Yahoo Finance N-able, Inc. (NYSE:NABL) Q1 2024 Earnings Call Transcript
N-able, Inc. (NYSE:NABL) Q1 2024 Earnings Call Transcript May 10, 2024
N-able, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the N-able First Quarter 2024 Earnings Call. All lines have been placed on mute during a presentation portion of the call. There'll be an opportunity for question and answer at the end. [Operator Instructions]. I would now like to hand the conference call over to our host, Griffin Gyr, Investor Relations Manager. Please go ahead.
Griffin Gyr: Thanks, operator, and welcome everyone to N-able's first quarter 2024 earnings call. 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.nable.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 for 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. The 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 certain GAAP and non-GAAP financial measures discussed on today's call is available in our earnings press release on our Investor Relations website.
And now, I will turn the call over to John.
John Pagliuca: Thanks Griffin. Today, I will discuss our strong first quarter performance, share observations and takeaways from Empower, our annual customer conference, and provide an update on the key 2024 company objectives we outlined in our previous call. Let's start with our first quarter performance. We delivered robust results amid a steady macroeconomic backdrop. Revenue was $113.7 million growing approximately 14% year-over-year on a reported and constant currency basis. An adjusted EBITDA was $39.6 million, representing an adjusted EBITDA margin of 35%. Once again, we exceeded the high end of our top and bottom line guidance. These results establish two critical points. First, we believe this shows that our product strategy is hitting the mark.
Over the past 18 months, we have strategically expanded the depth and breadth of our product portfolio, driving our monthly per device opportunity to over $30. First quarter results show that these expanded options and capabilities resonate with our customers. Cove Data Protection, where we have made significant investments to deepen our capabilities was our fastest grower. The security product group, where we added new SKUs and considerably expanded our breadth, followed as our second fastest grower. And lastly, our IT monitoring and management platform saw steady demand and continues to serve as the primary entryway to N-able. Growing the depth and breadth of our product portfolio is key to our strategy. Why? Well, small and medium enterprises are becoming increasingly digital and the technology landscape is getting more complex.
MSPs are relying on a more extensive set of advanced software tools to keep pace. Broad-based demand across our growing software stack gives us confidence that we're meeting these market needs. Second, we are delivering this innovation profitably, simultaneously growing our bottom line and our product portfolio. And we believe this quarter is proof of our model's capability to deliver customer value in a profitable manner. Switching gears, let's now discuss notable takeaways from our annual customer conference, Empower. With hundreds of MSPs, vendors, distributors, and industry leaders and attendance, Empower is an opportunity for the MSP community to share best practices and an unparalleled forum for us to get direct insight and learn from our customers and industry peers.
One resounding takeaway from the event is that MSPs are optimistic about their prospects. MSPs told us that while elements of SME spend remain measured, they feel industry tailwinds continue to blow in their favor. These discussions reinforce our belief in the economic resiliency of our customer base and the vital nature of our data protection, security, and IT management software solutions. Analysts echo the durability of the MSP industry. With Canalys forecasting total managed service revenue to grow by 12% in 2024. This collective sentiment gives us a continued confidence in our strategy as we invest across our product set and scale our operations to capture the attractive industry TAM. Another consistent theme we heard was that managing the cloud is an enormous opportunity and a daunting challenge.
Small and medium enterprises are moving operations through the cloud while maintaining on-premise capabilities. MSPs express excitement over this trend because it means the pie is growing. The cloud is another vector MSPs can manage and monetize. However, technicians must have the necessary purpose-built software tools and expertise to manage hybrid IT environments. This customer feedback validates the bet we placed by developing cloud commander. Our cloud management solution empowers MSPs to manage cloud workloads, cementing them as a trusted modern IT provider. At the same time, we maintain the ability for our partners to operate within on-premise environments. This dual approach gives them the confidence to capitalize on the future of the cloud while meeting their customers what they are in their digital journey.
We serve both on-premises and cloud needs. MSPs also clearly spoke about the ongoing changes in the security space. Both threat levels and regulatory and compliance requirements are rising and the SME is squarely in the crosshairs. The question is no longer, am I safe? The question is now, am I safe and am I compliant? This has a massive implication for both MSPs and SME operations. We eagerly discussed with and educated MSPs about why we believe adding N-able, managed detection and response to our already broad security stack, unique positions N-able as the answer to this urgent question, giving them layers of software and human services available in a single motion. All said, our dialogue at the event gave us confidence in our product development strategy in the mission-critical security center.
A final update from Empower was the progression of the N-able Ecoverse. The Ecoverse is our ongoing transformation to an open ecosystem with integrations extending across the broad universe of technician workflows. Over the long term, the Ecoverse aims to make every single action in IT technician workflow available via trusted APIs. This will help TAM the inefficiency of tool sprawl for MSPs, driving more efficient use of both the N-able tech stack and their other software solutions. The strategic rationale is simple. MSPs want to efficiently deliver a broad range of IT services to their SME customers. The Ecoverse positions us to meet this need. And while we're in the early stages of this journey, we believe the potential of our Ecoverse vision is substantial.
With network effects driving customer value, we believe the Ecoverse can establish the N-able software platform as the control hub for MSPs everywhere. And that it will drive N-able as a long-term MSP market share consolidator. We have made recent progress on this journey. Powerful new integrations with leading PSA and MSP automation vendors create immediate customer value. These partnerships significantly streamline MSP technicians' workflows, allowing them to ticket and bill more efficiently, connect applications, and operate complex IT environments better. We look forward to further advancing our Ecoverse vision and providing updates along the way. Reflecting on the many takeaways from Empower, we continue to have confidence in the MSP market and N-able's positioning for short and long-term success.
Let's now discuss key quarterly highlights and updates on the three 2024 focus areas. As a reminder, our immediate focus is on the following objectives. First, empowering MSPs with leading security and data protection solutions that give themselves and their SME customers a piece of mind they deserve. Second, driving rapid innovation into RMM platforms, enabling MSPs to better manage hybrid digital environments at scale. And third, doubling down our customer engagement model and delivering a differentiated level of service to the MSP community. Looking for us at our customer engagement model, we delivered exceptional progress along several dimensions. We leaned in and our in-market presence posted 30 events across multiple continents. This in-person interaction is core to our DNA.
We also launched our MSP horizons research, helping MSPs across the spectrum assess market trends and the best practices to drive their businesses forward. Our efforts to give customers improved contract flexibility and pricing predictability are seeing traction as customers adopt long-term contracts at a solid pace. And as a testament to these customer engagement efforts, we were recognized as the premier five-star rating in the 2024 CRN Partner Program Guide and a Gold Stevia Award for Best Customer Service Team. These are welcome acknowledgments of our deeply held belief that our MSP success is our success. We also continue to execute on our initiatives to drive innovation in our platforms. We bolstered a powerful patch engine and made meaningful improvements to the platform user experience.
These efforts advance our strategy of delivering features that solve MSP use cases, all within an improved technician experience. Past investments in the platform are also varying through. We continue to hear strong positive feedback about our new analytics feature and new customer acquisition on our flagship and central platform has increased in the past two quarters. We were excited to continue to invest in and further develop our powerful manager platform. We also made considerable progress on our initiative to give our MSPs the peace of mind they deserve with our security and data protection solutions. On the data protection front, the cove team continues to deliver world-class execution. Highlights in the quarter include the introduction of recovery to VMware, the development of fortified copies, and increased restore accuracy and speed through the use of AI.
These technical advancements solve real world problems for our partners. As cove gains traction among larger MSPs and internal IT departments that often utilize VMware, we believe the ability for cove to directly restore copies into a VMware environment broadens our appeal across the market. Our fortified copies functionality places data copies and locations inaccessible from Cove's management console, protecting data from a threat actor or malicious insider. And the integration of new AI restore techniques into cove drives significant time savings in core IT technician workflows. This effectively lowers our customer's cost of ownership while improving the experience. The value creation is borne by our results. Cove led our growth in the quarter is moving up third-party rankings at industry publications such as G2 and is taking market share.
On the security front, our business resilience strategy is resonating. We provide layers of security that allow our partners to increase resiliency across their businesses and their customers' businesses. This approach is driving a steady drumbeat of demand across our security suite. Our managed detection and response solution is also generating interest across the spectrum. We are seeing greenfield demand at the low end and ripouts at the high end with MDR also leading to multi-SKU deals. A rip and replace of a well-known competitor illustrates these dynamics well. A current cove customer was dissatisfied with their existing platform provider and started a dialogue with us centered on their MDR needs. Impressed by our MDR offering, they also evaluated our N-central platform and ultimately they signed an over six-figure ARR deal composed of MDR, EDR and N-central.
Our 2024 plan calls for ambitious progress and building on the great results we delivered in Q1, we believe we are on track to achieve the initiatives we laid out at the beginning of the year. With that, I would like to turn the call over to Tim to discuss our financial results and outlook. Then I'll circle back to some closing remarks. Tim?
Tim O'Brien: Thank you John, and thank you all for joining us today. We delivered another strong quarter again exceeding our guidance on the top and bottom lines. There are encouraging indicators that our expanded product portfolio is resonating with customers and we continue to innovate while delivering robust profitability. For our first quarter result, total revenue was $113.7 million, representing approximately 14% year-over-year growth on a reported and constant currency basis. Subscription revenue was $111.5 million, also representing approximately 14% year-over-year growth on a reported and constant currency basis. Other revenue, which consists primarily of revenue from the sale of maintenance services associated with the historical sales of perpetual licenses and revenue from professional services, was $2.2 million, declining approximately 6% year-over-year.
We ended the quarter with 2,187 partners that contribute $50,000 or more of ARR, which is up approximately 13% year-over-year. Partners with over $50,000 of ARR now represent approximately 56% of our total ARR up from approximately 52% a year ago. Dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was approximately 111% or 110% on a constant currency basis. As a reminder, the impact of our pricing and packaging changes in 2023 will affect net revenue retention starting in Q2 this year. 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 and non-GAAP reconciliation provided in today's press release.
First quarter gross margin was 84.7% compared to 84.6% in the same period in 2023. First quarter adjusted EBITDA with $39.6 million, up approximately 21% year-over-year, representing approximately 35% adjusted EBITDA margin. Unlevered free cash flow was $7.3 million in the first quarter. As a reminder, due to the timing of cash outlays throughout the year, Q1 is generally our lowest free cash flow quarter. CapEx, inclusive of $1.7 million of capitalized software development costs, was $5.1 million or 4.5% of revenue. Non-GAAP earnings per share was $0.11 in the quarter based on $187 million weighted average diluted shares. We ended the quarter with approximately $139 million of cash and an outstanding loan principle balance of approximately $341 million, representing net leverage of approximately 1.3 times.
Approximately 46% of our revenue was outside of North America in the quarter. Before turning to our financial outlook, I will give commentary on our first quarter results. First quarter revenue was above the high end of our guidance range. This outperformance was attributable to strong demand led by Cove Data Protection and success with our long-term contract initiatives. Turning to our financial outlook, our guidance accounts for the following elements. First, we are assuming FX rates of 1.07 for the euro and 1.24 for the pound for the remainder of 2024. Along with updates to other currencies to more closely reflect the current rate environment. These updated rates drive approximately $800,000 of negative revenue impact for the remainder of 2024 relative to our FX assumptions during our February call.
Second, our guidance accounts for the negative impact from the larger than normal 2023 pricing and packaging changes. As our pricing and packaging changes are effective annually starting in April, the second quarter is when this impact will start to be realized. Third, while we have previously touched on slower device growth due to the macro environment and some price sensitivity following our pricing changes in 2023, several indicators across our business and market give us the confidence to raise the midpoint of our constant currency revenue and adjusted EBITDA full year guidance. With that in mind, for the second quarter of 2024, we expect total revenue in the range of $116.5 to $117 million, representing approximately 10% year-over-year growth or approximately 10% to 11% on a constant currency basis.
We expect second quarter adjusted EBITDA in the range of $41 to $41.5 million, representing an adjusted EBITDA margin of approximately 35%. For the full year 2024, we now expect total revenue of $462 to $465 million, representing approximately 10% year-over-year growth or approximately 10% to 11% on a constant currency basis. We are raising our adjusted EBITDA outlook and now expect full year adjusted EBITDA of $162 million to $165 million, up approximately 14% euro per year at the midpoint and representing an approximately 35% adjusted EBITDA margin. We reiterate that we expect CapEx, which includes capitalized software development costs, will be approximately 5% of total revenue for 2024. We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 67% for the full year.
We expect total weighted average diluted shares outstanding of approximately $187 million to $188 million for the second quarter and $188 million to $189 million for the full year. Finally, we expect our non-GAAP tax rates to be approximately 26% in the second quarter and for the full year. Now, I will turn it over to John for closing remarks.
John Pagliuca: Thank you, Tim. It was a strong start to the year. We delivered strong performance and advanced important initiatives across the business. I would like to thank our 1,600 N-able employees for their ongoing dedication to serving the approximately 25,000 MSPs we partner with globally with a focused operating plan, a clear long-term vision, and a resilient market we are excited for the rest of the year. And with that, operator, we'll open the line for questions.
See also
15 Best Oil Stocks to Buy According to Analysts and
11 Best Dividend Paying Debt Free Stocks to Buy.
To continue reading the Q&A session, please click here.
