So look I'd.
I'd say, we look at the overall margin.
The portfolio view.
And we know that certain offerings have a little bit stronger gross margin than other.
In others, but really it's about driving the LTV and and just to be clear because we have a lot of three letter acronyms in this in this business. So edr the software and then and then managed Edr is the service that we attach and we're leveraging actually Sentinel won.
For both and we're leveraging their scale and their in their stock and their AI to drive an efficient solution to the MSP and then what we do as we integrate this in a way for our MSP in our RF. So our MSP is now can both do endpoint monitoring and management.
And endpoint security in one dashboard and that's the value add and Thats why Msp's love consuming.
The edr offering to enable because it's that aren't I think isn't that single pane of glass that command and control and still that powerful Edr technology at Centinela, one Leverages and then we layer that on top with the.
Basically the central one managed service to provide MSP.
That extra level of control and comfort.
That's the mix and that's how we go to market and it's been a success and as we mentioned I think we are well over $1 4 million devices that are currently being protected with edr up with Edr today.
Got it got it that's helpful.
And maybe on the Opex side.
I think an expected increase in R&D expense.
How are you thinking like how robust is the roadmap there how might we anticipate ongoing hiring.
It looks like you are getting leverage particularly out of like G&A.
But.
Respected R&D just to kind of build in expectations. There that is kind of growing it up.
At a higher pace than revenue.
Sure, So Tim and I.
For years, now and I'm actually coming I, just passed my 10 year anniversary in this space.
Three years now manage the business more from that rule of that type of approach right that aspiring to be that rule of 50, and where we can lean in and invest.
To drive long term durable growth, that's what we're going to do it and then in our space. We have these MSP and what they tell us overwhelmingly regardless of the country, regardless of the market that they're in is they would love to consume and buy products from us They trust our brands. They trust that if it's built purpose built for them it will help them.
Scale that will help them grow and so for me one of the best things. We can do is continue whether it's our own IP like Cove, our mail offering or a password management offering or through integrations with enterprise grade software, bringing more products to market. So we'll continue to lean in R&D as long as we see the opportunity and we do see the opportunity we've increased our.
Our R&D spending Cove, we've increased our R&D spend to monitoring increased via acquisition and through internal investment.
Investment in cloud and cloud management, and we believe those will have.
Those will have positive returns so we're going to continue to lean in R&D, we believe it's a massive opportunity for the MSP.
We're still in early innings here and we will continue to do that and we'll get scale and continue to drive our business and as our collective revenue snowball gets bigger we'll be able to get scale in some some opex areas and R&D over time.
We'll get scale, just as we get more and more.
That top line continues to grow.
Got it that's helpful. Maybe last one for me on Cove, So it sounds like great traction there.
Particularly with backup disaster recovery.
What do you think you might have in terms of opportunity in adjacent markets like governance, and data management or data migration, particularly as maybe.
The true endpoint.
<unk> and customers might might be migrating from on Prem to cloud.
Some some peers like an AD point for example have had migrated into some of those areas, but maybe thats because they are more enterprise focused but I'm just wondering what.
What adjacencies might you have.
On top of what our next to what.
Already done on the cost side.
Sure. It's a good question when we think of Adjacencies.
As it relates to Cove really what Pops up is selling direct to some of the mid market and small medium enterprises directly we have a we don't talk about this as much but we have.
A good part of our customer base come to us direct.
Saying that they're looking for a data protection offering or unified endpoint management offering direct because theyre not using an MSP or they want to co manage option option, which is also helpful. For MSP. So one of the big areas that we're looking at the Cove in particular is around directly into those mid market.
Yeah.
On a couple of quarters ago, we talked about winning large internal it departments and a lot of time, that's led by code and the code. The code solution fits very elegantly in that medium and mid size enterprise and so that's an area that we're looking at from a go to market and channel point of view to potentially leaning a little bit there and accelerate our coke story.
There as well.
Got it very helpful. Thank you.
Thank you.
Our final question comes from Keith Bachman with BMO. Please go ahead.
Alright, Thank you very much I wanted to ask.
<unk>.
About the growth algorithm that you are thinking about it in the first part of it is as you think about.
Over the next two years.
Organic or driving that R&D line.
Versus acquisition versus.
Partners, so to speak where something along or others.
How do you think about the key drivers to expanding your portfolio.
And the other side of that question you mentioned your debt is at two times.
What's your comfort level and kind of go in or whats your strategy kind of going up or down on that.
Interest rates are a little bit higher, but I just wanted to get.
You think back on how should we be thinking about the portfolio expansion over the next call. It two years.
The three levers of organic.
Partner and M&A and then the corollary came on that.
Do you see what you are comfortable either expanding or contracting at that level. Thanks.
Sure Great question and look just to bring it up a level right.
The three verticals if you will that we continue to play in and the service that we provide to our MSP, our monitoring and management.
Data protection and security.
And I'd say, we continue to look to expand in all three of those different verticals.
And how we choose to and with the mix is really depends on.
Where the offering is.
It's what I'll call it and its hype cycle, what does that profile and most importantly, what's the best way to service.
When we looked at when we looked at endpoint management excuse me endpoint security. This is now five or six years ago. We looked at NEC look back then we call that next generation AAV today, it's more commonly known as Edr and we looked at when we looked at that and where that wasn't the type cycle. It was early days, we knew that there were companies across the globe investing more.
The dollars into research and development and we knew we would be able to compete with that level of research investment and we wanted to make sure that we are providing an elegant solution to our customers and we decided to partner with Sentinel won and so when we look at that we're constantly looking at whether or not we can provide the best.
Solution for our customers. If we think it's right in our wheelhouse and our core competency.
That's obviously IP that we want to acquire or build ourselves. If it's something that may be better served where our north star.
Is to help make us more efficient for MSP than integrating and working with an enterprise grade software company is the best thing for our customers. So a lot of times, it's really what's out in the market. What's the best way that we can service our customers over the long term and Keith I'd just as an example, we acquired spin panel because they are in the monitoring and management of cloud assets So that Mani.
Stirring and management is core to what we do when we believe we can build that better than everyone. So we wanted to acquire that asset to get a little bit of a head start great team great IP and now we're going to continue to invest and as we look at different security offerings. We may choose to acquired if that fits our R&D kind of profile of our investment thesis.
But if not the enterprise partnership is a tremendous success I'd call. It a quad win it's a win for the MSP. It's a win for the small medium enterprise. They have an enterprise grade software. It's a win for our partner in this case as an example, sensible one because we've just opened up access to their Tam they were not going after the small medium enterprises.
Gave them access via our $25000 piece and it's obviously a win for enable we got a richer LTV a better relationship with our customers. We help them be secure so if we can find the quad win like that that fits our profile, we're going to do that as far as the leverage.
I think Jim and I are comfortable where we're at and if we would if we find the.
A better use for our capital I E.
<unk> an acquisition that fits our thesis of servicing these MSP and helping them, whether it be monitoring and management security and data protection that we believe it how the long term durable benefit for our customers, we're willing to make that acquisition and if that means increasing either using our balance sheet and the cash position, we have or some that we have a revolver.
We're willing to do that as well.
Okay, Perfect, let me Jackie follow on question.
Yes, sorry go ahead.
So I was just going to add a little bit of color on.
On that I think from a leverage standpoint, like we're very comfortable on anything.
Growth of three times.
But as John touched on for the right assets the right strategic asset I think we'd be comfortable kind of flexing above that.
For a shorter period of time.
And then from a from a growth algorithm standpoint.
As we look across the different vectors of retaining customers.
Better.
That's part of the strategy and we think Theres room for improvement there on the gross retention bit looking at the net retention bet, John kind of touched on the different vectors of either building buying or partnering and bringing new products to market.
We've we've built and brought a bunch of new products market in 2022, we partnered on the MTR front, we acquired from our spin panel perspective. So we're tapping on all three of those vectors.
From bringing new products to market and then.
Continuing to expand and focus on market share on the new so all three of those avenues from a growth perspective have opportunity for us to improve and accelerate growth.
Okay terrific.
You just sort of led into my.
More specific question on how should we be thinking about gross and net retention rate as we.
Go through the year versus went away class 103 that you recorded this quarter.
Yes, I think looking at where we're at from a.
From a constant currency growth perspective, where the guidance is that I would expect things to stay pretty steady from a constant currency perspective.
Currency was more of a headwind.
From a reported standpoint in 2022 as there is a lot of fluctuation there, but focusing more on the constant currency bet I would expect things to stay pretty consistent from a gross and net retention standpoint throughout the year as it relates to the guidance.
Alright, well consistent is good.
In this backdrop.
I appreciate it I appreciate the questions. Thanks, very much cheers.
Thanks Keith.
Thank you.
This is now the end of the Q&A session I will now hand, you back to John Kett for closing remarks.
Well listen thank you all for joining us on this on this quarterly earnings and we appreciate your ongoing interest in enable and signing off from products that take care.
This concludes today's call. Thank you for joining you may now disconnect.
<unk> and we appreciate your ongoing interest.