N-able, Inc.

Thank you and welcome everyone to Enable's second quarter 2022 earnings call. With me today are John Paliuca, Enable'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.n-able.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, our continued expectations following the spinoff of our business from SolarWinds in July of 2021, and the impact of the global economic environment on our business. These statements are based on currently available information and assumptions, and we undertake no duty to update this information except as required by law. These statements are also subject to a number of risks and uncertainties, including those related to the spinoff transaction completed last year. Additional information concerning these statements and the risks and uncertainties associated with them is noted in today's earnings release and in our filings with the SEC. Copies are available from the SEC or on our investor relations website. Furthermore, we will discuss various non-GAAP financial measures on today's call. Unless otherwise specified, when we refer to the financial measures, we will be referring to the non-GAAP financial measures. A reconciliation of the non-GAAP financial measures discussed on today's call to their GAAP equivalents is available in our earnings press release on our Investor Relations website. And now, I will turn the call over to John.

Thanks, Jeff. And thank you all for joining us today. Our financial performance in Q2 exceeded the high end of our outlook. with GAAP revenue growing year over year by 7% or 13% on a constant currency basis to $91.6 million, demonstrating success in our multi-product sales approach, with particularly strong growth in our security offerings and data protection as a service. We also exceeded our adjusted EBITDA forecast, coming in at $27.6 million, just over 30% EBITDA margin. During Q2, We made encouraging progress on multiple initiatives that we believe validate our strategy and made a few well-calculated bets in the market that appear to be playing out in our favor. I will go into more detail on that in a minute, but first, I wanted to talk about a major milestone we just hit, our one-year anniversary as an independent public company. From the outset, our business model was designed to allow us to grow as our MSP partners grow. And the spinoff we undertook last year was primarily about focus. Focus on empowering our MSP partners to serve their SME customers. A focus on delivering powerful and simple solutions for MSPs to scale their business. And a focus on our employees. We believe that we have proven the value of a spinoff for our partners, employees, and shareholders as we accelerate our product roadmap and continue to help MSPs achieve their goals. While we are mindful of the current macroeconomic dynamics, we will keep focus on what drives our business and we'll continue to invest with a focus on growth to maintain our momentum. It has been a landmark year for us. Our team has grown by almost 12% to more than 1400 people worldwide. We have hired across all functions and continue to build our team with industry leaders who have been key to driving our success. We have increased the pace of product launches and invested in strategic areas that matter to our partners. Our brand is resonating with our target audience, and we have been recognized across the industry for the great work we are doing. And we continue to rally behind the phrase, earn more fans, which is embedded in our product roadmaps, our go-to-market strategy, and our approach to partner success. The backdrop to all of this growth are the industry dynamics we have discussed in the past, which are only becoming more prominent over time. These include rapidly increasing IT complexity, labor scarcity, and rising cybersecurity threats. I've talked about them as tailwinds for us, which we believe they are long-term, durable tailwinds that we look to capitalize on by hiring, expanding, and investing in the future. Our products and solutions directly address these dynamics, which creates opportunities for us to deepen our relationships with our partners. You can see this in the product advances we've made, but it's also evident in some of the sales trends we're seeing. On the product front, we've made a number of advancements. For our partners and their customers, the cloud is no longer a talk track and presentations. It's an adoption speedway for IT professionals. We've always been cloud first company. cloud-first and backup with closed data protection as a service, cloud-first in many of our product offerings as we are a SaaS provider. And with our recent acquisition, we are now helping our partners optimize the value of their Microsoft Cloud products. There is strong demand in this area. And while a significant majority of our partners manage or resell Microsoft Cloud services, they face numerous challenges, including issues with automation, multi-tenant management, and complexity that restricts MSPs from leveraging the full breadth of capabilities. And this is why we acquired SpinPanel. And we intend to make this a core cloud offering for Enable. We have been speaking with the amazing team at SpinPanel for some time. And after looking across the entire landscape, we believe that the right decision was to acquire them. Not only because they're a strong fit with our cloud strategy, but culturally, They have a similar partner focus and a vision that aligns with ours. Now as part of Enable, we can invest in the resources to scale and integrate the products to ensure we are addressing the challenges our partners face in helping our MSPs to own the cloud. The spin panel solution is designed to help our MSP partners manage Microsoft Cloud in a way that allows them to reduce complexity, bring efficiency, and profitably scale their Microsoft business. The product is already in use by Microsoft partners around the world, and as soon as the acquisition was announced, we opened up a beta version to our partners, and the response to this offering has been strong, which we believe validates the need and the approach that we are taking. I am excited for you to learn more about it when we launch the product to the world. On the data protection front, we've been very pleased with the market response to our Cove data protection as a service, one of the truly cloud-first appliance-free enterprise-grade backup and disaster recovery solutions that allows MSPs to modernize their approach to data protection. As a measure of how widely used Cove is, we recently announced that Cove data protection has passed 1 million protected Microsoft 365 users. Cove overall is supporting over 12,000 partners and more than 142,000 end customers. We also just announced that a powerful new feature called Standby Image is now available. It enhances Cove by simplifying disaster recovery through the creation of standby copies on customer-owned infrastructure without the need to buy an expensive proprietary backup appliance. Cove data protection is ideal for recovery from a destructive cyber attack. With traditional approaches, simply restoring backup into production can be risky as it may reinfect the network. But with Cove and Standby Image, That risk is mitigated because the backup copies are removed from the network that the malware is targeting and customers have the flexibility to proactively restore a server image into a location that works for them. Our partners have really taken to Cove and data protection has become a product we can lead and we can lead with for potential new customers. Now turning to RMM. For decades, the Enable team has served MSPs regardless of size or stage. from highly specialized market-specific service providers to large global generalists who serve SMEs around the world, all the way down to startup MSPs serving their customers from the proverbial garage. To build on our mission, to meet our partners where they are in their journey, we recently announced a new offering called Insight, designed to help early growth MSPs jumpstart their business. We think of it as a way to level the playing field, as it is the same powerful, and scalable set of tools that seasoned MSPs use, but it is tailored and packaged to help those partners early in their growth trajectory to start up right and efficiently scale. It combines three major components of our platform, our cloud-based RMM, enabled take control for remote support, an MSP manager for professional service automation, plus our full suite of onboarding, support, and community resources to help them build their businesses. It's only been a few weeks, but already we are starting to see a pickup in response within this cohort. On the last call, we discussed our launch of Enhanced Services. Enhanced Services is designed to help MSPs unlock the full potential of our solutions and address market challenges like labor scarcity, growing cyber threats, and increasing IT complexity. Premium onboarding, support, and training allows MSPs to leverage our experience and expertise to optimize their teams and technician efficiency and accelerate time to value by delivering solutions to their customers faster. We see this as a critical part of our value proposition and is often the differentiator between us and a competitor. Now, for our notable customer wins, rather than divide them up as new wins and as expansions, as I've done in the past, I want to point out a few trends we are seeing in the market. The first is the opportunity we are finding with MSP consolidation. This type of activity has been accelerating this year, as many of you have noted. We believe we are uniquely positioned to assist these consolidators in optimizing their costs and resources when they standardize on our purpose-built, holistic suite of solutions. That, plus the technical and business support we give them on an ongoing basis, makes for what we hope are many years as an Enable partner. Let me give you a few examples. We want a large $250,000 plus ARR standardization deal with a worldwide MSP consolidator on Incentral. This partner is one of the largest MSPs in the world, and we will be replacing multiple competitors as they work over the next 12 to 24 months to integrate the companies they recently acquired. Right now, this is just for RMF, but we have begun conversations around security and code and believe there's a large potential there as well. Standardization deals like this involve a high degree of expertise in both the technical aspects as well as training and project management. And this is an area we believe that we excel in above our competition. Second, a large consolidator in Finland has pulled together 11 MSPs within their group, six of whom are currently using Enable products and five who are not. We were already working with one of the MSPs who did not have our solution in-house. We were the first vendor to approach the group with the idea of standardizing. Our professional service capabilities, including project management and scripting to automate their process as a value added service helped us to win the deal. We are now well over $200,000 of ARR with them. They are currently evaluating Cove as well across the growing base of 20,000 nodes. Third, another large consolidator based in the UK has a few of the recently acquired MSPs on Essential. And we've been encouraging them to standardize and enable tools across all of their holdings. We are now replacing a competitive RMM for more than a hundred thousand dollars in ARR. We are also ripping and replacing the legacy antivirus with our integrated antivirus security solution. We are excited about the possibility of adding new business in this account, including standardizing on Cove and on-pass portal, EDR and DNS offerings in the near term. And fourth, A partner who was a top 50 MSP with a large and central deployment acquired a similar size MSP, which effectively doubled the number of endpoints managed. The acquisition was an opportunity for them to reconsider their vendor relationships. So they came to us for our EDR solution, adding more than $200,000 annually. They're now actively evaluating Cove as their standardized backup solution as well. We're also beginning to see positive results and our refreshed multi-product go-to-market strategy that leverages our unique capabilities. In many cases, we generally lead with our RMM solution within Central and Insight as our foot in the door with potential new partners. We've been quite successful there, even though RMM has relatively high switching costs. But now, as our product line has evolved and Cove has really come into its own as a market-leading product, Cloud-based backup and data protection are showing themselves to be the tip of the spear for many accounts. As we prove our value, both with our products, as well as our partner success resources, we're able to expand our footprint. And I'll give you one recent example of this. A large North American MSP that Enable has been hoping to work with for many years has been dissatisfied with the support and capabilities they were getting from their current backup vendor. They put Cove and our partner success team to the test. After rigorous review, in a process, they chose to implement code for over $50,000 of ARR. We are speaking with them about rolling out in Central to help them with their vast set of Mac and legacy Windows nodes that they manage, among other things. This is a symbolic win for us, and we are extremely excited to be working with them. As you can see, with each of these examples I just mentioned, our service and partner success teams were instrumental in helping partners, especially with the labor scarcity issue that is affecting the industry. Along those lines, a more notable win to highlight, a large nationwide dental partnership organization has recently decided to operate as their own MSP. And they came to us not only for Incentral's inherent capabilities, but also due to our reputation for service and support. We were able to help them rapidly migrate their nearly 7,000 endpoints with zero service interruptions and no downtime. As a result, They are now nearly a $250,000 USD ARR partner for us. We intend to continue to capitalize on these trends as we invest in the elements of our winning formula, our market-leading technology, our sales and marketing motions that raise our brand awareness, and our partner success resources which help to drive sales opportunities, including the ones I mentioned a minute ago. We believe that this is what differentiates us from our competition and will continue to drive our success over the long term. I'll let Tim take over the call now and discuss our financial results and outlook. And then I'll jump back on briefly to talk about our go-to-market motions in the back half of the year. Tim?

Thank you, John. And thanks to all of you for joining us on the call today. I want to review our second quarter financial results, then discuss our financial outlook for the remainder of 2022. As John mentioned, we finished the second quarter ahead of our outlook. with total revenue of $91.6 million, representing 7% year-over-year reported growth, or 13% on a constant currency basis. Description revenue was $89.4 million, representing approximately 8% year-over-year growth, or 14% on a constant currency basis. Other revenue, which primarily represents maintenance revenue from our discontinued legacy license model, was $2.3 million, down 10% year-over-year and consistent with prior quarters. We ended the quarter with 1,818 partners generating greater than $50,000 of annual recurring revenue, or ARR, a 10% year-over-year increase. Partners contributing over $50,000 of ARR now represent 50% of total ARR, up from 46% a year ago. We saw strength across our portfolio with EDR and Cove data protection, and in particular, with Microsoft 365 backup solutions, continuing to outpace total company revenue growth. Dollar-based net revenue retention calculated on a trailing 12-month basis was 106% on a reported basis. This result reflects approximately two points of negative FX impact. 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. Also note that historical financials for the period prior to the effective spinoff date of July 19, 2021, included operating expenses that were prepared using carve-out allocation methodology while we were still part of SolarWinds. While the allocations and estimates in these carve-out financials are based on assumptions that we believe are reasonable, our standalone financials are not necessarily directly comparable to those prepared prior to the effective spinoff date. Second quarter gross margin was 85.5% compared to 86.4% in the second quarter of 2021. Second quarter adjusted EBITDA was $27.6 million, representing approximately 30% EBITDA margin. Unleveraged free cash flow was $25.1 million in the second quarter. CapEx was $3.9 million, or 4.3% of revenue. Non-GAAP earnings per share was $0.09 in the quarter based on 181 million weighted average diluted shares. We ended the quarter with approximately $86.6 million of cash and an outstanding loan principal balance of $347.4 million, representing net leverage of approximately 2.3 times. Approximately 45% of our revenue was outside of the US and Canada. I want to take a minute to expand on something John discussed. A year ago, when we spun off our business, one of the principal objectives was to focus our attention and financial resources on activating our growth strategy. One key aspect of that is capital allocation and our ability to make targeted investments in a manner that is appropriate for our strategic priorities. As you saw with the spin panel acquisition, this was a buy-build-partner consideration we made one that we believe aligns with our cloud-first positioning and creates value for our MSP partners and shareholders. Though a relatively small transaction, it was strategically important to us in order to accelerate the advancement of our cloud strategy. Our partners are looking to us to drive innovation and stay in front of customer demand for services, and we are executing on that by delivering a steady pace of product launches for new enterprise-grade solutions. We intend to continue to make capital allocation decisions that we believe will allow us to accelerate our growth, expand our platform, and achieve our optimal Rule of 50 metrics. Before I discuss our financial outlook for the third quarter and full year, I want to reiterate that aside from the global economy impact, the situation in Ukraine, Russia, and Belarus has not to date had any material impact on our operations, financial results, or business consistent with what we saw in the first quarter. We continue to believe we have adequate resources in non-impacted regions to support our products, including a newly established office in Warsaw, Poland. As the situation continues to evolve, we will take action as needed to mitigate any potential impact as we deem appropriate. Now I will provide our financial outlook for the third quarter and full year. There have been changes to the foreign exchange environment since our last outlook, and we are updating our guidance to reflect the impact of these changes. I want to start by reconciling our prior 2022 outlook based on current FX rates. As stated in our previous call, we assumed FX rates for the Euro and Pound of 1.05 and 1.23 respectively. We also stated that every point on the Euro equated to approximately $900,000 of annual revenue and every point on the Pound equated to approximately $300,000 of annual revenue. Using updated FX rates of 1.00 on the Euro and 1.19 on the Pound, as well as changes in other currencies, our prior 2022 revenue guidance of 376 to $379 million translates to $373 to $376 million, reflecting approximately $3 million of additional FX impact for the second half of the year. As it relates to our prior 2022 adjusted EBITDA outlook of $112.5 to $115.5 million, using these updated FX rates, our adjusted EBITDA outlook translates to $110.5 to $113.5 million, reflecting approximately $2 million of additional FX impact for the second half of the year. While the global macro environment remains uncertain and FX rates may continue to fluctuate, based on our current FX assumptions, we expect our third quarter of 2022 total revenue in the range of $92.5 to $93 million, representing approximately 5% year-over-year growth, or approximately 11% to 12% on a constant currency basis. For the full year 2022, we have slightly moderated our constant currency growth expectations, primarily to account for what we expect to see from a macroeconomic impact on device expansion for SMEs. We believe uncertainty in the macro environment may cause SMEs to add devices at a lower rate than we expected earlier this year. And as a result, we are tempering our forecast slightly for the back half of the year. To be clear, we believe there is strength across other parts of our growth algorithm, including market share growth for code and enable EDR, the cross-sell opportunity for our cloud products, and our steady velocity in terms of close rates overall. We now expect total revenue of $370 to $372 million, representing approximately 7% year-over-year growth on a reported basis, or 12% to 13% growth on a constant currency basis. For EBITDA, we expect third quarter adjusted EBITDA in the range of $26.5 to $27 million, representing approximately 29% margin at the midpoint. For the full year, our expense management remains disciplined and we are maintaining the level of investment in our strategic plan in order to take advantage of what we see as unique market and competitive opportunities. Therefore, given the factors I mentioned, including the FX driven revenue reduction, some expected headwinds due to macro environment uncertainty and the expense impact of the spin panel acquisition, We are now expecting full year adjusted EBITDA in the range of $107 to $109 million, equating to approximately 29% margin at the midpoint. CapEx is expected to be approximately 5% of total revenue for the full year. We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 70% for the full year. We expect total weighted average saluted shares outstanding of approximately 181 million for the third quarter and the full year. Finally, we expect our non-GAAP tax rate to be approximately 28% in the third quarter and 26% for the full year. Now I will turn it over to John for closing remarks.