Q4 2023 N-able Inc Earnings Call

Operator: Ladies and gentlemen, thank you for standing by. The N-Able fourth quarter and full year 2023 earnings call will begin shortly. If you would like to register a question at any time, please press star 1 on the telephone keypad. Thank you. N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N-A-B-L-E N My name is Elliot, and I'll be coordinating your call today.

Ladies and gentlemen, thank you for standing by and I, both fourth quarter and full year 2023 earnings call will begin shortly.

We'd like to register a question at any time. Please press star one on your telephone keypad. Thank you.

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Okay.

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Hello, and welcome to the enable fourth quarter and full year 2023 call. My name is Andrew and I'll be coordinating your call today.

Operator: If you would like to register a question during today's event, please press star followed by one on your telephone card. I'd now like to hand over to Griffin Gere, Investor Relations Manager. The floor is yours, please go ahead.

I would like to register a question during today's event. Please press star followed by one on your telephone keypad.

I would like to hand over to Griffin Kim Investor Relations manager the floor is yours. Please go ahead.

Matthew George Hedberg: Thanks, Operator, and welcome everyone to 4th Quarter 2023 Earnings College. With me today are John Pagliuca, N-Able's President and CEO, and Tim O'Brien, EVP and CFO. Following our prepared remarks, we will open the line for a question and answer session. This call is being simultaneously webcast on our investor relations website at investors.enable.com. There, you can also find our earnings press release, attended to supplement our prepared remarks during today's call. Certain statements made during this call are forward-looking, including those concerning our financial outlook, our market opportunities, and the impact of the global economic environment on us. The statements are based on currently available information and assumptions. We undertake no duty to update this; however, staff is required by law.

Thanks, operator.

Welcome everyone.

<unk> enables fourth quarter 2023 earnings call.

With me today are John Peeler Yoga enables president and CEO.

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 don't 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.

Including those concerning our financial outlook, our market opportunities and the impact the global economic environment on our business.

These statements are based on currently available information and assumptions, 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.

Matthew George Hedberg: The statements are also subject to a number of risks and uncertainties, including those highlighted in today's earnings release and our filings with the SBA. Additional information concerning these statements and the risks and uncertainties associated with them. Thank you all for joining us. Copies are available from the SEC or on our investor relations website.

<unk> 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.

John Pagliuca: Furthermore, we will discuss various non-GAAP financial measures on today's agenda, unless otherwise specified when we refer to financial measures. We will be referring to non-GAAP financing for reconciliation of certain GAAP to non-GAAP financial measures discussed on today's call, and N-A-I-B-L-E, and our earnings press release on our investor relationship. Now, I turn the call over to John. Thank you, Griffin, and welcome to everyone joining us on the call. Today, I want to discuss our 2023 results. Strategy for meeting the evolving needs of the MSP market we serve and key components of our 2024 operating plan. Let's start with our results.

Unless otherwise specified we refer to financial measures.

We will be referring to non-GAAP financial measures.

A reconciliation of certain GAAP to non-GAAP financial measures discussed on today's call.

Payable in our earnings press release on our Investor Relations website.

And now I will turn the call over to John.

Thank you Griffin.

And welcome to everyone joining us on the call.

Today I want to discuss our 2023 result.

Enable strategy for meeting the evolving needs of the MSP market we serve.

And key components of our 2020 operating plan.

Let's start with our results.

John Pagliuca: We delivered strong performance in the fourth quarter and fiscal year 23. Fourth quarter revenue grew in cost and currency by 11% year over year, and full year 2023 revenue grew 14% in constant currency. Our adjusted EBITDA in the fourth quarter was $39.2 million, reflecting a 36% margin, and $143.4 million for the full year, reflecting a 34% margin.

We delivered strong performance in the fourth quarter and fiscal year 'twenty three.

Fourth quarter revenue grew in constant currency and 11% year over year.

And full year 2023 revenue grew 14% in constant currency.

Our adjusted EBITDA in the fourth quarter was $39 2 million.

Reflecting a 36% margin.

And $143 4 million for the full year.

Reflecting a 34% margin.

Year over year, we expanded our annual adjusted EBITDA margin by over 300 basis points and Unlevered free cash flow margin by over 400 basis points.

John Pagliuca: Year over year, we expanded our annual adjusted EBITDA margin by over 300 basis points and our unlevered free cash flow margin by over 400 basis points. We are driving profitable growth. We also made solid progress on our initiatives across the company, laying the groundwork for what we believe will be a transformative 2024. Now, I'll share some highlights from 2023.

We are driving profitable growth.

We also made solid progress on initiatives across the company laying the groundwork for what we believe will be a transformative 2024.

And now I'll share some highlights from 2023.

On the product front, we increased the depth and breadth of our offerings.

John Pagliuca: On the product front, we increased the depth and breadth of our offerings; the launch of N-Able MDR in late Q4 widened the cybersecurity services market for both N-Able and our customers. This paves the way for our partners to augment their teams and provide a differentiated level of security services and RMM. We deliver analytics, Apple management, AI-generated script automation, and other critical functional upgrades empowering IT technicians to better manage a broader scope of IT assets. We also delivered a host of enhancements to Code, our cutting-edge data protection offering, adding Teams coverage to our M365 backup, and expanding our draft capabilities, including enhancing the standby image. Standby Image helps our partners recover faster and more predictably, so they can offer higher service levels to their customers, further differentiating COVID in the market, as a validation point. COBE was recently crowned a champion in the Canalys Managed Backup and Disaster Recovery Leadership Matrix, heralding a change of guard in this space.

The launch of enable MTR in late Q4, why didn't the cyber security services market to both enable and our customers.

This paves the way for our partners to augment their teams and provide a differentiated level of security service.

And RMM, we delivered analytics Apple management.

AI generated script automation and other critical functional upgrades empowering technicians to better manage a broader scope of assets.

We also delivered a host of enhancements to Cove.

Cutting edge data protection offering.

Adding teams coverage to our <unk> hundred 65 backup and.

And expanding our draft capabilities, including enhancing standby image.

Standby image helps our partners recover faster and more predictably. So they can offer higher service levels to their customers further differentiating <unk> in the market.

As a validation point Cove was recently crowned champion and the canal is managed backup and disaster recovery leadership matrix.

Heralding a change of guard in this space.

Legacy vendors in the past.

John Pagliuca: Legacy Vendors of the Past. Cove is the future. Collectively, these efforts drove a sharp expansion in our cross-sell opportunity in the second half of 2023 across our product portfolio. N-Able's average monthly per device revenue opportunity is currently over $30, up from the low 20s in the beginning of 2022. With over 8 million devices under management, the cross-sell opportunity now sits at well over $2 billion. We believe growing and filling our storefront with increasingly robust, purpose-built products is a winning strategy. In 2023, we delivered on this mission. And in 2024, we will begin to realize the opportunity this white space creates.

Cove is the future.

Collectively these efforts drove a sharp expansion and our cross sell opportunity in the second half of 'twenty three.

Across our product portfolio.

<unk> enables average monthly per device revenue opportunity is currently over $30.

Up from the low <unk> at the beginning of 2022.

With over 8 million devices under management, the cross sell opportunity now sits at well over $2 billion.

We believe growing and filling our storefront with increasingly robust purpose built products is a winning strategy.

In 2023, we delivered on this mission and in 2024, we will begin to realize the opportunity this white space creates.

John Pagliuca: Product innovation added fuel to our powerful go-to-market and partner success. In 2023, we hosted our main customer event in Power and dozens of global events, including roadshows, Business Transformation Sessions, peer groups, and Head Nerd office hours.

Product innovation added fuel to our powerful go to market and partner success engines.

2023, we hosted our main customer event and power.

And dozens of global events, including Roadshows.

Business transformation sessions.

Peer groups and Headboard office hours.

John Pagliuca: In total, we engage thousands of our partners at these live events, enabling them to fully maximize their investment and achieve their goals. This partnership approach within the MSB community is crucial to our fabric and sets us apart from our competitors. A customer win in the fourth quarter drives home how these touch points translate to customer values. Through Active Relationship Management, an account executive uncovered an existing MSP's desire to grow the security operations center business. This MSP attended one of our business transformation events focused on building a security service, and even though the MSP had an existing MDR solution in place. The customer signed a multi-skew, multi-year deal with us, including MDR, for approximately $240,000 in ARR.

In total we engage thousands of our partners at these live events.

Enabling them to fully maximize their investment and achieve their goals.

This partnered approach within the MSP community is crucial to our fabric and sets us apart from our competitors.

Our customer win in the fourth quarter drives home, how these touch points translate to customer value.

Through active relationship management and account executive uncovered an existing MSP desire to grow the security Operation Center business.

This is MSP attended one of our business transformation events focused on building security service.

And even though the MSP had an existing MTR solution in place.

The customer signed a multi SKU multi year deal with us, including MTR for approximately $240000 of IRR.

Our product enhancements and brand momentum also had a real impact on prospective customers.

John Pagliuca: Our product enhancements and brand momentum also had a real impact on prospective customers. As a result, our 2023 new customer revenue cohort was the highest in six years. And given the snowball nature of our growth model, we believe this bodes well for future expansion opportunities. Despite an uncertain macro environment in 2023. MSPs chose to start and expand their relationship with N-Able. To recap an exciting year, we expanded our white space opportunity, enhanced our product capabilities, and deepened our presence in the MSP community, all while driving profitable growth. Let's now switch gears and look at the MSP market as it stands today, our plans for the future, and our strategy for helping our MSP partners meet evolving SME needs. I'll start with key insights from our MSP Horizons report, a future-focused piece of research we conducted with Canalys, a leading channel analyst firm, packed with learnings from hundreds of MSPs across the globe. One highlight from the MSP Horizons is the durability of the MSP market. 97% of MSPs surveyed believe they will grow their managed services revenue this year, with roughly two-thirds expecting double-digit growth in 2024. Persistent tailwinds drive these forecasts.

Our 2023, new customer revenue cohort was the highest in six years.

And given the snowball nature of our growth model, we believe this bodes well for future expansion opportunities.

Despite an uncertain macro environment in 2023.

Osp's chose to start and expand their relationship with enable.

To recap an exciting year, we expanded our white space opportunity enhance our product capabilities and deepened our presence in the MSP community.

While driving profitable growth.

Let's now switch gears and look at the MSP market as it stands today, our plans for the future and our strategy for helping our MSP partners meet evolving SME needs.

I'll start with key insights from our MSP Horizons report.

Our future focused piece of research, we conducted with <unk>, a leading channel analyst firm.

Packed with learnings from hundreds of employees across the globe.

One highlight from the MSP horizon is the durability of the NFC market.

97% of MSP surveyed believe they will grow their managed services revenue this year.

With roughly two thirds expecting double digit growth in 2024.

Persistent tailwind is drive these forecast.

John Pagliuca: Rising IT costs, increasing security threats, intensifying compliance standards, staffing headaches, and staying ahead of the fast-changing technology landscape create considerable challenges for SMEs who are trying to manage their IT operations. MSPs provide the help and critical expertise SMEs need, with these durable forces driving demand. We steadfastly believe in N-Able's strategic positioning as a provider of purpose-built software to MSPs. There is an abundance of opportunity. While the market is strong, MSPs also face challenges. Their SME customers continue to operate on a tight budget.

Rising costs, increasing security threats intensifying compliance standards staffing headaches and staying ahead of the fast changing technology landscape Creek considerable challenges for Smes, who are trying to manage their it operations.

Msp's provide the help incredible expertise smbs need.

With these durable forces powering demand, we steadfastly believe and enables strategic positioning as a provider of purpose built software to MSP.

There is an abundance of opportunity.

While the market is strong MSP has also faced challenges.

The SME customers continue to operate tight budgets.

John Pagliuca: This tighter environment heightens MSPs' need for proven solutions that grow their top line and protect their bottom line. N-Able empowers both. Our security, data protection, and RMM solutions are integral components of MSP's offering, driving top-line revenue. Our software solutions are also scalable, unlike labor, and our platform approach drives consolidation of disparate point solutions. This improves technician efficiency and profitability, helping MSPs protect and grow their bottom line. We enable MSPs to play both offense and defense.

This tighter environment heightens msp's need for proven solutions that grow their topline and protect their bottom line.

Enable empowers both.

Our security data protection and <unk> solutions are integral components of MSP offerings driving the topline revenue.

Our software solutions are also scalable unlike labor and our platform approach drives consolidation of disparate point solutions.

This improves technician efficiency and profitability, helping msp's protect and grow their bottom line.

We enable nsp's to play both offense and defense.

The Msp's Horizons report also showed the areas in which MSP is a looking to differentiate their offerings to accelerate growth.

John Pagliuca: The MSP's Horizons report also showed the areas in which MSPs are looking to differentiate their offerings to accelerate growth. Cloud Infrastructure Management and Managed Security ranked as top priorities. I'll now double-click on each.

Cloud infrastructure management, and managed security ranked as top priorities.

I will now double click into each.

MSP desire for cloud management reflects the simple reality.

Businesses are running their operations in hybrid environments with 63% of SME workloads into anticipated to be run in the public cloud in 2024.

So msp's need tools that can operate in the cloud as well as physical networks servers and devices.

John Pagliuca: MSBU's desire for cloud management reflects a simple reality. Businesses are running their operations in hybrid environments, with 63% of SME workloads anticipated to be run in the public cloud in 2024. So, MSPs need tools that can operate in the cloud, as well as on physical networks, servers, and devices. N-Able has excellent solutions for this hybrid world. Our security solutions are industry-leading and delivered seamlessly to the cloud. Cove, our data protection solution, is also delivered in the cloud and protects both on-premises and cloud environments. And critically, in monitoring and management, we recently introduced market-leading innovation with the launch of Cloud Commander. CrowdCommander solves a simple problem statement for MSPs. Cloud Commander Leapfrog's approach, allowing MSPs to navigate the cloud through a single console.

Enable has excellent answers for this hybrid world.

Our security solutions are industry, leading and delivered seamlessly to the cloud.

Cove, our data protection solution has also delivered in the cloud and protects both on Prem and cloud environments.

And critically and monitoring and management, we recently introduced Martin leading market, leading innovation with the launch of cloud commander.

Cloud commander solves a simple problem statement for MSP.

Navigating the cloud is a headache.

The current paradigm portions msp's operate disjointed administrative portals across multiple Microsoft cloud.

This is time consuming manually intensive and mistake prone.

Cloud commander leap process approach, allowing msp's to navigate the cloud through a single console.

Our solution empowers technicians to manage workloads onboard an awkward users and apply access and security policies to users and devices with point in cookies.

This is a clear win for the MSP.

Emanating dashboard sprawl generates better technician efficiency.

Cloud and on premise capabilities expand MSP service capacity, and we believe combining cloud commanders cloud management capabilities with our historic strengths and device management is a leap forward for enable and the MSP we serve.

Security is also top of mind.

Increased Tac philosophy.

The pace of innovation by adversaries and growing compliance standards have elevated the security discussion for the it department to the C suite.

The intensifying threat landscape has also eroded the line between SEC ops and it ops.

Small and medium businesses do not want silos.

Want protection.

We've listened to the needs of the market and our product suite expansion in 2023 was concentrated in the security category highlighted by MTR.

So assuming out momentarily, we feel great about our positioning we play in a large growing market with durable secular tailwind.

John Pagliuca: Security is also top of mind. We play in a large, growing market with durable secular tailwinds. Our offerings align with the business priorities of our customers, and we are bringing products to market that align with market demand.

Our offerings aligned with the business priorities of our customers.

And we are bringing products to market that align with market demand.

This brings us to 2024.

John Pagliuca: Empowering MSPs with leading security and data protection solutions that give them and their SME clients the peace of mind they deserve. Second, driving rapid innovation into our RMM platform. Let's start with our customer engagement. We are focused on driving that number higher. We have also seen continued opportunities to facilitate engagement and positive customer outcomes through our recently launched customer platform, which over 20,000 IT technicians have used since its inception last year. This flexibility holds a mutual benefit for both N-Able and our MSPs. In the past, we generally landed customers on RMM, and our proverbial snowball would grow over time as MSPs added SKUs and rolled out our software across their SME customers, bolstering our new customer acquisition, at a per device price point several times higher than with RMF. In short, this leads to unfavorable unit economics, particularly for smaller MSPs. But as the only person running his business, he didn't have the time or resources to deliver the intensive protection services requested.

We have an ambitious plan guided by the following objectives.

First.

Empowering MSP with leading security and data protection solutions that give themselves and their SMB clients the peace of mind they deserve.

Second driving rapid innovation into our R&M platforms, enabling msp's to better manage hybrid digital environments at scale.

And third doubling down on our customer engagement model delivering a differentiated level of service to the MSP community.

Let's start with our customer engagement.

We realized approximately $4 per device per month of our $30 plus white space opportunity.

In 2024.

We are focused on driving that number higher.

With this in mind, our go to market teams are employing more sophisticated tearing and bespoke customer pathways, while engaging with our customers at end market events, where we have seen high on ROI.

We have also seen continued opportunities to facilitate engagement and positive customer outcomes through our recently launched customer platform.

Which over 20000 technicians have used since its inception last year.

Bundled multi SKU offerings and longer term contracts there are another area of opportunity.

This flexibility holds mutual benefit for both enable and our MSP.

Driving the success of our deep security suite is another 2024 focus points.

We believe <unk> is key to this initiative.

John Pagliuca: We believe we can profitably replicate the success at scale. Implementing mechanisms to stop the breach is critical, but not sufficient. Cove also enjoys up to 60% of the total cost of ownership compared to well-known competitors, with Hybrid Devices, Operating Systems, Cloud Environments, and Workforce Pliability making SME environments even messier. While Tim will go into more detail, I want to outline what all this means for our 24 financial... Looking ahead to 2024, our assessment of the demand environment reflects strong growth from a resilient market and Accelerated Cross-Selling of our growing products. And with that, I'll turn the call over to our CFO, Tim O'Brien, to discuss our financial results and outlook. And then I'll circle back for some closing remarks. Tim?

Nearly requires a substantial staffing.

This leads to unfavourable unit economics, particularly for smaller Msp's.

A recent $30000 deal illustrates how enable can solve this problem.

It MSP told US he was seeing strong client demand security services.

But as the only person running his business. He didn't have the time or resources to deliver the intensive protection services requested.

By utilizing external security personnel to enable and Dr.

The MSP was able to deliver the security outcomes as clients desired, while also achieving profitable growth Brazil in business.

We believe we can profitably replicate the success that scale and.

And provide a tech enabled staff augmentation pathway for Msp's.

Which will allow them to land additional customers expand their scope of service and sleep easier at night.

We see particularly strong opportunity to expand our LTV at the low end of the market.

Tim O'Brien: We advanced our product roadmaps. 2023 was an excellent step forward in our goal of driving a sustained Rule of 50 company, substantiating the power of our model. Total revenue in the fourth quarter was $108.4 million, representing 13% year-over-year growth or 11% on a constant currency basis.

M D R tends to be a more of a greenfield opportunity for msp's.

Cope also aligns with companies needs to be secure.

Implementing mechanisms to stop the breaches critical but not sufficient.

Cove Act as a stallworth failsafe quicker.

Quickly restore data in case of a breach.

In 2024 were energised by the prospect of continuing to take market share in this fast growing space.

Our ambitious roadmap aims to enhance coves ease of use through improved integrations with popular Psa symptoms.

Brought in the scope of IP environments, where code can restore data.

And further ensure backup copies of clean and safe.

Tim O'Brien: Subscription revenue was $106.1 million, representing approximately 14% year-over-year growth or 12% on a constant currency basis. For the full year, we finished 2023 ahead of our outlook with total revenue of $421.9 million, representing year-over-year growth of 13.5% on both a reported and constant currency basis. Fourth quarter adjusted EBITDA was $39.2 million, up approximately 26% year over year, and coming in well ahead of the high end of our outlook, representing a 36.2% adjusted EBITDA margin. For the full year, 2023, gross margin was 84.6% compared to 85.2% in 2022. Unlevered free cash flow was $102.3 million in 2023 and $34.6 million in the fourth quarter.

Cove also enjoys up to 60% of the total cost of ownership compared to well known competitors.

And we continue to develop cove with an iron maintaining our pricing advantage.

Over half of our Msp's used Cove.

Supporting our view that great economics, and strong capabilities are winning value proposition.

But in MSP needs to protect data Cove is the answer.

Lastly in 2024, we plan to take additional steps to modernize our arm and platforms provide msp's the ability to connect to third party software and a more secure an automated way via api's.

And bring innovation to Msp's in the form of cloud commander in other hybrid focus solution.

With hybrid devices operating systems cloud environments, and workforce, playability, making SME environments, even messier.

We believe our roadmap and solutions will resonate and enable our msp's to manage the increasingly digital SME.

With Claire customer use cases, and a path to value in sight.

We are relentless we focused on continuing the modernization of RMM platforms.

We've covered a lot of ground today.

While Tim will go into more detail I want to outline what all this means for our 24 financials.

Looking ahead to 2024, our assessment of demand environment reflect strong growth from a resilient market temper.

Tempered by a tight operating environment for Sme's and Msp's.

We expect full year gross retention in line with fourth quarter results near 86%.

Continued healthy contribution from new customers.

An accelerated cross selling.

Of our growing product suite.

Tim O'Brien: CapEx was $5.2 million, inclusive of $1.9 million of capitalized software development costs for 4.8% of revenue in the fourth quarter. Before turning to our 2024 outlook, I will give commentary on our fourth quarter and full year results. Key drivers of this profit performance were the flow-through of the revenue beat to the bottom line and continued strong cost management across the P&L. This brings us to our first quarter and full year 2024 guidance. There are several points to consider regarding the building blocks of our guidance for the year. First,

However, we also expect that SME budgetary constraints will lead to slower device edition, which will have a moderating impact on our overall growth this year.

Net net we expect to operate in line with broader MSP market growth of low double digits in 2024, while investing and executed with rigor physician ourselves of growth acceleration in the mid to long term.

And with that I'll turn the call over towards CFO, Tim O'brien does.

<unk>, our financial results and outlook and then I'll circle back with some closing remarks.

<unk>.

Thank you John and thank you all for joining us today.

Strong fourth quarter and full year results are a testament to our compelling value proposition business model and resilient market.

We advanced our product Roadmaps <unk>.

Expanded our cross-sell opportunity and drove profitable growth expanding our annual adjusted EBITDA margin by over 300 basis points year over year.

Tim O'Brien: Our guidance assumes FX rates of 1.07 for the euro and 1.25 for the pound for the remainder of 2024. Given that nearly half of our revenue is generated outside of North America, I want to update the guidelines around the impact of FX movements on revenue. As a proxy, every point of the euro is approximately $1.1 million of annual revenue impact, while every point on the pound is about $375,000 of annual revenue impact in 2024.

2023, with an excellent step forward on our goal of driving a sustained rule of 50 company substantiating the power of our model.

The progress we made in 2023 is a solid foundation for us to build on in 2024 and beyond.

Now I'll review, our fourth quarter and full year 2023 results.

Total revenue in the fourth quarter was $108.4 million, representing 13% year over year growth or 11% on a constant currency basis.

Subscription revenue was $106 $1 million, representing approximately 14% year over year growth or 12% on a constant currency basis.

Tim O'Brien: Second, our revenue guidance reflects our assessment of a stable but cost-conscious environment. As SME device growth helps feed our model, we expect this component of our growth algorithm to continue to be muted. Regarding expenses and profits, our guidance demonstrates a continued balanced approach. We believe it is important to maintain a steady hand and fund initiatives to drive business growth in 2024 and beyond. We are investing and operating with a growing TAM in mind. These propelling forces are balanced by our desire to align cost with growth. On the whole, we believe our 2024 operating plan positions us to advance initiatives necessary to achieve future growth acceleration while also delivering profit levels that align with our goal of driving towards a sustainable Rule of 50 profile for the long term.

Other revenue, which primarily represents maintenance revenue from our discontinued perpetual license model was $2.3 million down 1% year over year.

We ended the quarter with 2196 partners contributing $50000 or more of <unk>, which is up approximately 16% year over year.

Partners with over $50000 or they are now represent 56% of our total IRR up from 51% a year ago.

Dollar based net revenue retention, which is calculated on a trailing 12 month basis was approximately 110% on both a reported and constant currency basis.

For the full year. We finished 2023 ahead of our outlook with total revenue of $421.9 million representing year over year growth of 13.5% on both a reported and constant currency basis.

Subscription revenue was $412 $1 million, representing approximately 98% of total revenue and growing approximately 14% year over year on both a reported and constant currency basis.

Tim O'Brien: For the full year 2024, we expect CapEx, which includes capitalized software development costs, to be approximately 5% of revenue, and adjusted EBITDA conversion to unlevered free cash flow to be approximately 67%. In 2024, we anticipate approximately $30 million in interest expense for the full year, which assumes an effective interest rate of approximately 8%. We expect total weighted average diluted shares outstanding of approximately $187 to $188 million for the first quarter and approximately $188 to $189 million for the full year.

Turning to profit margins note that unless otherwise stated all references to profit measures and expenses are calculated on a non-GAAP basis and <unk> items outlined in the gap to non-GAAP reconciliation provided in today's press release.

Fourth quarter, adjusted EBITDA was $39.2 million up approximately 26% year over year and coming in well ahead of the high end of our outlook, representing a $36, 2% adjusted EBITDA margin.

Full year 2023, adjusted EBITDA was $143 $4 million up approximately 25% year over year, representing an adjusted EBITDA margin of 34%.

John Pagliuca: Finally, we expect our non-GAAP tax rate to be approximately 28 to 29% in both the first quarter and the full year. Now I'll hand it back over to John for closing remarks.

Fourth quarter gross margin with $84, 5% compared to 85% in the fourth quarter of 2022.

Full year 2023, gross margin was $84, 6% compared to 85.2% in 2022.

John Pagliuca: Thanks, Tim, a year ago. We are faced with a rising inflationary market and uncertain economic conditions in 2023. We believe there is significant wind in our sails as we enter 2024 with a focused operating plan, and an exciting market prospect. Our commitment to delivering critical IT solutions for MSPs and SMEs across the globe is resolute.

Unlevered free cash flow was $102.3 million in 2023, and $34 $6 billion in the fourth quarter.

2023 unlimited free cash flow grew 37% year over year.

Capex was $22.3 million inclusive of $8.6 million of capitalized software development costs or 5.3% of revenue for the full year.

Operator: We look forward to a transformative 2024 and are determined to deliver for our customers and stakeholders. And with that, we will open up the line for questions. Operator.

Capex was $5 $2 million inclusive of one $9 million are capitalized software development costs or four 8% of revenue in the fourth quarter.

non-GAAP earnings per share was 11 in the fourth quarter based on $186 million weighted average diluted shares and 37 cents for the full year based on 186 million weighted average diluted shares.

Operator: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally.

We ended the year with $153 million of cash and equivalents and had an outstanding loan principal balance of $342.1 million, representing net leverage of approximately one three times based on trailing 12 month EBITDA.

Mike Cikos: The first question comes from Mike Cikos with Needham. Your line is open, please go ahead. Hey, guys, thanks for taking the question here. We're looking to get a little bit more color as far as your outlook for calendar 24. And there are two dynamics here. I think both would probably be good for Tim.

Approximately 46% of our revenue was outside of North America in the quarter and the full year.

Before turning to our 2024 outlook I will give commentary on our fourth quarter and full year results.

Tim O'Brien: But John, feel free to chime in as well. Tim, the first thing I'm trying to think about is the growth algorithm here. I know you guys are calling out that muted device count, but is there a way to think about what the net retention is that you guys are assuming? And let's say ballpark figures if you're assuming, I don't know, one one ten on a constant currency. What's the composition of that?

Fourth quarter revenue came in above the high end of our guidance range and was attributable to continued strong demand for our products, coupled with positive FX impact relative to expectations.

Adjusted EBITDA also exceeded expectations.

Drivers of this profit outperformance with a flow through of the revenue beat to the bottom line and continued strong cost management across the piano.

This brings us to our first quarter and full year 2024 guidance.

Tim O'Brien: Is it seven to eight points from this cross sell, maybe a point from device count, and then another point above the new, I guess, NRR coming from new customer acquisition? Like, how do we think about those different pieces playing out over the course of 24? And then I just have a quick follow-up. Yeah, absolutely, Mike. Thanks for the question. Overall, our 2024 guide philosophy is unchanged.

There are several points to consider regarding the building blocks of our guidance for the year.

First our.

Our guidance assumes FX rate of 1.07 for the Euro and 125 for the pound for the remainder of 2024.

Given that nearly half of our revenue is generated outside of North America I want to update the guidelines around the impact of FX movements on revenue.

As a proxy every point of the Euro is approx immediately one $1 million of annual revenue impact. While every point on the pound is about $375000 of annual revenue impact for 2024.

Tim O'Brien: We continue to guide prudently and responsibly, accounting for a bunch of different ranges of outcomes, but we touched on a couple of the kind of moving pieces to think about as you kind of unpack 2024. One part is retention, so John touched on gross retention.

Second our revenue guidance reflects our assessment of a stable, but cost conscious environment.

We see encouraging demand indicators for our software solutions buoyed by enduring market Tailwinds and our expanded product suite.

We are excited about the cross-sell opportunity that exists within our current customer base inclusive of the new product additions, we have brought to market.

That said, we expect to continue to observe tightened budgetary conditions at the semi level, which we believe will result in slower growth and the rate of SME device additions.

Tim O'Brien: We continue to see very steady retention from a dollar-based perspective at the MSP level, where we've seen some impact. And that's more touching on the device trend that you mentioned and we also mentioned, is where we've seen some impact there, more at the FME level. And then I also touched on kind of the grow-over impact from a pricing and packaging standpoint in 24 versus 23. Back rovers in the range by two to two and a half points year over year.

Semi device growth helps feed our model, we expect that this component of our growth algorithm to continue to be muted.

Third.

Revenue guidance reflects our plan to 2024 contracts pricing and packaging changes in the Grove headwind from our higher than typical changes in 2023, given the inflationary environment.

Regarding expenses and profit or guidance demonstrates a continued balanced approach.

We believe it is important to maintain a steady hand and fund initiatives to drive business growth in 2024 and beyond.

Tim O'Brien: And then as you think about growth and net retention, so some impact on gross retention due to, you know, that device growth at the SME level, we're expecting very steady cross-sell and expansion sales across the portfolio. And one of the themes that we touched on is how we've expanded the cross-sell opportunity that exists in the base with some of the new offerings. That's a big focus area for us as we enter 2024 here, and we're expecting to, you know, perform at a higher level on that aspect of the growth algorithm throughout the course of 2024. Got it, and you already, I'll re-architect the second question just because I was going to ask that grow over impact question, so I'm happy you're citing that two to two and a half point contribution of calendar 23, which serves as the headwind of growth 24.

We are investing in operating with a growing <unk> in mind. These propelling forces are balanced by our desire to align cost with growth.

As we've stated consistently we aim to operate within a rule of 50 framework.

On the whole we believe are 2024 operating plan physicians us to advance initiatives necessary to achieve future growth acceleration, while also delivering profit levels that align with our goal of driving towards a sustainable rule of 50 profile for the long term.

Now I'll provide our financial outlook for the first quarter and full year 2024.

First quarter 2024, we expect total revenue in the range of 111 to $111 $5 million, representing approximately 11% to 12% year over year growth on both a reported and constant currency basis.

We expect first quarter adjusted EBITDA in the range of 37 $5 million to $38 million, representing approximately 34% margin.

For the full year 2024, we expect total revenue of $460 million to $465 million, representing 9% to 10% year over year growth or 9% to 11% growth on a constant currency basis.

Tim O'Brien: I think the other question, I know that in the prepared remarks, John had cited, let's say, growth retention expectations in calendar 24 of 86% versus the, I think you guys just did 88% in calendar 23, so what is it that's weighing on that gross retention that we're expecting that to decline two points on a year over year basis? Is it really the device counter, or is there anything else there? No, it's mostly just there.

We expect full year adjusted EBITDA in the range of $158 million to $162 million, representing and approximately 34% to 35% margin.

For the full year 2024, we expect Capex, which includes capitalized software development costs to be approximately 5% of revenue and adjusted EBITDA conversion to unlevered free cash flow to be approximately 67%.

As a reminder, or that is floating in currently fixed the sofa.

Tim O'Brien: And I'll double back on kind of where we're seeing it. We're seeing very steady dollar-based retention with our MSPs. In total, it's more of an atrophy at the SME level. So I think it's more macro driven from, you know, what's going on at the SME more broadly. And that is in our model where we see it from a device expansion perspective. Okay. Thank you.

In 2024, we anticipate approximately $30 million in interest expense for the full year, which assumes an effective interest rate of approximately 8%.

We expect total weighted average diluted shares outstanding of approximately $187 million to $188 million for the first quarter and approximately $188 million to $189 million for the full year.

Mike Cikos: I'll turn it over to my colleagues. Thanks, Mike. We now turn to Matt Hedberg with RBC Capital Markets. Your line is open, please go ahead.

Finally, we expect our non-GAAP tax rate to be approximately 28% to 29% in both the first quarter and the full year now I'll hand, it back over to John for closing remarks, John.

Matt Hedberg: Thanks for taking my questions. Maybe as a follow-up to Kim, you were talking about the price increase from last year, and I appreciate that caller. I'm just sort of curious, are there any sort of pricing increases that have been planned for this year? I know last year was a little bigger than normal, but just sort of wondering if there's anything embedded this year for additional price increases. Hey Matt, thanks for the question.

Thanks, Tim.

A year ago, we were faced with the rising inflationary market and uncertain economic conditions.

In 2023.

We believe our model proved to be resilient, increasing net retention and landing the most promising cohort of customers in the past six years.

All while increasing profits and cash flow meaningfully.

We believe there was significant wind in our sails as we enter 2024.

With a clear strategy.

Focused operating plan and.

Exciting market prospects.

Tim O'Brien: Every year we kind of strategically plan kind of pricing and packaging changes based on, you know, a number of different factors such as, you know, value we've brought to market from, you know, the roadmap execution perspective, competition, as well as, you know, kind of the inflationary environment. So, annually, we always plan some form of pricing and packaging changes. So we will have that in 2024.

Our commitment to delivering critical it solutions for Msp's, an SME use across the globe is resolute.

We look forward to a transformer of 2024 and a determined to deliver for our customers and stakeholders.

And with that we will open up the lines for questions.

Operator.

Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If you would like to withdraw your question. Please press staff all a bunch of.

<unk> ask you a question, please and showing your devices on music lately.

The first question comes from Mexico with Nathan Your line is open. Please go ahead.

Hey, guys. Thanks for taking the question here.

Was looking to see if I could get a little bit more colors for your outlook for for calendar 24, and there's there's two dynamics here.

Tim O'Brien: The size compared to what we did in 2023 is kind of where I spoke to that impact year over year. So we are doing something in the same timeframe as 2023 in the April lens, but it's just not as impactful from a size perspective in 24 versus 23. So maybe just a quick one.

I think both would probably be good for Tim but John.

John feel free to chime in as well.

But first I'm trying to think about the growth algorithm here I know you guys are calling out that muted device count.

Is there a way to think about what the net retention is that you guys are assuming in let's say ballpark figures if you're assuming.

Tim O'Brien: So I think you said two to maybe two and a half points. That's sort of net of this year's price increase, too. So that's sort of like, would be inclusive of this plus plus lessers. Correct. OK. OK. That's the right way to think about it. And then, OK, got it.

110 on a constant currency basis, what's the composition of that is it.

Seven eight points from this cross sell maybe a point from device count and then another point above.

Above the I guess <unk> coming from new customer acquisition like how do we think about those different pieces playing out over the course of 24, and then I just have a quick follow up.

Tim O'Brien: Very clear. And then, John, in understanding your guidance, or I guess for Kim either, understanding your guidance includes expectations for slower device counts in 2024. Can you rank the opportunities to accelerate growth beyond that initial target? You went through a number of them on the call, and it feels like cross-sell is big, MDR could be big. But I'm sort of wondering, how you feel about ranking those opportunities?

Yeah, absolutely Mike Thanks for the question.

Overall are 2024 guide philosophies unchanged.

We continue to guide prudently and responsibly accounting for a bunch of different range of outcomes, but.

We touched on a couple of other kind of moving pieces to think about as you kind of unpacked 2024.

One part is on retention so John touchdown gross retention, we continued to see very steady retention.

At the from one dollar raise perspective at the MSP level.

John Pagliuca: Sure. You know, what we really achieved in 2023 was a pretty material uptick in our white space opportunity that we created, right? As I mentioned in my prepared remarks, not too long ago, we were in the mid-20s or low-20s per device. And now, with the additions of a couple of key SKUs and really an opening of, I'd say, adjacent markets, we have really ratcheted up that opportunity to $30-plus per device. And that's significant, right?

Where we have seen some impact and that's more touching on that device trend that you mentioned and we also mentioned is where we where we've seen.

Some impact they're more at the SME level.

And then I also touched on kind of the the grow over impact from pricing and Patrick packaging standpoint in 24 versus 23.

Back Rovers in the range by two to two and a half points.

Year over year and.

And then as you think about the the gross and net retention so some impact on the grocery attention dude.

That device growth of the at the semi level, we're expecting very steady.

Cross-sell an expansion sales across the portfolio and.

John Pagliuca: And so what we'll see and what we're really focusing on is the ability to begin to realize that white space opportunity in a couple of different ways. And the increase in the white space opportunity also allows us now to go to market with a couple of more creative bundled types of packages that will help not just on the large end of the MSP market but in the small side. And we're starting to see small indicators of success in the early days from that. So, by far and away, the number one opportunity here is for us to begin to realize that enormous white space opportunity that is in our base.

One of the themes of.

We touched on is how we've expanded the.

Cross-sell opportunity that exists within the base with some of the new offerings. That's a big focus area for us as we've entered 2024 here.

And we're expecting to perform at a higher level on that aspect of the growth algorithm.

Throughout the course of 2024.

Got it and your.

Alrighty.

I'll re architected. The second question is because I was going to ask that go over impacts on half year, citing that two to two and a half point contribution countered twenty-three which serves.

Serves as a headwind 24 growth.

I think the other question I know that in the prepared remarks.

Johnny decided let's say gross retention expectations in calendar, 2486%.

First is that I think you guys just did 88% in Keller twenty-three.

What is it that's weighing on that grows retention that we're expecting that the declined two points on a year over year basis is it really the device camera or is there anything else there.

John Pagliuca: We have 25,000 MSPs, and they're servicing well over half a million SMEs out there. And by giving them the opportunity in a platform way to leverage these multiple SKUs, helping them drive efficiency, helping them drive their top line, that's where our focus is. And as a result, that will start driving that ASP per device up. And with 8 million devices, moving it even by pennies or a dollar has a significant impact on our business. Got it. Thanks a lot.

No, it's mostly there and I'll I'll I'll double back on kind of where we are seeing it.

Seeing very steady dollar base retention with our Msp's.

In total.

It's more of a.

<unk> at the SME levels, I think it's more more macro driven.

What's going on at the SME more more broadly and that that is in our model, where we see it from a device expansion perspective.

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

Matt Hedberg: Best of luck. Thanks. We now turn to Keith Bachman with the Bank of Montreal. Your line is open, please go ahead. Hi, many thanks, and I want to offer you congratulations.

Thanks, Mike.

Announcements and <unk> with obviously capsule markets. Your line is open. Please go ahead.

Great guys. Thanks for taking my question.

Okay, maybe as a follow up to 10, you were talking about the price increase from last year and appreciate that color I'm. Just curious are there any sort of pricing increases that had been planned for this year or.

Keith Bachman: The results look pretty solid, and what is sort of a challenging area in security, I think, broadly speaking, which leads me to my first question: pricing commentary. I actually want to go in a different direction. What is the risk that you'll need to take prices lower on a like-for-like basis? And Paolo the other night sort of threw cold water on the entire security market, including Endpoint. And I understand Paolo is an enterprise player and you're just the opposite, but you know, certainly raised concerns about pricing being more aggressive across, A, the spectrum of customers, and B, a number of different security areas, including endpoint. And so just wanted to understand, you know, how are you thinking about the risk, on a like-for-like basis, of having to be more aggressive in pricing, or do you not see that as a risk Great question, and I will not pretend to be an expert on the Apollo results, but from my understanding and listening to Nikesh, he was clear.

Last year was a little bigger than normal, but I'm wondering if there's anything embedded this year for additional pricing.

Price increases.

Hey man. Thanks for the question every year, we we kind of strategically plan pricing.

Pricing packaging changes based on.

A number of different factors.

Value, we brought to market.

Roadmap execution perspective.

Competition as well as you know.

The inflationary environment. So annually, we always plan some form of pricing and packaging changes, though we do have that in 2024.

Size compared to what we did in 2023.

Is kind of where I spoke to that impact year over year. So we are we are doing something in the same timeframe of 2023 in April.

Lands, but it's probably it's just not as as impactful from a size perspective in 24 versus 23.

So maybe just so I think he said to to maybe two and a half points, that's sort of net of this year's price increase too so that's sort of like.

Would be inclusive right plus plus lessors correct. Okay. Okay. That's the right way to think about it yet.

Okay got it very.

Very clear and then John.

Understanding your guidance.

John Pagliuca: The demand for security and security services remains quite strong and quite robust. And from my understanding, it was he was more moving his business more toward a platform play as opposed to a point solution play. Well, we're already a platform play, and so it's the combination of those different offerings and not a point solution that gives us the strength in our packaging for our customers, right? And it also provides a technical but also an economic moat around that offering. And so, as an example, what we're giving our MSPs is the ability to monitor and manage and provide endpoint security offerings in one platform, in one view, so they can manage their businesses effectively. It's that combination, and really that's why we exist.

I guess for Tim either understanding your guidance.

Includes expectations for slower device counts in 2024 can you can you rank the opportunities to accelerate growth beyond that initial target you went through a number of them on the call it feels like.

<unk> could be big but surely wondering how do you how do you think about like ranking those opportunities.

Sure the.

What we really achieved in 2023 was pretty material.

<unk>.

In our white space opportunity that we created right as I mentioned in the prepared remarks.

Not too long ago, we were in the in the mid twenties low twenties per device.

And now with the.

The addition to a couple of key skews and really an opening of I'd say adjacent markets, we really ratcheted up that opportunity to 30, plus dollars per per device and and that significant and so what will we will see what we're really focusing on is the ability to begin to realize that white space opportunity.

From a couple of different ways and the increase in the white space opportunity also allows us now to go to market with a couple of more creative bundled type of packages that will help.

John Pagliuca: We really exist to allow our MSPs to monitor, manage, and secure in a highly effective way. And that provides that, again, that economic and technical moat. So we're mindful of what's going on in the market, but we believe that the value that we bring in this combination, this better together of monitoring and management and security, is a differentiator that allows us to price in a way that is very profitable for our MSPs. And we know that our MSPs and their growth algorithm are driving a lot of top-line and bottom-line results via this combination of monitoring and management and security. So we're mindful of it.

Not just on the large.

Of the of the MSP market, but in the small side and we're seeing we're starting to see small indicators of success in the early days from that so I would say by far and away the number one opportunity here.

Is for us to begin to realize that enormous white space opportunity that is in our base, we have 25000 msp's.

And they are servicing well over 5 million half a million Scuse me sme's out there and by by giving them the opportunity and a platform way to leverage these multiple skews, helping them drive efficiency, helping them drive their top line.

That's where our focus is in by as a result that will start driving that aspie per device up and it was 8 million devices moving it even.

Even pennies or.

John Pagliuca: We're always keeping an eye on what's going on in the market, but it's that killer combination that we believe gives us that moat and some of that protection. Let me, um... Yeah, I'm not sure demand is robust across the spectrum, but we'll see how that plays out. But I wanted to transition to code for a sec, and maybe if you could just address the competitive landscape there, on, you know, how you guys are competing in code. How you're winning. Do you ever see this?

Has a significant impact on our business.

Got it thanks, a lot vessel levels.

Thanks. Thanks.

<unk> with the bank of Montreal <unk>. Please go ahead.

Hi, many thanks and.

Congratulations to resolve pretty solid.

And what is sort of a <unk>.

Challenging area insecurity, I think broadly speaking, which leads me to my first question.

Is.

I understand.

The pricing commentary I will actually want to go in a different direction.

What is the risk that you'll need to take prices lower on a like for like basis and.

Paolo the other night sort of cold water on the entire security market, including endpoint and I understand Palos in the enterprise player and you're just the opposite but.

John Pagliuca: in your market segment, the rubrics and cohesion, or is that just you know, are they targeting a larger customer? but just a little bit about the kind of growth rate, competitive advantage, disadvantages, opportunities, that would be great, and that's it for me. Sure.

Certainly raised concerns about.

Pricing being more aggressive across a the spectrum.

Of customers and be a number of different security areas, including endpoints.

And so just just for them to understand.

John Pagliuca: So, with our data protection offering, and just a quick history lesson. Historically, we were really going to market with our backup offerings as a cross-sell motion. And then, in 2022, we really rebranded our COVE offering, and because of the investment we made and the expansion of that offering with our data protection offering, we began to go to market not just as a cross-sell, but also as new customer acquisition. And we win there too.

How are you thinking about the risks on a like for like basis of having to be more aggressive and pricing or do you not see that a risk within the <unk>.

Great Great question and.

I will not pretend to be an expert on the pillow results, but from my understanding and listening to the cash he was clear the demand for security and security services.

Remains quite strong in quite robust and my understanding it was he more moving his business more toward a platform play as opposed to a point solution play well, we're already a platform play and so it's the combination of those different offerings and not a point solution that gives us the strength and.

And our packaging to our customers right in and it also provides.

John Pagliuca: So, we don't necessarily bump into the cohesities of Rubrik in so much of the world. Those are a little bit more enterprise. COVE does win at the mid-market. We have a team that's dedicated to selling our data protection offering into the mid-market. But historically, where we see a lot of competition are companies like Veeam or Datto, potentially even like Axiant or StorageCraft. And we win there, really, because the product and technology are differentiated. We don't require an appliance.

Technical but also an economic mode.

Around that that offering and so as an example, what we're giving our msp's has the ability to monitor and manage and provide endpoint security offerings and one platform and one view. So they can manage their businesses effectively it's that combination and really that's why we exist we really exists to allow our MSP.

To monitor manage and secure and a highly effective way.

And that provides that again that economic and technical mode. So we're mindful of what's going on in the market, but we believe that the value that we bring in this combination does better together monitoring and management and security.

As a as a differentiator that allows us to price in a way that is very profitable for our msp's and we know that our msp's and their growth algorithm driving a lot of top line and bottom line.

John Pagliuca: A lot of other folks do require an appliance. Ours is directly to the cloud. The algorithm that we have in COVE really drives a better TCO, up to five to six times less storage, up to five to six times less time required for technicians to backup, because we use this true Delta technology where we're taking a snapshot of the image, and then we're only really updating and pushing through the cloud changes on either the virtual machine or the server or the workstation or the M365 a bit. And so, that technology is a Again, it saves the technicians time. It also allows us to price the offering at a disruptive bit. So, the technology is ahead, but the pricing is disruptive. And the validation points are there,

Results via this this combination of monitoring and management security so.

We are mindful of it were always keeping an eye on what's going on in the market, but it is a killer combination that we believe gives us that.

That moat and some of that protection.

Okay.

Let me.

Yeah, I'm not sure demand is.

Robust across the spectrum, but we'll see how that plays out but I wanted to transition to code for a second.

And maybe if you could just address the competitive landscape there.

How you guys are competing in Cove.

How you are winning do you ever see.

In your market segment, the rubrics and cohesin e's or is that just.

Are they targeting the larger customers.

But just a little bit about kind of growth rates competitive advantages disadvantages opportunities that would be great and that's it for me many thanks.

Sure so with our data protection offering and just just a quick history lesson historically we've.

We were really going to market with our backup offerings as a as a cross sell motion and then 2022, we really rebranded <unk>.

John Pagliuca: As I mentioned in the prepared remarks with Canalys, we're now in that category of leading the data protection offering, in particular for the mid-market and definitely for the MSP. So, it's a very powerful story where the technology and the price point and the overall TCO for our customers are just disruptive. Excellent. Any comments on how that business is growing? Sure.

<unk> offering and because of the investment we made and the expansion of that that that offering with our data protection offering. So we began to go to market not just as a cross sell but also.

New customer acquisition.

And we win there so we don't necessarily bump into the cohesive rubrics. So much of the world was a little bit more enterprise.

<unk> does win at the mid market, we have a team is dedicated and selling our data protection offering into the mid market, but historically, where we see a lot of competition or accompanies like a V. R. A dot O potentially even.

John Pagliuca: The demand remains quite strong. I'd say overall Cove is growing at a faster clip than N-Able as a whole. Okay, perfect. Many thanks. Our next question comes from Brian Essex with J.P. Morgan. Your line is open, please go ahead.

Like an accent or a storage craft and we when they're really because the product and technology differentiated we don't require an appliance a lot of the other folks do required appliance ours is directly to the cloud the algorithm that we have in Cove.

Really drives a better <unk> up to five to six times less storage up to five to six times less time required for technicians to backup because we use this shoe Delta technology, where we're taking a snapshot of the image and then we're only really updating and pushing through the cloud changes on the on the either the virtual machine of the server.

Brian Essex: Hi, good morning, and thank you for taking the question. I was wondering if you could talk a little bit about the launch of MDR. Is there, you know, do you see a substantial amount of pent up demand? How has the attraction been so far, and kind of what are the expectations given the given the lift?

The workstation or the empty 65, a bit and so that technology to differentiator.

Again, it saves the technician's time, it also allows us to price.

The offering at a disruptive bit so the technology is a is ahead the pricing is disruptive and the validation points are there as I mentioned the prepared remarks with canal. We've now we're now in that category of leading the data protection offering in particular for the mid market and definitely for the MSP. So.

John Pagliuca: and Price for contribution in 2024. Sure, thanks for the question. With MDR, when we survey our MSPs in small shops or large shops, there are always two areas of demand that pop up. One is cloud management. The second is cybersecurity services.

It's a very much of a powerful story with the technology and the price point in the overall Tcl for our customers is just disruptive.

John Pagliuca: And what we're seeing with MSPs is a need to service their customers. You know, the reason why security demand remains high has a lot to do with compliance and regulatory bodies, right? And so now, small and medium enterprises are looking to make sure that they're compliant with whatever regulatory body that they're servicing, whether it be a government or a particular vertical. And they're turning to MSPs to help them be compliant. And a lot of that requires a deeper level of protection, detection, and response.

Excellent any comments on how that business is growing.

Sure.

Demand remains quite strong I'd say overall cove is growing at a faster clip than enable as a whole.

Okay perfect. Many thanks.

Our next question comes from Brian Essex with J P. Morgan. Your line is iPhone. Please go ahead.

Hi, Good morning, and thank you for taking my question.

I was wondering if you could talk a little bit of on the launch a N D. R.

Is there do you see a substantial amount of pent up demand how's attraction den so far and kind of what are the expectations given the give us a lift in price for a contribution in 2024.

Sure. Thanks for the question.

With MTR, where we survey, our msp's small shops or large shops.

There's always two areas of demand that pop up one is cloud management. The second is cyber security services and what we're seeing with Msp's is the need to service their customers.

John Pagliuca: And so that's where MDR really comes into play. So we're seeing it as probably the number one or two area of demand for managed service providers. The interesting thing or the exciting thing, in my view, is that it's not just for the large MSPs. It's also for the small MSPs. And if you're faced with this demand from your customers, you have two choices. You can build a SOC, a security operations center, which is going to cost you millions of dollars.

The reason why security demand remains high has a lot to do with compliance and regulatory bodies right and so now small medium enterprises.

Are looking to making sure that they are compliant with whatever regulatory body that they're servicing whether it be a government or a particular vertical and the turning to msp's to help them be compliant and a lot of that requires a deeper level of protection and detection and response.

John Pagliuca: And you might not have the the personnel to do so. Or you can partner with us and leverage technology like the enable MDR offering and allow our, you know, our teams and the technology to do some of that work for you and and help you focus on servicing your customers while making sure that their customers are secure and running their businesses. So it's early days. You asked about, you know, we've only really gotten to market in January. We did a couple of pre-launch things in Q4, but we've started a really good market early this quarter, and so far, so good.

So that's where emdr really comes into play. So we're seeing it is probably the number one or two area of demand for managed service providers. The interesting thing with the exciting thing in my view is that that's not just for the large msp's. It's also for the small msp's and and if you are faced with this demand from your customers.

Two choices you can go build a sock.

Security Operation Center, which is gonna cost you millions of dollars and you may not have the personnel to do so or you can partner augments and leverage technology like the enable emdr offering and allow our our teams in the technology to do some of that work for you and and help you focus on <unk>.

Servicing your customer will making sure that.

Their customers a secure and.

And running their businesses so.

John Pagliuca: The pipeline's been growing. The demand stories are responding to the technology. It is, it is in that spirit of making technology simple for our MSPs, and they appreciate the transparency and the technology. So, early days. I'll look to give you more updates in the future on how that how that offering is tracking. Excellent, thank you for that.

It's early days you asked about we've only really gotten to market.

January we did a couple of pre things in Q4.

But we've started really market in an earlier this quarter and so far so good the pipelines been growing the demand stories resonating the technology. It as it is in that spirit of making technology simple for our Msp's and they appreciate the transparency in the technology. So early days and look to give you more updates.

Brian Essex: And maybe to follow up on your response, I think it was to Matt's question about the white space within the MSPs. How should we think about where the points of friction are for incremental adoption? Is it MSPs penetrating the code install base, and where there's already potentially some? You know, I guess.

In the future on how that how that offerings tracking.

Excellent. Thank you for that and then maybe to follow up on your spots I think it was.

Last question about the the white space at the knee.

M S P's, how should we think about.

Where the points of friction are for incremental at the option is it is it msp's penetrating the COVID-19 installed base and where there is already potentially some.

I guess.

John Pagliuca: I guess potential for ripe adoption with existing customers, or is it this long tail of, you know, unpenetrated customers that they're focusing on penetrating, and how are their incentives aligned with your ability for incremental penetration into their installments? So the beauty of our model, and what I want to remind everyone, is that we're a sell-to but also a sell-through. And what I mean by that is, whether it be endpoint security or data protection, our MSPs are sometimes faced with, in their customer base, managing two, three, six, ten different backup offerings, right?

I guess potential for bright adoption with existing customers or is it this long tale of.

Penetrated customize it there.

That they're focusing on penetrating and how are their taxes are lined with your ability.

Mental penetration into their installed base.

So the beauty of our model and what I want to remind everyone is that we're a cell too, but also a sell through and what I mean by that is whether it be endpoint security or data protection are msp's, sometimes are faced with and their customer and their customer base managing 236 10 different.

Backup offerings right and so one of the big bits that we that we preach here it enable us how our msp's can standardize on a particular technology stack because that drives a bunch of efficiency from a software costs, but also from a labor costs and that's typically the long pole right is that the only to go through some of their customers.

John Pagliuca: And so one of the big bits that we preach here at N-Able is how our MSPs can standardize on a particular technology stack because that drives a bunch of efficiency from a software cost, but also from a labor cost. And that's typically the long pole, right, is that they'll need to go through some of their customers and standardize and flip their backup offering or flip their endpoint security offering. And I'd say our largest, more mature, the upper-decile MSPs, maybe the upper-quartile MSPs, do that a little bit more easily than some of our smaller shops. The smaller shops are a little reticent to go do that, and that takes a lot more time. So in the majority of the logos in that bottom 75% quartile, it takes time for them to standardize to their base. And so we could win an account.

And standardized and flipped their backup offering or flipped their endpoint security offering and I would say our largest more mature the upper decile msp's, maybe the upper quartile msp's do that a little bit more of an ease and some of our smaller shops. The smaller shops are a little reticent to go do that.

And that takes a lot more time, so and the and the majority of the logos and that that bottom 75 per cent Cortina. It takes time for them to standardize to their base in that so we could win an account we can win with cove, but it only might reflect 5% of the msp's estate and getting that MSP to push through to their entire SMB based.

John Pagliuca: We can win with code, but it only might reflect 5% of the MSPs' estate. And getting that MSP to push through to their entire SMB base to realize the efficiencies gained is a little bit more of a journey, a little bit of education, and it requires the MSP to push through. So I'd say that's what takes the longest time, and what we really try to help them do is to automate that and push through that standardization process.

Realize the the efficiencies gained.

Just as a little bit more of a journey is a little bit of education and it requires the MSP to push through so I think that's what takes the longest time.

And what we really try to help them do is to automate that and pushed through that standardization process.

Matthew George Hedberg: Very helpful, Clarity. Thank you for that, and thanks for taking the question. Our final question today comes from Jason Ader with William Blair. Your line is open, please go ahead. Yeah, thanks. Good morning, guys.

Very helpful clarity, Thank you for that and thanks for taking my question.

I'll final question today comes from Jason <unk> with William Blair. Your line is open. Please go ahead.

Yeah. Thanks, good morning, guys.

Jason Ader: I want to just ask about the device commentary. I know you talked about pressure on device additions, but I'm wondering if there's any pricing pressure in terms of RMM kind of per device. I know that there are competitors out there that have tried to use RMM as kind of a loss leader and just whether that's having an impact, as well. Hey Jason, thanks for the call and thanks for the question.

Just ask on the device commentary.

I know you talked about pressure on device additions, but wondering if there's any pricing pressure in terms of the.

Tara madmen per device cause I know that there's been competitors out there that have tried to use our amount and just kind of Ah.

A loss leader and just whether that's having an impact as well.

Sure.

Thanks for the call and thanks for the question.

That's that's the beauty of the expansion of the white space opportunity Jason So.

John Pagliuca: That's the beauty of the expansion of the white space opportunity, Jason, so with the ability now, again, from going to that low 20s to the 30s, it gives us a little bit more play for the bundling and allows us to present really for an LTV for the MSP. I know a lot of folks have always asked, "Hey, can you disclose your RMM revenue versus your backup revenue?" As a business, as a leadership team, we really focus on the LTV of the customer, and so if that means incentivizing them on a particular SKU like RMM so that we can get our endpoint security and data protection SKU one from a customer point of view, a bigger white space opportunity allows us a little bit more freedom and a little bit more creative bundling. That's one point.

With the ability now again for a loan to that low twenties. The thirties. It gives us a little bit more play for the bundling.

And allowing us to present really LTV.

For the for the MSP I know a lot of folks I've always asked taking you disclose your RMM revenue versus your backup revenue as a business is a leadership team, we really focused on the <unk> of the customer and so if that means.

Incentivising them on a particular scoot skew like RMM. So that we can get our endpoint security and data protection skew one from our customer point of view.

A bigger whitespace opportunity allows us a little bit more freedom and a little bit more creative bundling. So that's that's one <unk>.

John Pagliuca: The expansion allows us a little bit more freedom in bundling. The second point we mentioned about what we're focused on in 2024 is around some of these committed contracts, and what we're doing that's somewhat different than we did last year is we're really giving MSPs a choice, and we're saying, hey, look, in exchange for a committed contract, there's a potential to get better economic terms for you, but in exchange, we want that long-term commitment. And what we're finding is that MSPs prefer the choice there, and it's helping them lock in the economics long-term, which will give us much better visibility into our customer retention and allow us to focus on that white space opportunity. So that's what we're looking to do as it relates to some of the initiatives there for 2024. Gotcha. OK, so.

Expansion allows us a little bit more freedom in the bundling. The second point, we mentioned on what we're what we're focused on 2024 is around some of these committed contracts and we're doing that is somewhat different than we did last year is it really giving msp's a choice and we're saying hey look.

In exchange for.

A committed contract.

There is a potential to get.

Better economic terms for you, but in exchange you want that long term commitment than what we're finding is the msp's.

Prefer they prefer the choice there and it's and it's helping them lock in the economics, longterm, which will give us a much better visibility into our customer retention and allow us to focus on that white space opportunity. So that's that's what we're looking to do.

As it relates to some of the initiatives there for 2024.

Gotcha, Okay. So.

Jason Ader: You didn't exactly answer my question, but I think I understand it. I mean, is it fair to say that there actually has been some broader sort of market pressure on R&M Pricing but that you're not too worried about it just because of the other opportunities that you talked about and the ability to kind of leverage your position there? Yeah, you know, so, no, no, no. It's a fair follow-up.

You didn't exactly answer my question, but I think I get it.

Is it fair to say that they're actually has been some broader sort of market pressure on pricing.

But that you're not too worried about it just because of the other opportunities that you talked about and the ability to kind of leverage our position there.

Yes.

So.

No no no.

It's fair follow up where we're winning.

John Pagliuca: We're winning in our RMM category. We're winning, you know. Our Q4 is one of our strongest quarters as it relates to bookings and that NCA, that New Customer Acquisition and Monitoring and Management, so we're winning there. I don't really see a challenge in the price points for our RMM nodes. It's more the flexibility as to what the prize really is. Is the prize, we'll call it $2 to $3 on the Monitoring and Management node, or is the prize, you know, the $30 on the entire estate when you add the data protection and security? So, we're trying to look at it a little bit more holistically, so I'm not really seeing a change in the market and an increase in competitive pricing on the node. No, we're not. Okay, good, him on the January, February, you know, we're done with February.

In our RMM category.

Winning R. Q4 is one of our strongest quarters as it relates to bookings and that and that <unk> that new customer acquisition and monitoring and management. So.

We're winning there I don't I don't really see a challenge on the on the price points for our RMM nodes.

It's more of the flexibility as to what the what the prize really is is the prize will call. It two to $3 on the monitoring and management.

Note or is the price on the $30 on the entire state when you add the data protection security. So we're trying to look at it a little bit more holistically.

I'm not I'm, not seeing really a change in the market.

An increase in competitive pricing on the note now we're not.

Okay, Good and then.

Just Tim on the January February and we're almost almost done with February now.

Jason Ader: I know you gave guidance for Q1, but any, you know, kind of commentary, color commentary on... Whether there's any changes in the first couple of months of this year versus, let's call it the last, demand-wise? Yeah, I mean, demand in Q4 was strong. It was our best booking month, our best booking quarter of the year, and December was our best booking month of the year.

I know you gave guidance for too long, but any.

Any kind of commentary color commentary on.

Whether there is any changes in the first couple of months of this year versus let's call. It the last three months of 2023.

Demand wise adjacent to call out.

Yeah.

Demand in queue for a strong it was or it was our best booking months, our best booking quarter of the year December was our best booking month of the year.

Tim O'Brien: And demand and pipe has been has been very solid and very steady as we've started 2024. I think, Some of that's on the heels of that white space expansion as well that John spoke to with some of the new product offerings kind of coming into the fold and, you know, beginning to build the pipeline around those with Cloud Commander and MDR and, you know, the combination of being able to put together, you know, more bundling and more multi-skew deals, I would say has been a net positive to kind of pipe creation as we've entered 2024. But Q4 demand was strong and, you know, that's been very steady as we've gotten into the beginning parts of 2024 here. Okay, so, growth rate in Q4 was the lowest of the year in terms of revenue on a year-over-year basis. What you're saying that if you looked at bookings would... It's a different story.

And demand in pipe has been has been very solid and very steady as we've started 2024.

I think.

Some of that is on the heels of that white space expansion is while that John spoke to with with some of the new the new product offerings kind of coming into the fold and.

Beginning to build the pipeline around those with cloud commander NMD R and the combination of being able to put together.

More more bundling and more multi skew deals I would say has been a net positive to kind of pipe creation as we've entered 2024, but.

Q for demand was was strong and.

That's been very steady as we've gotten into the beginning parts of 2024 here.

Okay. So.

Growth rate in Q4 was the lowest of the year in terms of revenue on a year over year basis. It was 11%.

But you are saying that if you looked at bookings would it be.

<unk> story.

Jason Ader: Yes, yeah, and as a reminder, the impact of in-quarter bookings on in-quarter revenue is very, very minimal. A lot of the revenue generated from bookings shows up in the next quarter from a revenue perspective. Last question for me, just on the free cash flow for 2024, what are some of the puts and takes there? You know, it looks like you, uh... You were about 16% free cash flow margin in 23, is there..., plan to, or the expectation that it will be higher as a percentage of revenue in 24? And just again, the things we should be thinking about as we build.

Yes, yeah, and and as a reminder, the impact of in quarter bookings on in quarter revenue is very very minimal.

A lot of the revenue generated from bookings.

Shows up in the next quarter.

From a revenue perspective.

Gotcha, Okay and then.

Last question for me.

Just on the free cash flow for 2024.

What are some of the puts and takes their.

It looks like you.

You were about 16% free cash flow margin and twenty-three is or.

Plan to.

Expectation that it will be higher percentage of.

Revenue in 24, and just again any of the things we should be thinking about.

As we filled out our models.

Tim O'Brien: Yeah, I think I'd expect free cash flow margin to increase similar to how EBITDA margin is increasing. We continue to focus on, you know, optimizing and converting EBITDA to free cash flow at a higher rate. One of the wildcards for free cash flow for 24 will be just what happens with the interest rate environment. But from an unlevered free cash flow standpoint, you know, we've been able to drive, you know, pretty significant growth on that front, improved conversion. And, you know, we're looking at a couple of things to kind of optimize that from a tax as well as just, you know, working capital perspective as we get into and get through 2024 here.

Yeah I think.

I'd expect free cash flow margin to increase similar to how kind of EBITDA margin is increasing.

We continue to focus on.

Optimizing and converting.

EBITDA two free cash flow at a higher rate.

One of the Wildcards for free cash flow for 24 will be just what happens with the interest rate environment.

But from an unlevered free cash flow standpoint, we've been able to drive.

Pretty significant growth on that front improved conversion and we're looking at a couple of things to kind of optimize that from attacks as well as just working capital perspective, as we get into as we get through 2024 here. So I think there's there's room to improve from an another free cash flow margin.

Jason Ader: So I think there's room to improve from an unlevered free cash flow margin as well as a free cash flow margin perspective as we kind of chart our way through 2024, but focus on continuing to grow. If you get more committed contracts kind of for the longer term, does that help free cash flow because you have more deferred revenue? How does that work?

As well as free cash flow margin perspective, as we kind of chart our way.

Three 2024.

Bottom focuses on continuing to grow.

If you get more committed contracts kind of longer term does that help free cash flow because you have more deferred revenue how does that work.

Tim O'Brien: I would not expect that to impact free cash flow. The model, from like a monthly billing perspective, I would not expect to change via the long-term commitment. The long-term commitment will still drive a monthly billing model. So I wouldn't expect big swings in deferred revenue. Alright, thank you.

I would not expect that to impact free cash flow.

The the model from like a monthly billing perspective.

I would not expect to change.

The long term commitment.

The long term it will still still drive a monthly billing model.

So I wouldn't expect big swings in.

There is only started revenue there's.

There is no deferred revenue impact from that.

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

They're yeah they're.

There won't be deferred revenue in back there.

Alright, thank you.

Thanks, Jason.

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

Unnamed Speaker: After Born Deaf and Blind, he worked in the sertificacie Alba, with a current ambition to continue his work in music as an artist. He was able to perform his own songs during the Cannibali University Recital, which started in office hours with a significantly reduced number of people than he would've been able to without it. He was able to write music that changed the world so much that he could carry his Wonderful Minds band with him for the next couple of years.

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