Q3 2023 N-able Inc Earnings Call
[music].
Hello, and welcome to the enable third quarter 2023 earnings call. My name is Alex they'll be quite tilt towards back to Nicole today right.
Like to ask a question at the end of the presentation you can press star one on the telephone keypad.
I had to remove your question you May press star two.
I'll now hand over to your host Griffin Gate Investor Relations manager. Please go ahead.
Thanks, Operator, and welcome everyone to enables third quarter 2023 earnings call.
With me today are John Peeler, 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 that 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.
<unk> those concerning our financial outlook, our market opportunities and the impact of the global economic environment on our process.
These statements are based on currently available information and assumptions.
And we undertake no duty to update this information except as required by law.
These statements are also subject to a number of risks and uncertainties, including those highlighted in today's earnings release, and our filings with the SEC.
Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and in our filings with the SEC.
Copies are available from the SEC or on our Investor Relations website.
Furthermore, we will discuss various non-GAAP financial measures on today's call.
Unless otherwise specified we refer to financial measures.
We'll be referring to non-GAAP financial measures.
A reconciliation of certain GAAP to non-GAAP financial measures discussed on today's call is available in our earnings press release on our Investor Relations website.
Now I will turn the call over to John.
Thank you Griffin.
Welcome everyone and thank you for joining us today.
As the age of the managed service provider advances.
The outsourcing.
Outsourcing market remained strong.
There are a few key factors for this.
It is getting more complex and expensive.
Organizations look to realize the benefit of digital operations.
Modernize their legacy systems.
And meet growing regulatory requirements.
This tri sector of challenges distracts organizations from their core operations.
And can push them to outsource and augment their it needs to MSP.
Enable was formed with this in mind.
Our unwavering mission.
To empower msp's with purpose built technology positions us favorably with the expanding small and medium enterprise.
Ecosystem by helping partners meet these challenges head on.
We believe our third quarter results highlight the strength of our market and cement our standing as a leading software provider to MSP.
Despite an uncertain macro environment, we exceeded top and bottom line guidance with revenue of $107 6 million.
Growing 15% year over year.
Our 13% on constant currency basis.
And adjusted EBITDA of $36 6 million.
Renting an adjusted EBITDA margin of 34%.
Our highest margin ever as a standalone public company.
And as Tim will elaborate we are maintaining our full year 2023 constant currency revenue guide of 13% and raising the midpoint of our full year 2023, adjusted EBITDA guide for $136 3 million.
To $139 5 million.
We accomplished all of this while laying the groundwork for future success.
Our teams advanced important strategic initiatives and we are particularly excited to announce that we are entering into a new product category.
Bringing enabled managed detection and response to market this month.
Our relentless determination to bring value to the MSP community requires adapting to fast changing technology needs through focused product innovation.
With our approximately 25000 msp's ranging in size from sole proprietors to global publicly traded technology service providers.
We believe we have a unique line of sight into the dynamic market landscape.
And I want to discuss three prominent trends influencing our product development focus and strategy.
First consolidation and modernization second the movement market.
And third increasing security standards.
First.
We see technology consolidation and modernization driving customer behavior.
In an uncertain economic environment Msp's have an eye on operational efficiency and solutions with proven ROI.
Our integrated platform and leading technology solutions align with MSP needs.
Helping to reduce through strong and unlock their growth.
We believe our tech suite of top tier RMM data protection and security solutions, coupled with our multi tenanted platform and external integrations strongly positions us to satisfy MSP desires to consolidate and modernize their tech stack.
A second trend is MSP is going up market.
Large enterprises face many of the same challenges as Smbs and are increasingly turning to msp's to augment our run there.
Our security operations.
We believe this means a larger addressable market for both MSP and.
And enable.
And our product and go to market investments aimed to enable MSP to realize this opportunity.
The scalability automation and efficiency of our solutions appeal to up market focused MSP and.
And we continue to raise the bar to position enable as a leader in this evolving market segment.
A great byproduct of the MSP market trend is the capabilities, we developed to help win Msp's went up market.
Also better position our teams.
It's only in the mid size and large departments directly.
While our core focus is our MSP partners, we continue to pursue direct sales opportunistically and are seeing positive momentum in this part of our business.
Now turning to our third trend increasing security standards.
The significant business impact of a successful cyber attack has long place security is a top priority.
In addition to MSP is buying security solutions to protect from bad actors.
They also face growing global compliance requirements that serve as a tailwind to security demand.
Here the message is clear.
Security is shifting from an option to a requirement.
With a robust and recently expanded suite of security options spanning endpoint protection Mail protection content filtering and more we provide a layered security approach that is built to fulfill regulatory requirement and safeguard the modern digital enterprise.
We made exciting progress in the last quarter to advance our product suite to capitalize on these trends.
And I want to share these updates and the encouraging market feedback we received.
Starting with Cove, we have invested considerably in developing our technology to further <unk> ability to scale into larger domains and help msp's move up market.
Our third quarter deal involving the displacement of a known market competitor.
And representing our largest initial code wind ever at over 500000 of IRR at scale speaks to our success here.
Another excellent example of <unk> market traction coming from our recent MSP customer with 11 legacy data protection solutions.
Understanding the risks and headaches of a multi vendor approach they decided to consolidate on coke.
The MSP thoroughly evaluated each product and specifically commented on Cove strong technical performance.
Intuitive technician friendly interface.
And the ability to meet data sovereignty requirements.
With Cove Datacenters located worldwide.
With sophisticated attacks often going beyond an organization's core network and now targeting data storage copies. The distinction between data protection and security is increasingly blurry.
Modern data protection salute solutions can't just restore that data they must keep data safe.
And <unk> was built with this in mind.
Because of our cloud first approach.
Customers data copies are not exposed to local network, which reduces the attack surface and gives our customers peace of mind.
The market is responding to co innovation.
Our 2023, new customer cohort is the best ever.
And our Cove, Microsoft 365 backup solution is now protecting over $1 8 million users growing at approximately 48% year over year.
<unk> also received industry recognition and we are delighted to share that analysis, a global technology research firm recently named co a champion and their managed backup and recovery leadership matrix.
On the Iron Man front.
We remain laser focused on meeting Msp's West Messiest.
We simplify the complexity of hybrid environments users and devices.
Going beyond the confines of traditional iron Mems.
This means delivering a modern end to end unified management platform.
We made significant progress on this vision in the third quarter.
We released the refreshed user interface.
Unveiling a new asset inventory view, which comes on the heels of the analytics feature and enhanced Apple management capabilities, We released earlier this year.
These advancements give technicians deeper insight into their it environment and.
And enable them to manage their it stacks better.
This can translate to tangible business impact.
Our powerful capabilities bolster msp's ability to go upmarket and.
And service larger organizations with disparate operating systems, while realizing the benefit of consolidation.
Our approach is resonating with customers and we're seeing steady demand in this segment.
Turning to security.
We continue to advance our security suite and are particularly excited about our entry into managed detection and response.
MTR is a unique marriage in the security industry.
Combining cutting and cutting edge technology with human oversight and expertise to help organizations advance protection.
This combination solves a deep pain point for our customers because the threats are increasing.
But organic organizations cannot manage those threats alone.
Alert fatigue, staying ahead of the evolving threat environment and staffing challenges when organizations need help.
In a recent poll, we conducted with thousands of our MSP.
They expressed a strong desire for MTR from enable.
Industry research firms also validate the MTR market with canal recently, stating that the cyber security services opportunity for partners will be larger than selling cyber security technology. This year.
MBR is much more than managed edr.
Does MTR goes beyond the endpoint, providing broad security visibility and response across the customers' entire ICT ecosystem.
Including their users cloud application and network.
It is powerful.
Adding MTR broadens our appeal as a one stop shop for security solutions and services.
And we have the backing of a strategic partner in this space.
Born from the front lines of National Cyber defense with multi tenanted cloud native modern architecture.
We believe there is a significant opportunity and perhaps most telling.
Since commercializing this technology customer engagement has met our high expectations.
In addition to delivering more solutions, we are focused on a superior customer experience.
To this end, we recently enhanced our integration framework improving functionality across our security offerings.
This enhanced framework also expand our ecosystem breath.
Facilitating faster time to market with vendors that want to expand their go to market reach through and enable power ship.
Across the security spectrum from MTR to mail security remains mission critical and we are committed to helping propel our customer security journey forward.
With these trends powering demand, we're investing in operating for the long term and our focus on delivering great technology that positions enable to advance the age of the MSP.
Our operational efforts and strategic goals are all focused within the framework of our sell to and sell through business model.
We refer to our MSP customers as partners.
As we leverage the reach of our approximately 25000 MSP to gain access and sell our solutions to.
Over 500000, small and medium sized businesses.
This partnership enables a multi pronged growth algorithm, which allows us to reach the SME at healthy profit margins.
When we land an MSP we growth.
When an MSP lanza customer we grow.
And when an MSP customer adds and employee we grow.
And when we bring a new service to market.
We unlocked the potential to grow across that that MSP and SMB base.
These elements of our model from the building blocks of our growth algorithm, which our MSP retention.
Cross selling of new services to existing MSP.
MSP device device growth.
And lastly, enable adding new MSP.
And I want to discuss operational updates in the third quarter regarding each of these components.
Starting with enabled adding new MSP.
Our new customer engine continues to be strong while.
While we're only three quarters through the year, the 2023 customer cohort dollars either.
Best ever since we became a public company.
We are reaching new customers, who are choosing to partner with enable.
This success, despite an uncertain macro environment reflects the strength of our compelling value proposition and is a testament to the efforts of our go to market teams.
Education leads to adoption.
And the enabled purple without enforced in the market connecting with customers.
In the third quarter alone, we hosted seven Roadshows across North America sponsored 11 global industry events and hosted over 50 head nerds boot camps, reaching thousands of partners and prospects.
In addition to helping land new MSP.
Our efforts to educate our partners on the value of our offerings helped drive their expansion.
And we saw steady cross sell in the quarter.
With our solution set spanning RMM data protection and security.
Enable msp's have a low friction path to expansion.
Our average revenue per partner is growing as customers buy more of our solutions.
And there are steady penetration and uptake across our product set.
We see a rich opportunity for further penetration with multibillion dollar cross sell potential in our existing base.
While cross sell and NCA are healthy the uncertain macro environment is weighing on partner device growth and retention.
We are seeing tighter budgets and slower device growth.
We believe tighter budgets have lead to rationalization and optimization of existing spend.
That said there were numerous bright spots in our operational effort to retain and expand customers.
Our partner success organization scored their highest ever customer satisfaction scores on technical support.
We see continued demand for our enable head nerds, who our partner evangelists and subject matter experts.
And as part of our ongoing mission to constantly improve every aspect of the customer experience, we launched a new partner success Center enable me.
And have already engaged with nearly 13000 partners through the center.
We invest in these elements of our business.
Because we grow as our partners' growth.
With the MSP is acting as an extension of our sales force, we efficiently access SMA it spend and.
In our third quarter adjusted EBITDA margin was the highest in our public history.
Which serves as a strong testament to the effectiveness of our strategy.
Great technology and superior operational execution are the lifeblood of our business.
But our people and culture are the oxygen.
One key focus area is our continued diversity.
Equality and belonging journey.
As one recent example, we hosted a global cross functional women leadership summit to help drive cultural transformation and execution excellence and further develop our women leaders.
We were also honored to be recognized by comparably, a leading workplace culture and corporate brand reputation platform.
With three awards in the quarter.
With that.
I'd like to turn the call over to Tim to discuss our financial results and outlook, then I will circle back for some closing remarks Tim.
Thank you John and thank you all for joining us today.
Our third quarter results were strong.
Exceeding guidance on both the top and bottom lines.
Steady demand for our platform solutions and strong cost management highlighted by our highest ever adjusted EBITDA margin as a public company.
Helped drive our outperformance.
Looking ahead, we believe our market remains durable and while we are mindful of the macro environment, our business model with multiple growth vectors and a clear strategic focus.
<unk> is well positioned to capitalize on the growing demand for MSP.
For our third quarter results total revenue was $107 $6 million representing.
Approximately 15% year over year growth or approximately 13% on a constant currency basis.
Subscription revenue was $105 $2 million.
Representing approximately 15% year over year growth or approximately 13% on.
On a constant currency basis.
Other revenue, which consists primarily of revenue from the sale of maintenance services associated with the historical sales of perpetual licenses and revenue from professional services was $2 4 million up approximately 2% year over year.
We ended the quarter with 2134 partners that contribute $50000 or more of IRR.
Which is up approximately 19% year over year.
Partners with over $50000 of IRR now represent approximately 55% of our total IRR up from approximately 50% a year ago.
Looking at net retention for the third quarter.
Dollar based net revenue retention, which is calculated on a trailing 12 month basis was approximately 108% or 110% on a constant currency basis.
Turning to profit and margin note that unless otherwise stated all references to profit measures and expenses are calculated on a non-GAAP basis and exclude the items outlined in the GAAP to non-GAAP reconciliations provided in today's press release.
Third quarter gross margin was 84, 6% compared to 84, 8% in the same period in 2022.
Third quarter, adjusted EBITDA was $36 $6 million up approximately 27% year over year, representing approximately 34% adjusted EBITDA margin.
Unlevered free cash flow was $30 2 million in the third quarter and Capex inclusive of $2 million of capitalized software development costs was $5 5 million or five 1% of revenue.
non-GAAP earnings per share was <unk> <unk> in the quarter based on 186 million weighted average diluted shares.
We ended the quarter with approximately $127 million of cash and an outstanding loan principal balance of approximately $343 million, representing net leverage of approximately one six times.
Approximately 46% of our revenue was outside of North America in the quarter.
Turning to our financial outlook.
As John discussed, we see tailwind in our market and believe in the long term opportunity for enable.
As we look to the near term.
We see macro uncertainty, creating caution and SME budget with.
With organizations seeking to optimize spend in a tighter budgetary environment.
Which we have reflected in our guidance.
And while our R&D engine continues to bring critical robust solutions to Mlps.
Our growth expectations are reflective of the time to market for these new products, which we continue to work to accelerate.
With that in mind for the fourth quarter of 2023, we expect total revenue in the range of $106 $5 million to $107 million.
Representing approximately 11% to 12% year over year growth or approximately 10% to 11% on a constant currency basis.
We expect fourth quarter adjusted EBITDA in the range of 35% to $35 $5 million, representing an adjusted EBITDA margin of approximately 33%.
For the full year 2023, we now expect total revenue of $420 million to $425 million.
Maintaining the midpoint of our prior full year guidance.
Representing approximately 13% year over year growth on both a reported and constant currency basis.
We are raising our adjusted EBITDA outlook and now expect full year adjusted EBITDA of $139 two to $139 7 million.
Approximately 22% year over year at the midpoint and representing an approximately 33% adjusted EBITDA margin.
There have been changes to the foreign exchange environment since our last outlook.
And I want to take a moment to reconcile the impact of these changes on our guidance.
In our previous call, we assumed FX rates for the euro and pound of 1.07 and $1 five respectively.
Using updated FX rates for the remainder of the year of 1.05 for the Euro and one two for the pound and updating other currencies to reflect the current rate environment translate to a negative impact on revenue of approximately $1 1 million for the fourth quarter.
We believe our ability to maintain the midpoint of our full year 2023 revenue guidance and raised full year 2023, adjusted EBIT guidance. Despite these FX headwinds.
Thanks to our operational strength.
We reiterate that we expect Capex, which includes capitalized software development costs of approximately $8 $5 million will be approximately 6% of total revenue for 2023.
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 $187 million for the fourth quarter and $186 million for the full year.
Finally, we expect our non-GAAP tax rate to be approximately 23% in the fourth quarter and 25% for the full year.
In closing we are pleased with our strong third quarter looking.
Looking forward, while we are mindful of the macro uncertainty. We believe we are uniquely positioned to benefit from the robust long term addressable market opportunity.
We have a proven track record of execution.
Our customer base is diversified by region and industry.
And the it management security and data protection solutions, we provide are high priorities.
The addition of our new MTR offering adds another gear to the business model.
With our strong adjusted EBITDA margin free cash flow and balance sheet, we have considerable capital allocation flexibility to invest strategically to meet the needs of our market.
Now I will turn it over to John for closing remarks.
Thanks, Tim.
We scaled our business to new heights in the third quarter and made progress on critical strategic initiatives.
As we March forward on our quest to advance the age of the MSP.
Our vision is clear and we believe the opportunity is vast.
The SME ecosystem, we serve is large and growing.
And our differentiated model, which efficiently cracks the code to the trillion plus SME market by providing enterprise grade technology to MSP delivered both growth and profit.
With our clear strategy, an appealing market opportunity, providing direction and energy to over 500 plus enabled.
Our sharp focus on driving operational excellence and continuing to deliver great technology to MSP.
And with that we will open up the line for questions operator.
As a reminder, if you'd like to ask a question press star one on your telephone keypad.
Our first question for today comes from Mike <unk> of Needham.
Your line is now open. Please go ahead.
<unk>, thanks for taking the questions here.
Great to see the revenue beat here in the maintenance of that that revenue guide as well as the EBITDA beat and raise for the full year that we're seeing here. Despite some of those FX headwinds today know that Tim addressed earlier.
I think there's probably two different angles, but both of these questions are kind of getting at the new customer engine that we're talking to and John I appreciate the comments as well as far as that growth algorithm.
The first question is really tied to the macro and I know that you guys are saying hey, the calendar 'twenty three customer cohort is it.
Turning his cohort from a dollar perspective and thinking about two new customers for.
For the company as a publicly traded company since the spin I guess in the context of macro can you help us think about I know you guys are saying.
A more cautionary environment is that cautionary comment.
Demonstrating even on a quarter to quarter basis and things might be.
More difficult versus where we were 90 days ago. That's the first question I do have a follow up beyond the macro.
Sure Thanks, Mike and I appreciate you all.
Following the stock and looking forward to talking to you and your team a little bit more tomorrow.
On the quarter on quarter comment look.
We purposely wanted to spell out the growth algorithm just to remind folks that.
We have this multifaceted approach as you mentioned the NPA part of the of the algorithm was quite strong it was quite strong.
In Q3, even compared to Q2.
Theres really no major difference in the macro environment that we're necessarily seeing from Q2 to Q3 like quarter over quarter performance I would say, it's more makeup a little bit of a continuation of the same where we're seeing MSP looking to hit their targets their both their topline and bottomline targets and the way that they are achieving that is more.
<unk> cross sell of additional services, rather than adding Smes and so that's what we're seeing a little bit of that moderated.
Device adds coming up and so I'd say, it's a continuation of really that moderated device AD and a little bit more of a focus on where they're spending their money as it relates to licenses licensing costs.
Across their broader portfolio.
Got it. Thank you for the color there and then the second question is when it comes back to the new customers, but.
Almost some competition here.
And so I just wanted to see is there any change on the competitive front.
You can see where some quarters removed from the <unk> acquisition.
Is there any benefit coming to enabled through that and then the secondary pieces. Obviously you guys are talking about the <unk> offering and what that does for enable but I have to imagine something.
Elevates you guys at a competitive level. So any feedback that you guys are receiving since the MTR I know you had some bullish.
Bullish comments in the prepared remarks, but just wanted to see if I could get any incremental color on those two pieces. Thank you.
Yeah on the NCAA I'd say, we continue to see a strong uptick in our core data protection offering so when we when we spun the business, though at a couple of years back.
We looked at Cove in data protection as a category is a tremendous opportunity one from the category and what we're seeing is the demand from the MSP base, but two we have a differentiated offering from a technology and from a CTO of total cost of ownership. So we decided a couple of years back to invest in the new brand bring back up to the front as we call it internally.
<unk> and really started pushing the COVID-19.
<unk> suite as more of an NCAA, new customer offering as opposed to just the cross sell offering and really were starting to see this through.
Net of all that hard work from a go to market teams and the brand and our product leadership continuing to differentiate that offering so.
Overall across the deals I would say, we're pretty consistent but if I had to point to one headline our bright spot, it's really that core data protection offering having success in new customers on the MTR front. Yes. We are bullish. This is this is an offering that we've been studying in the market that we've been studying for quite some time, we wanted to make sure that we file.
And an offering that can.
By itself differentiate enable compared to all the competitive landscape and we think this will help Mike both on our cross sell as you know we have a large security offering and so MSP look to enable and they trust enable at the security offerings, though we expect them to continue to trust enable at the MBR offerings, but also this will help.
With MTA in new customer acquisition, and even some of our early conversations with some of the MSP in the market if theyre not in the market for data protection offering RMM offerings, we're having now a conversation with them on MBR and so we're quite excited as to what this offering brings both in terms of cross sell but also new customer.
So look for further updates as we get into 2024 there.
That's great to hear thank you.
Thank you. Our next question comes from Jason Ader of William Blair. Your line is now open. Please go ahead.
Yes. Thank you. Good morning, guys just wanted to ask about the RMS business drill down on that a little bit.
<unk>.
Just for modeling purposes can you just remind us what <unk> said publicly about how big <unk> is as a percentage of your revenue.
Hey, Jason.
Thanks for the question.
Drilling down on the RMM business in terms of what we said historically in terms of the size of the business, we don't disclose the size of the.
The underlying kind of product lines within the business, but we have given color on just kind of stack ranking them and just how to think about the components of the overall business. So RMM.
His number one.
Data protection is number two.
And security is number three and the combination of data protection and security is bigger than <unk>. So they're all they're all sizeable.
Product lines within the business.
Got you, Okay, and then on the R&M side it sounds like it's sort of a continuation of some of the pressure on device growth.
We've heard sort of in the market that Theres also been a fair amount of pressure on pricing per device pricing and I'm wondering just what how are those dynamics shifted over time I don't know if its a competitive situation, where some people in the market or kind of bombing.
Bombing the price.
I guess what is the strategy.
Grow RMM in a weaker macro environment, let's just assume that we're going to be in the sort of same titer.
Environment through 2024.
How do you guys counteract maybe some of that pressure either on device growth or on pricing you don't want to put words in your mouth, but if you could comment on the pricing environment. There and then also just what the strategy would be to grow our amendment, a weaker macro environment, putting aside the strength that youre seeing in DP.
In security.
Thanks, Jason This is John P. So when we one of the reasons by the way that we don't really disclose revenue by type.
As we look at the broader opportunity from the LTV of the MSP.
So if you think about the opportunity on the MSP and I know you're familiar with our Investor relations deck, we typically say hey per device.
That's around the mid $20 per device type of opportunity.
By the way now with MTR that opportunity is down in the low thirties right. So that's why we're so excited about MTR, but when you think about the stack.
Our amount depending on what offering they have that could be a $1 $3 of about $30 backup and data protection is a material piece security is.
From an opportunity stock point of view, probably the largest one and so what we try to do is focus on the word adoption as opposed to just revenue by around them.
So for US this is not too dissimilar to some of our competitors, where we're looking to land and get the trust of the of the MSP historically, the front door coming into enable for MSP has been RMM and so that's when they would come in and then we would we would go and add in cross sell from there, but now with data protection, we're finding a different.
We have them in a different pattern, where actually landing with Cove, and our cross selling into RMM, we hope and expect to do that with MTR as well that will give at least three potentially four different lanes or avenues into enable from the cross sell motion and then we can begin building that trust and that value at the MSP is to get that stack up.
About 30.
<unk> $30 per device, a pretty all $30 per user per month type of opportunity. So for us. The focus really is not necessarily on the RMS revenue. It's on the RMM adoption, but more so on the enable MSP partner relationships. So we can unlock that 30 box. If you take that $30 and you smash at times, the roughly <unk> <unk>.
8 million devices that we have.
And multiply that by 12, you get that $2 billion to $3 billion opportunity and that's where the that's where the real game is going to be one for us. It's all about landing the customer regardless of what what path and then and then through trust and showing the value of the platform and how we can help them with their tcl their total cost of ownership.
To help with their efficiency play add more and more services to the MSP. So that's that's really the strategy and a slight slight I'd say evolution there.
Three or four years ago. It was hey come in to enable to RMR one of our two <unk> today, it's come in through one of those two.
Leading our <unk> data protection and in Tomorrow, It will be through MTR other type of security offerings. So that's why we're we're excited in how we think about the overall $2 $83 billion opportunity, that's just within our customer base today.
Got you makes sense and I just wanted to understand sort of the.
Evolution that you just.
Referred to.
Is that evolution, partly due to the pricing over the last five plus years.
$1 $3 Thats actually been coming down and therefore, you guys have had to.
Sort of broadened.
Or is there something or is it just more.
The needs of the market have shifted.
I would say this the stack the opportunity stack has gotten larger right. When I think about the market I often refer to it as the X and Y axes, right and on the X axis or all the services and if you're a business or any company. If you are a one service that youre going to market with well then you are laser focused on particularly with <unk>.
Price point, but as we add services and the Tam.
<unk> by the X axis, well now you have a little bit more of a strategy as to what you're planning for what we're really playing for or making sure that we're landing the MSP and helping them add more small medium enterprises, so youre willing to take a different a different cost mix for the different offerings, because youre not just focused on one offering it's one of the the benefits I would say it would be.
Coming off a bigger more of a platform story, adding data protection, adding security. We now can focus on the bigger LTV. So.
I don't think its necessarily.
But the need for RMM has diminished I just believe that that tech stack has gone up just with us by itself.
In this business for about 10 years that tech stack might've started about $15 or so.
Years ago, and now that we're adding things.
Endpoint security, we're adding things like managed detection and response, we're adding things like office 365 backup the value of the Tech stack continues to increase which somewhat changes the strategy and the tactics that you want to go and acquire those customers because there.
A more value to you to land them and grow them.
Makes sense. Thanks, thanks for that appreciate it.
As a reminder, if you'd like to ask a question you press star one on your telephone keypad.
Our next question comes from Matt Hedberg of RBC capital markets.
Your line is now open. Please go ahead.
Great guys. Thanks for my question for taking my questions John.
In your prepared remarks, I believe you said.
Having a direct relationship of direct relationships with certain customers could make sense I presume. These are.
Fairly large customers just wondering if you could provide a little bit more detail on that strategy and sort of where do you draw. The line between letting an MSP handle everything and more of a direct relationship.
Yes. Thanks, Great question, Yes, what I was referring to there is that internal it department right.
And so if you think about our offerings, Matt whether it's our Cove data protection offering while the remote monitoring and management. Those use cases are very similar and scratches similar actually internal it department, especially where it is more of a robo framework right remote office branch office folks are working from home. They are in a hybrid environment different geos different offices and the.
Professional is under the same type of scrutiny and performance issues as an MSP and what's that all about efficiency and an MSP or an internal it department have that same need where they can leverage our tools our platform.
Our automation and do more with less so the use case and the persona is a very similar.
We've been finding that our offerings are I've had quite success.
We have had success for quite some time and we're really just leaning in a little bit more with a more of a specialized sales and go to market team that because what we're finding is we were we were not necessarily marketing or selling to that mid market enterprise, but they were buying from us in 2023 really began a little bit more of a focused effort to talk to that.
We're selling to understand what that persona needs and setting up a sales and marketing motion that satisfy their needs and so it's been a success overall.
That part of the business is has been one of our bright spots for sure and as far as your second question on the line there is not really align it.
If an internal it department.
Is choosing to manage their own digital assets themselves.
Then enable will provide them that software.
The benefit of our tools into the same thing with our <unk> offering as we allow MSP.
Co manage with these customers and so if you're a CIO or an internal it department you can choose to use in our in central RM platform. Our Cove data protection and then you can bring in an MSP to augment so both your internal team and your managed service provider. Your IP consultant, both can have eyes on glass and see the same environment.
So what's happening now that I mentioned with Jason's question that I always refer to our Tam as the axes on the services and the Y axis is the size of the customers and because of both our direct motion to internal it departments, but also as a result of MSP landing larger and larger customers. Our Tam has increased.
Thing that Y axes, and the size of enterprise that enable a servicing is getting bigger and this concept of a co managed environment, where our CIO was saying Hey look I have my own.
My own staffing issues, let me pull in an MSP to augment some of these services that I need and I can do so at a and actually save and save some budget as well and so we're finding that to be a healthy formula. So the fact that our our platform allows both MSP and internal it department to either do it separately or together in a co managed model.
Just really resonates with these personas that are both trying to solve the same thing doing more with less keeping their digital assets protected productive and so that their workforce can do so in a collaborative manner. So the first one is a similar and our platforms are perfectly really built and architected for that for that type of persona.
That's super helpful. John seems like a nice incremental catalyst as well next year as you kind of continue that motion.
And then maybe one for Kim <unk> I think it looks like it ticked up maybe 100 basis points on a constant currency perspective from Q2.
Obviously this is a it's a trailing trailing 12 month metric but.
That slight improvement how do you see that perhaps trending into Q4, I mean could it could move up a little bit if theres, a little bit of a Q4 budget flush.
Because obviously theres an impact on maybe 2024 as a result of that but just kind of curious on your thoughts there.
Yes on the trailing 12 months. It was it was slightly slightly up I would say.
On the quarter. It was it was pretty consistent.
Q3 versus Q2.
I wouldn't say historically, we haven't seen like a budget flush end of the year from an MSP perspective.
To lend to any type of.
On natural acceleration from an IRR perspective.
And as I would say as we think about NR in Q4.
I would expect it to be fairly consistent it's been a pretty steady metric we did get a slight.
Increased due to the timing of some of the price change.
In Q2.
That will live with us kind of through through.
The second quarter of next year, but we arent modeling any significant change from our perspective quarter over quarter.
Got it thanks, a lot guys.
Thank you next question comes from Brian Essex of Jpmorgan. Your line is now open. Please go ahead.
Hi, good afternoon, and thank you for taking my question and great to see the incremental operating margin expansion.
Maybe on that point, Ken if you could help us understand some of the levers behind some of the cost controls that you had in the quarter. It looks like operating expenses actually declined sequentially, which initially.
Looks like it might be seasonal, but then when we dig into some of that.
The drivers of that some of them may be different.
Maybe you can help us understand what legacy to pull in the quarter, how sustainable are they and how you think about operating leverage as we kind of start to look into 2024.
Yes, absolutely.
Looking across the P&L I think we touch on this historically, but we.
We see we see leverage opportunities across all.
All three aspects, whether it be G&A sales and marketing and R&D.
If you look at 'twenty, three we've made a bigger investment into R&D.
Strategically to drive new <unk> and.
An accelerated pace of new product being introduced to our partner base.
In 2023 and beyond.
I expect us to be able to get leverage on that incremental investment that we made.
In 2003 on that line G&A again that that line has been pretty flat since we spun the business out.
And continue to expect to get leverage there over the short medium and long term and then the last piece of the sales and marketing.
Where I would say, we're always scrutinizing and making sure we're getting the proper ROI from our sales and marketing perspective breaking.
Breaking down our spend into <unk>.
And optimizing where we see the ROI.
<unk> is not up to our standards. So that's a continuous process that that we've looked at kind of since we've been a public company on the sales and marketing front and we expect to continue to do that but stack ranking the opportunity for leverage across the P&L I would say one still sits as G&A.
Two would be in sales and marketing and three would be in an R&D, but opportunity on all three nonetheless.
Got it.
Helpful and maybe if I could circle back on MBR to follow up.
Any sense that you might have in terms of any pent up demand.
And how long you might be you may have been I guess seeding your installed base for that and.
You anticipate ulta.
Ultimate penetration rate might be.
Sure.
We know from talking to our customers and we hit this a little bit on the prepared remarks, so we did a.
A pretty pretty sizable.
Customer survey, where we ask them.
They're bigger focus areas, where for 2023, and 2024 and cyber security services was very much top of mind and and from talking to our customers and even looking at the survey results. We believe that there's a good amount of opportunity and the good news here, Brian is out there for both our small msp's.
And our large MSP. So on your adoption I believe that it will cover the broader installed base.
And so that the double click into that is.
What type of uptick will what the msp's out as they roll this out to their small medium enterprise.
So we believe as Theres more of a driver from a compliance point of view by the way we backup the two things that are really driving this one.
When companies looking to get cyber insurance.
There is much.
Much more focus overall on the stack and being able to be able to not just protect but also to detect and respond across the basis is helping MSP and the second thing.
There is a big push from a compliance point of view so security.
Really before was a decision how.
What is the level of risk I'm willing to take as a small medium enterprise or as an MSP and now with compliance with it used to be maybe a sliding scale from a risk aversion or a range of gray is now more black and white binary if you want to be compliant whether youre in the health care industry. Our fintech, whether you were in a certain geography like in the U K with <unk>.
<unk> essentials.
If you want to play in that market as a small medium enterprise you need to be compliant and they are pretty specific as to what that need is and what the what those requirements are so thats driving a lot of the the.
The need for the cyber security services, the pop up at the small medium enterprise and we're seeing it across the geographies and across the verticals that our MSP participate in and across the different sizes. So.
We're quite bullish on the opportunity it'll take some time as the MSP.
Roll this out.
And get comfortable with the motion themselves, but we are quite bullish that it will have a broad a broad appeal to that to the to our installed base.
Great Great color. Thank you.
Thank you at this time, we currently have no further questions. So I'll hand back to John <unk> for any further remarks.
Thank you all for participating in our quarterly call and for the questions and looking forward to talking to you all at the beginning of 2024 take care.
Thank you for joining today's call you may now disconnect your lines.
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