Q3 2024 N-able Inc Earnings Call

Thank you.

Speaker Change: Thank you for your patience everyone. The enabled third quarter 2024 earnings call will begin shortly. After the presentation there will be a Q&A session and to register to ask a question please press star 4 by 1 on your telephone keypad.

If you change your mind please press star 4 by 2. Please ensure that when asking a question your device is unmuted locally. Thank you.

[inaudible]

Chach: Hello everyone and welcome to the Enable Third Quarter 2024 Earnings Call. My name is Chach and I'll be coordinating your call today.

After the presentation there will be a Q&A session and to register to ask a question please press star followed by 1 on your telephone keypad.

Chach: and if you change your mind please press start followed by 2.

I'd now like to hand over to your host.

Investor Relations Manager to begin. Please go ahead.

Speaker Change: Thanks, Operator, and welcome, everyone, to Enable's 3rd Quarter 2024 Earnings Call.

Speaker Change: With me today are John Pagliuca, Enables President and CEO, and Tim OBrien, 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.

Speaker Change: 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 of the global economic environment on our business.

Speaker Change: These statements are based on currently available information and assumptions, and we undertake no duty to update this information except as required by law.

Speaker Change: 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.

Speaker Change: 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.

Speaker Change: Copies are available from the SEC or on our Investor Relations website.

Speaker Change: Furthermore, we will discuss various non-GAAP financial measures on today's call.

Unless otherwise specified when we refer to financial measures, we will be referring to non-GAAP financial measures.

Speaker Change: A reconciliation of non-GAAP financial measures discussed on today's call to the most directly comparable GAAP measures is available in our earnings press release on our investor relations website. And now, I will turn the call over to John. Thank you, Griffin, and thank you everyone for joining us this morning.

Today, I will discuss our third quarter results.

Enable strategy for driving short and long-term success.

and product and business highlights for the quarter.

Starting with our third quarter results.

Revenue was $116.4 million.

Speaker Change: representing 8% year-over-year growth on a reported basis and 7% on a constant currency basis.

Speaker Change: Adjusted EBITDA was $44.8 million, representing an approximately 39% adjusted EBITDA margin.

We once again exceeded our quarterly guidance.

Speaker Change: We are growing the business because our mission is on target.

We strive to make MSPs and small-medium-sized businesses cyber-resilient.

Speaker Change: Our IT management software ensures their systems are safe and functioning.

Speaker Change: Our data protection software creates the safety net they need to restore data in the event of data loss.

and our security software protects their businesses from attackers.

We manage, backup, and secure.

We believe we make them resilient, and this resiliency matters.

Speaker Change: IT systems keep the world running, and our software keeps IT systems running.

Speaker Change: Looking at the different layers of our cyber resiliency platform, industry demands is strongest for cloud data protection, followed by security, then IT management.

We see this echoed in what underlies our results.

In the quarter, our strongest tailwinds were in data protection.

Demand for business continuity fuels this momentum.

Businesses depend on protected data and functioning IT systems.

Speaker Change: When those systems fail or are compromised, the business faces a potential extension event.

The stakes are high and the risks are numerous.

Speaker Change: Our customers want a solution to this problem. A reliable way to restore their digital operation and minimize downtime in case of an outage, breach, or data loss.

They want resilience, and Cove Data Protection answers the call.

Speaker Change: We are pleased to announce that COVE, which is once again our fastest growing product solution, is now also our largest recurring revenue product group.

And the architecture is our differentiator.

Speaker Change: With our proven product market fit, disruptive technological moat, and market growth rates for cloud backup projected to grow in the double digits, we see considerable opportunity to continue winning in this attractive category.

We've also seen steady demand with our security suite.

Speaker Change: The depth and breadth of our suite creates compelling value for top-tier, end-to-end cyber resilience.

Our protective offerings encompass EDR, endpoint antivirus,

Speaker Change: email protection, password management, patching, device monitoring, remote device take control, and tech enabled services.

Speaker Change: We don't just defend one entry point, like the front door or window. We aim to protect the entire house.

Our tech-enabled, human-assisted managed detection and response services, MDR.

Speaker Change: which is powered by extended detection and response software, known as XDR, stands out within our security portfolio.

Speaker Change: Brought to life via our third-party partnership, the strength of these combined solutions is resonating as they distinctly solve pressing security challenges.

Speaker Change: First, XDR provides the ability to see and act broadly across the IT estate.

This enables comprehensive risk mapping and focused remediation efforts.

Speaker Change: Without the ability to see and interact cleanly with the entire IT estate, technicians are playing a losing game of whack-a-mole.

Speaker Change: They are left trying to piece together where they have coverage gaps between their multi-vendor, multi-product software stacks, and waste time struggling to manually correlate data and respond to events.

Speaker Change: Our XDR ingests data from the network, cloud, endpoints, and users.

This creates the complete and actionable insights technicians need.

Speaker Change: And second, the MDR feature provides human interpretation of security events without breaking the bank.

Speaker Change: The shortage of skilled cybersecurity labor has persistently been a major industry challenge.

Speaker Change: Even when the right human talent is found, it can be cost prohibitive to small and medium businesses.

Speaker Change: We address this by providing outsourced experts, which allows MSPs to augment their operations efficiently.

Speaker Change: This human element is particularly salient at the low end of the MSP market, where businesses often face the most significant challenges in profitably adding staff.

and where we have seen considerable greenfield opportunities.

Speaker Change: Empowering our MSPs with leading security solutions is one of the three fiscal year 24 transformative strategic pillars and with XDR and MDR representing one of our fastest growing SKUs at this stage of the development we are delivering on this pillar.

Speaker Change: We also looked at fiscal year 24 to transform the customer relationship and leverage industry trends to better position ourselves in the long term.

Speaker Change: While I'm pleased with the overall trajectory of this transformation, this initiative has also generated a near-term headwind.

Speaker Change: As mentioned in our prior calls, we started offering customers long-term contracts at the beginning of the year. Reception has been strong.

Over 50% of our MRR is now under long-term contract.

The thesis behind the initiative is straightforward.

Speaker Change: We believe customers with long-term commitments will build a stronger connection with Enable, especially as they benefit from our extensive and growing product portfolio and award-winning customer support.

Speaker Change: This deeper relationship is expected to drive higher retention and expansion over time.

Speaker Change: Our belief is also supported by the simple fact that customers asked us to start offering longer term contracts as they wanted the predictability long term commitments would bring to their operations.

Speaker Change: We continue to have full conviction that this initiative is the right move.

Speaker Change: That said, customers have sought to optimize their estate before entering long-term deals, placing short-term pressure on our financials. As the bulk of estate optimization occurred in first half 2024, we expect this headwind to subside in second half 2025.

Speaker Change: Pricing is another discussion point. Largely due to the inflationary environment in 2023, we implemented higher-than-typical pricing changes, with 2024 price increases reflecting a more normalized state. Growing comparisons in 2024 are challenged relative to 2023.

Speaker Change: We expect both the state optimization and pricing headwinds to be transitory.

Speaker Change: Now let's take a step back and look at broader market trends to understand where Enable is placing its bets and why.

Speaker Change: We remain steadfast in our mission of providing top-tier technology to small and medium-sized enterprises with a focus on delivering these solutions through managed service providers with a heavy lean on cyber resilience that is baked into everything we do.

Speaker Change: With rising IT complexity pushing SMEs to use MSPs for IT support

We believe there's a significant opportunity for Enable.

This opportunity is validated by Market Analysts Firm Canals.

Speaker Change: who projects the MSU market to grow by at least 12% in 2024.

Speaker Change: We are also optimistically expanding within resellers and direct sales to SMEs.

Speaker Change: These are natural adjacencies where we see product market fit and alignment with existing go-to-market operations that will allow for efficient expansion.

Speaker Change: Simply put, we believe we are operating in large markets with robust tailwinds. This favorable backdrop gives us confidence in our positioning and investment strategy.

Speaker Change: Clicking in further, we see the strongest demand for solutions that enhance resiliency, namely security and data protection.

Speaker Change: We have strategically invested in these priority categories through COVE and our XDR partnership, positioning our customers and Enable2Grow.

RMM also delivers resiliency and remains a core focus.

Speaker Change: Our award-winning RMM solutions include a robust set of features to help fuel protection, including proven patch capabilities, monitoring built with security in mind, and business continuity as a fundamental value proposition.

Speaker Change: Our RMM solutions also drive greater efficiencies into our customers' businesses.

Speaker Change: A consistent theme we've observed in our over 20 years of service to the MSP community is that the MSPs often struggle to achieve their profitability potential.

Speaker Change: One reason is that technicians, often the largest expense on the MSP's P&L, are burdened with managing multiple environments in software sprawl.

This is difficult to do efficiently.

Speaker Change: Our multi-tenant RMM platforms address this by streamlining technician workflows, improving labor efficiency, and ultimately raising MSU profitability.

Speaker Change: Our investment in the Ecoverse, the ongoing transformation of RMMs into a next-generation open ecosystem IT management platform, aims to further these customer outcomes.

Speaker Change: With our high conviction that delivering resiliency and efficiency to our customers is a winning proposition, the Eco-Verse stands alongside Cove and XDR as a foundational strategic investment that positions our customers and enable to grow.

So bringing it all together.

Speaker Change: We believe that we are well positioned and that there is substantial market opportunity. And so we are placing clear strategic bets on top customer priorities.

Speaker Change: With that, let's look at the key executions we delivered in the third quarter.

From a product perspective, we've made strides forward.

Speaker Change: As part of our OpenRMM platform strategy, we've expanded our API and data analytics capabilities.

Speaker Change: With new APIs, in September alone, we reached over 15 million API calls across 25% of our in-central staff customers.

Speaker Change: Our growing analytics capabilities now track over 950 unique attributes with data from over 4 million devices.

and 1,000 monthly active users.

Speaker Change: These capabilities allow customers to collect and analyze data quickly with greater fidelity, allowing for faster insights, response, and remediation.

Speaker Change: Also, as part of our Ecoverse vision, we now have over a million devices activated with our new Unified Agent, enabling the collection of real-time metrics for faster insight and remediation.

Coop also delivered significant progress.

Speaker Change: We updated our data retention model to dramatically simplify the creation of data protection policies to allow customers to meet compliance requirements.

We also made Microsoft 365 backup enhancements.

including the ability to restore to an alternate user.

Boosting Technician Efficiency and Compliance.

Speaker Change: Lastly, we implemented up to 30% better backup speeds and delivered key usability improvements.

Speaker Change: Another impressive list for the team and more benefit for our customers.

We continue to turn complexity into simplicity for technicians.

Speaker Change: On the security front, we announced our Global Compliance Initiative, including Cybersecurity Maturity Model Certification, and we achieved our SOC 2 audit, ensuring that service providers can operate in an increasingly regulated federal civilian and federal defense supply chain.

Speaker Change: And to further enhance our focus on protecting user identities, we delivered robust encryption and our Passportal service, protecting over 5 million credentials that are stored and used by 74,000 users.

The channel response to all this is encouraging.

Speaker Change: At our major distributor conference in Dubai, we shared our ECOverse vision, significant product updates, and channel commitments.

Speaker Change: The feedback was overwhelmingly positive, with over 90% of our international channel revenue represented.

Speaker Change: A strong presence at in-person events like this Distributor Conference is an important element of our highly effective go-to-market strategy, which has enabled us to penetrate the fragmented SME market while maintaining adjusted EBITDA margins of over 30%.

Speaker Change: This quarter, we implemented strategic refinements as part of our ongoing mission to efficiently deliver world-class software throughout the IT Services Channel.

Speaker Change: One highlight is a further investment in our brand and market awareness.

Speaker Change: With resiliency as a top customer priority, we made targeted investments in COVE.

Speaker Change: COVA has demonstrated a right to win with solid conversion rates at each final stage including strong performance and head-to-head product bake-offs.

Speaker Change: With proof that we can capitalize on opportunities, we want to get more at-bats.

Speaker Change: Our website is a vital tool for visibility and opportunity generation, so we significantly revamped the COVE section, ensuring the world knows exactly why 14,000 MSPs and 180,000 businesses trust COVE, and why COVE might be the right business for them too.

Speaker Change: We are also refining our security positioning. While we are pleased with the security product portfolio and penetration, we also see promising upsell opportunities within the category.

Speaker Change: Exploratory bundling concepts have been well received and we are further exploring pricing and packaging changes to seize the security opportunity and fully realize enables true power and safeguarding customers.

Speaker Change: Two customer wins in the quarter illustrate our success in executing our mission.

in an effort to save time and money.

Speaker Change: A roughly 300-employee small business was looking to centralize its tech stack and move away from segregated tools and process.

Speaker Change: This internal IT customer purchased RMM, Cove, and EDR in a $40,000 ARR deal, representing about $15 per device per month.

Speaker Change: With products built for small to medium enterprise use cases, a go-to-market strategy that efficiently capitalizes on this market, and a partner success organization constructed to focus on their needs, this one is exactly the value we strive to deliver to SMEs everywhere.

Speaker Change: And another customer example, representing approximately $90,000 of ARR, an MSP cited our EcoBris Open Ecosystem as a deciding factor in signing a deal.

Speaker Change: who liked two other ecosystem vendors and wanted to keep them as part of their IT stack. Our RMM had robust integrations with both of them, ensuring that they could run operations and workflows as desired, giving them the confidence to switch to enable RMM, AV, and DNS.

Speaker Change: It is an honor to be trusted with these and thousands of other customers' IT management and security needs, and through our open ecosystem, contribute to the success of the global IT channel.

To conclude...

Speaker Change: Our model has continued to deliver growth and profit, we are executing on critical initiatives, and we are more focused than ever on building cyber resilience for MSPs and underserved small and medium-sized businesses.

Speaker Change: I will now hand it over to Tim and circle back for closing remarks.

Kim?

Tim OBrien: Thank you, John, and thank you all for joining us today.

Speaker Change: As our results demonstrate, Enable continues to execute our strategy of delivering robust software to small and medium enterprises.

Speaker Change: Performance in data protection and security, strong MSP level retention, and our highest ever year-to-date ARR from new customers give us confidence in our approach and provide a solid foundation for future growth.

Speaker Change: For our third quarter results, total revenue was $116.4 million, representing approximately 8% year-over-year growth on a reported basis and 7% on a constant currency basis.

Speaker Change: Subscription revenue was $115 million, representing approximately 9% year-over-year growth on a reported basis and 8% on a constant currency basis.

Speaker Change: 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 $1.4 million.

Speaker Change: We ended the quarter with 2,275 partners contributing $50,000 or more of ARR, which is up approximately 7% year-over-year.

Speaker Change: Partners with over $50,000 of ARR now represent approximately 57% of our total ARR up from approximately 55% a year ago.

Speaker Change: Dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was approximately 105% or 104% on a constant currency basis.

Speaker Change: Turning to profit and margins, note that unless otherwise stated, all references to profit measures and expenses are calculated on a non-GAAP basis and exclude the items outlined in the GAAP to non-GAAP reconciliations provided in today's press release.

Speaker Change: Third quarter gross margin was 83.7% compared to 84.6% in the same period in 2023.

Speaker Change: Third quarter adjusted EBITDA was $44.8 million, up approximately 23% year over year, representing approximately 39% adjusted EBITDA margin.

Speaker Change: Unlevered Free Cash Flow was $27 million in the third quarter.

Speaker Change: CapEx, inclusive of $1.6 million of capitalized software development costs, was $5.3 million, or 4.6% of revenue.

Speaker Change: Non-GAAP earnings per share was 13 cents in the quarter based on 188 million weighted average diluted shares.

Speaker Change: We ended the quarter with approximately $174 million of cash and an outstanding loan principal balance of approximately $340 million, representing net leverage of approximately one time.

Speaker Change: Approximately 47% of our revenue was outside of North America in the quarter.

Speaker Change: Before turning to our financial outlook, I will give commentary on our third quarter results.

Speaker Change: Revenue recognition in accordance with ASC 606 triggered by signing of long-term contracts drove approximately four points of growth in the quarter.

Speaker Change: This positive impact flowed through to our adjusted EBITDA, driving roughly four points of margin.

Speaker Change: As John mentioned, pricing and packaging changes compared to 2023 and estate optimization from our long-term contract initiative acted as headwinds.

Speaker Change: These drove approximately 6% of negative impact in the third quarter of 2024 compared to the third quarter of 2023.

Speaker Change: As it relates to our previous guidance, we experienced a positive FX impact of approximately $1.3 million relative to expectations.

Speaker Change: Turning to our financial outlook, our guidance accounts for the following elements.

Speaker Change: First, we are assuming FX rates of 1.07 for the Euro and 1.28 for the Pound for the remainder of 2024.

Speaker Change: along with updates to other currencies to more closely reflect the current rate environment.

Speaker Change: These updated rates drive approximately $300,000 of negative revenue impact for the fourth quarter relative to our FX assumptions during the August call.

Speaker Change: Second, we anticipate the net impact of revenue recognition in accordance with ASC 606 to be slightly negative to revenue and adjusted EBITDA in the fourth quarter.

Speaker Change: We expect the impact of pricing and packaging headwinds and estate optimization to persist through the first half of 2025.

Speaker Change: With that in mind, for the fourth quarter of 2024, we expect total revenue in the range of $111.5 to $113 million, representing 3 to 4% year-over-year growth on a reported and constant currency basis.

Speaker Change: We expect fourth quarter adjusted EBITDA in the range of $38 to $38.5 million dollars, representing an adjusted EBITDA margin of approximately 34%.

Speaker Change: For the full year 2024, we now expect total revenue of $461.2 to $462.7 million, representing approximately 9-10% year-over-year growth on a reported basis and 9% growth on a constant currency basis.

Speaker Change: We are raising our adjusted EBITDA outlook and now expect full year adjusted EBITDA of $169.3 to $169.8 million, up approximately 18% year-over-year at the midpoint and representing an approximately 37% adjusted EBITDA margin.

Speaker Change: The impact from these updated assumptions is approximately $3 million of negative impact relative to our expectations during the August call.

Speaker Change: We reiterate that CapEx, which includes capitalized software development costs, will be approximately 5% of total revenue for 2024.

Speaker Change: We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 62% for the full year.

Speaker Change: We expect total weighted average diluted shares outstanding of approximately $188-$189 million for the fourth quarter and $187-$188 million for the full year.

Speaker Change: Finally, we expect our non-GAAP tax rate to be approximately 33% in the fourth quarter and 25% for the full year.

Thanks, Jim.

Speaker Change: We made considerable progress in the quarter as we strive to deliver the resiliency and efficiency our partners need.

Speaker Change: We aim to continue to build on this progress and advance our position as a vendor of choice for small and medium-sized enterprises and MSPs everywhere.

And with that, Operator, we'll turn it over to questions.

Speaker Change: To ask a question, please press star followed by 1 on your telephone keypad now.

Speaker Change: If you change your mind, please press star or 4x2. When preparing to ask your question, please ensure your device is unmuted locally.

Speaker Change: The first question today comes from Brian Essex from JP Morgan. The line is now open.

Speaker Change: Hi, good morning and thank you for taking the question. Maybe John, I was wondering if you could start with, you know, what you're seeing from a macro perspective in your install base. You know, if I think about MSPs that are largely in the smaller end of the spectrum, are they able to maintain healthy business in this environment or are you seeing more consolidation with larger MSPs and how does that affect your business?

Speaker Change: Thanks Brian, good morning and thanks for the question. On the macro side, we conducted a survey a little bit ago.

Speaker Change: for the most part. And resoundingly, the feedback was quite positive. The channel is quite healthy.

Speaker Change: The vast majority of MSPs are planning to grow, I think like in the 90% MSPs are planning to grow next year, and I think even the vast majority are planning to grow double digits. So, the demand is there. Why is the demand there? They're seeing a lot more demand on the security front and the disaster recovery front.

Speaker Change: The other interesting dynamic here on MSPs are actually being pulled into larger enterprises as well.

Speaker Change: So this concept of co-managed, where if you're an IT director inside a mid-market or even a Fortune 1000 company, you're looking to augment your staff, and we're seeing MSPs, as they're getting more and more sophisticated, going more there. So overall, on the channel, we're finding a pretty healthy environment. Folks are planning on growing. They'll grow this year, and they're planning on growing next year.

Speaker Change: Got it, that's helpful. Maybe to follow up with Tim, on the cost side, you know,

Bye.

cost rationalization, cost control this quarter.

Speaker Change: declined pretty materially year over year and sequentially. How sustainable is any cost rationalization there and how should we think about the way that you're shifting the focus on investing in the business given the shifting growth rate?

Speaker Change: Yeah, absolutely. I think the G&A spend is definitely sustainable. That's been an area that we've highlighted as.

the area that kind of had the most.

Speaker Change: They're most flex in the model, historically. And then on the sales and marketing front, I think as we evolve and bring new things to market, that will ebb and flow a little bit. I think we've optimized that to the right level at more in a point in time.

Speaker Change: But I would expect us, you know, that to kind of grow in line with with revenue as we look forward into

into 2025 and beyond.

Speaker Change: and we've obviously been investing on the on the R&D front from a product and roadmap perspective and you know we've had you know some some things come to market this year we expect to bring things to market you know you know two to two to three things new to market on an annual basis

Speaker Change: and we're starting to see some tailwinds there from some of the new offerings in 2024 and would expect that to be more material in 2025.

Speaker Change: As Tim mentioned, we'll lean in on our R&D to bring more products to market and with the strategy there that it's

Speaker Change: It feeds into the platform, it makes our customers stickier, but then that sales and marketing engine is much more efficient on the expand. So that's a little bit of the strategy there. We'll lean in R&D, add more products, and then that expand motion is more cost-effective, which will drive the epita that we continue to enjoy.

Speaker Change: Yeah, and Brian, just to note that the sales and marketing does include some capitalized commissions in Q3 this year versus last year, so that's part of the reduction year over year to the tune of about a million dollars or so. Very helpful.

Yeah, very helpful. Thank you. I appreciate it.

Yep.

Speaker Change: Thank you. The next question is from Matthew Hedberg from RBC Capital Markets. Please go ahead.

Speaker Change: Hey, good morning guys. This is Mike Richards here on for Matt Hedberg. Thanks for taking the question. I guess just my first one is a point of clarification. Just on the updated guidance and the moderated assumptions for the long-term contract, is that

Speaker Change: You know, is that you're expecting less customers to enter into these long-term contracts than 90 days ago? So you're getting less of that upfront red rack or are you seeing more optimization than you saw 90 days ago when these customers are entering into these contracts?

Ok.

Speaker Change: You know, we convert new customers into these contracts and we convert existing customers into these contracts. On the new front, what we're seeing is a higher mix of customers going on to hosted and SaaS offerings.

Speaker Change: versus on-premise. So it's not that there's less people going into long-term contracts, it's the mix is more on the SaaS front, which does not have any, you know, material impact on revenue.

Speaker Change: And then on the existing customer front, that's where we're seeing, you know, an expected conversion on the on-premise bit to be lower than we had, you know, packed into our guidance last quarter and that net effect we quantified at about $3 million.

Thank you for watching!

Speaker Change: Got it, thank you. And then, you know, last quarter you called out 20% booking growth, so I'm just curious if that momentum sort of continued into Q3 and like what you're seeing from a new business and expansion perspective. Thanks guys.

Speaker Change: Demand continues to be strong. The top of the funnel, the opportunities were up double digits year over year. Bookings were up in the teens year over year. So in Q3, it typically is a little bit of a.

Speaker Change: seasonality slowdown just given the diverse customer base. We have a lot of as you know a lot of our customers are international.

Speaker Change: So we typically see it from a quarter-over-quarter basis, a little bit of a slowdown, but that's typical with the summer months. But no, I'd say it's very much the same themes that you've been hearing from us. Data protection and security continue to be quite strong, and we continue to see bookings growth, at least in the teens.

And for Q3.

Thanks guys.

Thank you.

Speaker Change: As a reminder if you'd like to ask a question please press star 4 by 1 on your telephone keypad now.

Speaker Change: The next question is from Jason Adder from William Blair. Your line is now open.

Jason Adder: Thanks, good morning guys. I guess just on the last or one of the previous questions. Can you just talk about the mix today in the business between on-prem and SaaS? I guess I'm not

Speaker Change: super familiar with that distinction. I guess I assume that all of your business is basically.

Speaker Change: monthly recurring SAS revenue, but I guess that was wrong. Can you talk through the distinction there and the mix today and where it's been and where it's going?

Speaker Change: Yeah, sure Jason. The business is primarily 100% monthly recurring revenue, but there is a mix of SAS revenue and on-premise revenue.

Speaker Change: The on-premise revenue is about 15% of the overall business, and that's been trending downward over time, and we would expect it to trend downward over time.

Speaker Change: as well, especially with the mix of where new customers are landing and some of the strategic product work that's going on within the business.

Speaker Change: We've historically disclosed that. It's in our Q&K. We disclose point-in-time revenue versus overtime revenue. That's the distinction between on-premise customers and SaaS customers. So you'll be able to kind of see the trend line there and the impact of, you know, the committed contracts there that we have from a rep-rec perspective.

Speaker Change: Yes, so Jason, it's all subscription, it's just that if they're, and they're, if they're hosted or, you know, in our cloud environment, so just completely.

SAS, that's going to be just routable.

Speaker Change: and if they're a subscription and they're, but it's an on-prem, in other words, the MSP.

as the software on their premise.

Speaker Change: then that's where the revenue gets a little bit more accelerated. And this is limited to our in-central customer base.

Speaker Change: our co-data protection offering, our insight offerings, our security offerings, they're all 100%.

SASS and cloud-based, and central-based is a percentage.

Speaker Change: of those customers that are on-prem. By the way, some of that...

Speaker Change: just the legacy bit. They've been on-prem customers for eight, 10 years type of thing. Some of them have requirements that they prefer to be walled off and not necessarily in a hosted environment. And where I believe the fact that we're giving customers choice there actually allows a little bit of a better differentiation in the market and allows us to win in some of those environments where they might have customers that demand a little bit more of a on-prem type of requirement

and me type of thing.

Speaker Change: For the new customers, you talked about a higher mix of new customers basically going into SaaS.

Speaker Change: which is affecting your revenue, right? That's what you just talked about.

Is that correct?

Speaker Change: Yes, coupled with, I would say we expect to convert existing customers at a lower rate than we previously had assumed in Q4 as well on converting existing customers.

More specifically on the on-prem part of the equation.

Speaker Change: Gotcha, okay. So is that a separate issue from the estate optimization? Just trying to understand, because that seems like a separate issue from like the long-term contract initiatives, which is impacting estate optimization.

Speaker Change: It is yeah, and I think the nuance there is what you see in our in our net retention rate So the state optimization impacts net retention in a negative fashion Conversion or non conversion of customers into long-term contracts both hosted or

Jason Adder: both staff and on-prem, will not impact that. So as it does impact revenue, it won't impact net retention. And just for clarity Jason, we're actually quite pleased that more and more of our customers are going to the to the cloud.

Speaker Change: offerings, it's actually a proof point on all the things that we're delivering. And so in the prepared remarks, we talked about the ECOverse.

Speaker Change: and the modernization of the RMs and the asset views that we have there, the analytics that we have there.

Speaker Change: Frankly, we're pushing more and more value to our cloud environments and the market's picking that up. So the fact that we're shifting and seeing more of our customers going toward our more modernized

Speaker Change: offering is more of a proof point that what we're doing is resonating in the marketplace.

our 2024 cohorts.

Speaker Change: are the best they've been in five years. Another proof point that what we're bringing to market is delivering. So I don't want anyone to take that the mix.

Speaker Change: It's an overall better experience for our customers. They don't have to maintain the server. It's a better TCO for them. And it allows us to scale. What we're seeing in the market, larger and larger MSPs is more private equity money coming into this industry from our customer base.

Speaker Change: And we're seeing larger and larger companies merge. And when those companies now are managing, you know, 100,000 devices.

Speaker Change: They're looking for a solution that can scale. And what we've done with a lot of the microservices that we've done is, you know, we've effectively kind of delivered more of an infinite-scale kind of model so that these...

Speaker Change: these larger MSPs now can pick our cloud offering with this ability to kind of scale in a way that might not have been done so easily. And we believe this will be a differentiator in the market as well.

Speaker Change: because some of the legacy stuff that others have that might be still on-prem, their servers may start to shake, so to speak, and don't have the level of scale that we have. These are all overall good things and proof points that what we're delivering is actually resonating as more and more of these customers are pushing to our cloud offering.

Speaker Change: Okay, and just one final clarification. So just when you are seeing

Speaker Change: Lower conversion to SAS for existing customers than expected. That is a revenue headwind because SAS has an uplift versus on-prem. Is that the right way to think about the revenue headwind there?

Speaker Change: No, it's the inverse. The conversion of on-prem customers has the impact on revenue, and a lower conversion there is a product of the updated outlook.

Lower conversion of on-prem to SAS.

Lower conversion of on-prem from month-to-month to long-term contract.

Speaker Change: Thank you. The next question is from Mike Sikos from Needham. Please go ahead.

Speaker Change: Thanks for taking the questions guys. I just had two on my side and the first was...

Just cleaning up my understanding a little bit

Speaker Change: off of Jason's question, but have you guys quantified or do you have handy what that upfront portion of the subscription revenue was for those on-prem customers?

Speaker Change: Yeah, we quantified in the prepared remarks. It was about four points of impact from a growth perspective on Q3, Mike, and the way to do that math is via our disclosure on point-in-time revenue versus over-time revenue, which is in the Q. I'm happy to point you guys there as a follow-up if that's helpful.

Okay, okay, and then just...

Speaker Change: And then for Q4, it's a slight headwind to our outlook, from a growth perspective, where it was a tailwind in Q3, or it was a tailwind in all three quarters of, you know, of 24, and it's a slight headwind in Q4.

Speaker Change: Understood. Okay. And if I'm thinking about, let's say, a state optimization or some of the pricing headwinds are seen as more transitory here, are any of those headwinds expected to bleed into 25 from where we sit today, or does this kind of flush out over the course of the December quarter?

Speaker Change: Yeah, I would expect the headwinds to persist through the first half of 2025. That was also in the prepared remarks, you might not have been able to jump on.

Speaker Change: It's just a byproduct, right? So if a lot of the optimization happened in the first half of 24, that will just carry through for the following 12 months. So once we get into the... that will dissipate as we get into the second half.

Got it. Thank you guys. I appreciate it.

Thanks, Mike.

Speaker Change: We currently have no further questions, so I'd like to hand back to John Pagliuca for closing remarks.

Thank you.

John Pagliuca: Thank you all for joining us today and looking forward to providing you another update shortly. See you in a quarter.

Speaker Change: This concludes today's call. Thank you for joining. You may now disconnect your lines.

Thank you