N-able, Inc.

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'll be a Q&A session, and to register to ask a question, please press star, followed by one, on your telephone keypad. And if you change your mind, please press star, followed by two. I'd now like to hand over to your host, Griffin Gyr, Investor Relations Manager, to begin. Please go ahead.

Thanks, Operator. and welcome everyone to Enable's third quarter 2024 earnings call. With me today are John Pagliuca, 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.enable.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 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 highlighted in today's earnings release and our filings with the SEC. Additional information concerning these statements and the risks and uncertainties associated with them is highlighted in today's earnings release and in our filings with the SEC. Copies are available from the SEC or on our investor relations website. Furthermore, we will discuss various non-GAAP financial measures on today's call. Unless otherwise specified when we refer to financial measures, We will be referring to non-GAAP financial measures. A reconciliation of non-GAAP financial measures discussed on today's call to their 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, representing 8% year-over-year growth on a reported basis and 7% on a constant currency basis. Adjusted EBITDA was $44.8 million, representing an approximately 39% adjusted EBITDA margin. We once again exceeded our quarterly guidance. We are growing the business because our mission is on target. We strive to make MSPs and small, medium-sized businesses cyber resilient. Our IT management software ensures their systems are safe and functioning. 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. IT systems keep the world running and our software keeps IT systems running. 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. When those systems fail or are compromised, the business faces a potential extinction event. The stakes are high, and the risks are numerous. 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. 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. With our proven product market fit, disruptive technological mode, 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, 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, email protection, password management, patching, device monitoring, remote device take control, and tech-enabled services. 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, which is powered by extended detection and response software, known as XDR, stands out within our security portfolio. Brought to life via our third-party partnership, the strength of these combined solutions is resonating as they distinctly solve pressing security challenges. First, XDR provides the ability to see and act broadly across the IT estate. This enables comprehensive risk mapping and focused remediation efforts. Without the ability to see and interact cleanly with the entire IT estate, technicians are playing a losing game of whack-a-mole. 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. Our XDR ingests data from the network, cloud, endpoints, and users. This creates the complete and actionable insights technicians need. And second, the MDR feature provides human interpretation of security events without breaking the bank. The shortage of skilled cybersecurity labor has persistently been a major industry challenge. Even when the right human talent is found, it can be cost prohibitive for small and medium businesses. We address this by providing outsourced experts, which allows MSPs to augment their operations efficiently. 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. 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. We also looked at fiscal year 24 to transform the customer relationship and leverage industry trends to better position ourselves in the long term. While I'm pleased with the overall trajectory of this transformation, this initiative has also generated a near-term headwind. 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 contracts. The thesis behind the initiative is straightforward. 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. This deeper relationship is expected to drive higher retention and expansion over time. 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. We continue to have full conviction that this initiative is the right move. 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. 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. We expect both estate optimization and pricing headwinds to be transitory. Now let's take a step back and look at broader market trends to understand where Enable is placing its bets and why. 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. With rising IT complexity pushing SMEs to use MSPs for IT support, we believe there is a significant opportunity for enable. This opportunity is validated by market analyst firm Canalys, who projects the MSP market to grow by at least 12% in 2024. We are also opportunistically expanding within resellers and direct sales to SMEs. These are natural adjacencies where we see product market fit and alignment with existing go-to-market operations that will allow for efficient expansion. 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. Clicking in further, we see the strongest demand for solutions that enhance resiliency, namely security and data protection. We have strategically invested in these priority categories through Cove and our XDR partnership, positioning our customers and enable to grow. also delivers resiliency and remains a core focus. 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. Our RMM solutions also drive greater efficiencies into our customers' businesses. 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. One reason is that technicians, often the largest expense on the MSPs P&L, are burdened with managing multiple environments and software sprawl. This is difficult to do efficiently. Our multi-tenant RMM platforms address this by streamlining technician workflows, improving labor efficiency, and ultimately raising MSP profitability. 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. With our high conviction that delivering resiliency and efficiency to our customers is a winning proposition, the Ecoverse stands alongside Cove and XDR as a foundational strategic investment that positions our customers and Enable to grow. So bringing it all together, 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. With that, let's look at the key execution we delivered in the third quarter. From a product perspective, we made strides forward. As part of our open RMM platform strategy, we've expanded our API and data analytics capabilities. With new APIs in September alone, we've reached over 15 million API calls across 25% of our in-central SaaS customers. Our growing analytics capabilities now track over 950 unique attributes with data from over 4 million devices and 1,000 monthly active users. These capabilities allow customers to collect and analyze data quickly with greater fidelity, allowing for faster insights, response, and remediation. 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. Cove also delivered significant progress. 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