N-able, Inc. (NABL) Earnings Call Transcript & Summary

[Audio Gap] To our MSPs. So what is it that we do? We provide -- I'll back up. So the vision, if you will, is really to help small, medium enterprises with the digital evolution of whatever their need is, right? I like to use the word digital evolution versus digital transformation, which you're probably glad to hear because I'm sure you folks are all hearing digital transformation all day. I think digital evolution is more appropriate for 2 reasons. One, companies need to either evolve or they die. And number two, it's not a transformation, it's not a butterfly that happens right away. And so what small, medium enterprises are looking to do is find an MSP, a managed service provider to help them be productive, to help them collaborate and to help them be secure. And so that's the vision. What we do and our mission is to empower these managed service providers. We provide them a purpose-built platform, and we couple that with customer success, and we help them manage, monitor and secure the small, medium enterprises. So that's the remit by a quick introduction for those that might not be too familiar with the space. We aspire to be a rule of 50 type of company. For those that know SolarWinds, SolarWinds was a rule of 50 company that was more geared toward value and EBITDA. As part of the spin, our remit is really to invest in the business and get that acceleration going. Last quarter, we were in the mid-teens and you're all good at math, you can figure out what the EBITDA number is for that rule of 50. But our goal really is to help these MSPs provide them a platform and some customer success so that they can be successful.

So platform for MSPs to enable small businesses?

Yes. Well...

Got it.

I could have done that much quicker here.

No, no, I love -- no, no just trying to reiterate, so we're kind of going together here. So as you mentioned, you guys -- you IPO-ed in July. It's been a pivotal year for you guys as you became a stand-alone company. So maybe as we think back over the year that's passed here, are there any key accomplishments that you'd like to call out? And then on the opposite side here, as we look ahead into '22, what are your main priorities? Where are you investing? Can you talk about any infrastructure or personnel build-out that you have planned?

Sure. 2021 was really what we call like a foundational year. The mantra that we established inside the company was this concept of forward together. And forward together, it was a message for our employees. We refer to ourselves as N-able-ites to the MSP community and really to the market as a whole. And we spent a good amount of time on the spin. We invested in the infrastructure. We built basically a full leadership team. Mike Adler, who's in the second row here is our CTPO. We brought on a CMO. We brought on -- so the key leadership team is now in place. We rebranded, as I mentioned, with the N-able name, and we really established the foundational layer for those that -- one of the often questions we got, hey, how much -- how dependent are you on SolarWinds? The answer is really not at all. We're completely freestanding. We have all the complete G&A functions that you need, and we're really off and running. So for 2021, it was a focus on this foundational layer this concept of forward together. We had really one eye on the spin and making sure that we could execute on that. And we really had one eye on our growth initiatives. I'm really excited now because as we turn the corner and that -- all that work that we did, that foundational layer for the business now that, that's been established, we now can put both eyes squarely on growth. And so that's what has to be really excited as we begin to start investing in the thesis of the spin itself, investing in the business and starting to get that acceleration that we're driving toward.

That's really exciting. So I also noticed that as part of getting your management in place and kind of having everything kind of all lined up here, you appointed Ann Johnson to your Board and you also formed the Cybersecurity Committee, so congrats on that. And then I guess kind of another angle, I read that you guys have been making a lot of progress on ESG-related initiatives. And I know that's been a topical for investors as well. Is there any rationale for these changes, in particular? Or how are you thinking about that as we head into '22?

No, sure. So Ann Johnson is a Corporate Vice President at Microsoft. She leads a lot of the strategic initiatives there from a Microsoft point of view, whether it be cyber security acquisitions. But she also has a tremendous amount of go-to-market experience and leadership. In addition to that, she's also a very strong women leader. She does a lot of leadership initiatives inside of Microsoft. She was a perfect choice for us. We had a vacant board seat. And we were looking for someone that could really help with me and my team as far as go-to-market, help with Mike and his group as far as our cybersecurity road map. And she also brings a lot of these intangibles from a leadership point of view that I look to lean on in quite a bit. On the ESG front, it's something that's important to me. It's something that's important to my board members and to our investors. And frankly, this is a grassroots bottoms-up type of initiative. We were strong believers in diversity of thought and really trying to build that environment of inclusion so that we can get the best thinkers in the building. And so that's, I think, evident of some of the board composition that we have and some of the leaders that we've hired over the last several quarters to bring in that best talent regardless of their background or gender or race. So it's an important initiative to me and something that we'll continue to develop.

A lot of hard work in '21 and good stuff ahead, I guess. So that's exciting. Well, congrats on that front. Why don't we turn over to some financial results here. I think you guys have mentioned that customers with over $100,000 in ARR now represents 46% of total ARR. That's great momentum and exciting to hear that. Can you kind of double-click there? Are there any verticals or any industries that you saw particularly strong adoption or that you're kind of over-indexing to now because you've seen such strength?

So what's going on? It's less about vertical. It's more about this maturation that's happening in the industry, right? So we're seeing more and more MSPs consolidate through acquisition. We're seeing a lot of private equity and venture capital money come into the space. And what we're seeing is actually MSPs now going into mid-market enterprise, publicly traded companies and becoming an augments part of an IT team. So we're seeing a lot of co-managed work. MSPs, I've been in this industry for about 8 years. And 8 years ago, typically, MSPs were walking in to an SME that was 50 employees on down. MSPs are still providing service to those type of companies. But now they're landing 500 employees, 1,000 employees, publicly traded companies, multinational companies, and they're providing a level of support and service to these companies to deal with some of the macro trends that we're seeing. I'm sure all day, you were talking -- you've been talking about cloud. You've been talking about security. I'm not sure how much you've been talking about labor scarcity. Well, we sit at the intersection of all 3 of these major tailwinds and labor scarcity is a big deal for the small and medium enterprise, but also for the mid-market and large companies. So these -- all of these companies are now looking to the MSPs to augment their existing staff. And that's why you're seeing a lot of our MSPs and a lot of our ARR, as an example, beginning to be north of 50,000 a year. And the good news for N-able, the bigger the MSP, the more complex networks that they're dealing with, the bigger the customers. We do really well. Our RM really handles the complex networks, The diverse networks and offer this broad layer of security for these bigger MSPs so they can do their jobs, so they can grow their book of business. So this tailwind and this consolidation is a positive for the industry overall, and it's quite a positive for N-able as well.

Interesting. And so it's almost like -- okay, almost like as we see like the cloud take off as we see almost like an as a surface economy becoming even more accepted. These enterprises that are having labor shortages because like the great resignation and other factors, it's almost like they're relying more on these MSPs and those MSPs rely on N-able. And so it's kind of like -- like you said, you're at the intersection of these different tailwinds, which is kind of exciting. That makes a lot of sense.

Yes, no doubt. And that's -- we've been seeing this trend, I'd say, for the last 12 to 24 months, but I think with the great resignation and with a couple of other -- of these like macro tailwinds, we're starting to see that and we're able to lean in a little bit there.

Got it. Okay. No, that makes sense. I think you'd mentioned that international revenue is now almost half of the business and that seemed surprisingly large when I was digging into the story here. Can you talk a little bit about why you've been so successful internationally? And how are you investing there moving forward?

Sure. A lot has to do with our origins or our roots, right? So N-able 1.0 and so SolarWinds acquired N-able back in 2013 and N-able was based in Ottawa. The LOGICnow business, where I was the CFO, was based in Dundee in Scotland. And we have a lot of -- our backup business was really from the Netherlands. So we had a strong base in Europe for the most part and in Canada. That gave us, I would say, an advantage into getting into some of these markets. But internationally, that's actually probably -- there's a tremendous amount of opportunity internationally. Why the U.S., the U.K., Canada, Asia-Pac, Australia and New Zealand, they were a little bit further ahead with this concept of proactive IT and this whole concept of a layered security approach. We're starting to see the other -- the other markets, the other geos really start to gravitate towards this proactive approach. And as a result, we see a good amount of opportunity in some of these other markets internationally as well.

All right. Okay. Maybe just one more on recent results here. You recently reported, I think, 14% constant currency growth, which was great. But then we saw you guide to 11% growth for the fourth quarter. Can you give us a sense of the linearity that you guys are seeing? Or what's the driving factor of that deceleration?

Sure, sure. This business has proven to be tremendously resilient over the last 2 years. If we take a step back, and we've all been, to some extent, part of this. We've seen 3, what I call, meteoroids, kind of, hit the business in the last couple of years. Number one, we had the pandemic, which had an impact on my MSPs, adding new customers. Number two, we had the SolarWinds incident that happened in December, which really impacted our pipeline conversion in Q4 of 2020 and our demand gen in 2021. And then as I mentioned earlier, we rebranded in March, which, as you know, has a little bit of an impact on new customer acquisition. So the way our business works, I often refer to our business as a snowball. It's -- we're 100% recurring revenue. It's a bunch of small transactions. We grow as our MSPs grow, we land them effectively small, and it doesn't matter what size, if we land them, they begin to add customers, they begin to add employees. They begin to add services and that snowball that LTV of the customer grows. Well, with those incidents that I mentioned earlier, we obviously had some impact on our new customer acquisition. That began to really -- and we knew this, and this is why we guided for the full year, what we guided before. So our guide for the full year has actually gone up. And we had some good performance in Q3, but it's in line with what our expectation was because of that cohort that happened on some of those, what I call like meteoroid type of events that hit the business, which is why now that those events have -- are clearly in our rearview, the impact has dissipated. I'm very much excited about 2022.

Got it. Maybe we'll take a step back for just a second, just building on your answer to talk about pricing. You mentioned there's like the snowball effect. And as your MSPs grow, you also reap the benefit of that. how does the pricing work? Are you -- you're providing them a platform. Are they -- is the price that they pay increasing as they land more customers and as they grow or is it based on usage? Or how does the equation come together?

Sure. I call it my growth algorithm, right? And the good news is our growth algorithm is aligned with the growth algorithm of our MSPs, which is always nice to be in a business where you're completely aligned with your customer and where our product is their central nervous system. They need to do this. They need to be -- have a platform like N-able, an N-able platform to run their business period. So we land, of course, in every subscription business, the key is retaining that snowball, making sure that we're landing and keeping that snowball. And then we grow when we land a new MSP. We grow in that new MSP, lands a new small medium enterprise. We have well over 0.5 million small medium enterprises across the globe. We grow again when that small, medium enterprise, adds a new employee or a new device or a new mailbox or a new workstation. And so we grow there. And then we grow again by adding additional services. We have a good amount of monitoring and security services. So when we bring a new service to market. We effectively turn this -- we have this in our platform. So it's partner -- it's a platform-led growth story, but we also have it as a partner-enabled growth story. What do I mean by that? We have 25,000 MSPs at roughly 250,000, 300,000 technicians. They become an extension of our sales force. They're going out to the small, medium enterprise saying, "Hey, you need EDR. You need additional security, you need backup and disaster recovery services and you need data protection as a service", and they become an extension of our sales force. That's why we were able to generate the type of EBITDA that we're able to do because the sales force -- this MSP customer base becomes our sales force. So we have this multipronged, multi-levered growth algorithm that as a finance guy at heart, I just love the way that the business works. It's highly recurring. We have great visibility, and we have a tremendous amount of growth levers to kind of play with. And that's true for the MSPs as well. The MSPs, they'll grow as they add a new customer, as they add new employees and then as they add new services. To answer your question at the very beginning, we typically will charge per device per service. So if an MSP is using us for monitoring and they're adding a workstation or a virtual machine per device where actually that snowball, we were adding to that snowball.

Well, it looks like a compounding effect then there's multiple ways to lend.

That's exactly right.

Yes. Wow, that's exciting. So I guess maybe that partly answers the next question that I was going to ask. It's around your confidence to hit the 15-plus percent growth goal. And maybe if you can touch on any sort of limiting factors that might prohibit you from getting there?

As I mentioned, right? So 2021, we effectively had one eye squarely on the spin and making sure we establish this foundational layer and one eye on these growth initiatives. As we put that spin activity behind us, we have both eyes on the growth. And the way we've been really articulating the growth strategy is a 3-pronged approach. We have one -- and each prong or each investment has its own type of what I refer to as a J-curve. And by J-curve, I mean, the investment shape and the way it will show its return. And so the first is channel. We've typically -- we talked about the origins in international. But if you double-click into that, we've been an or story. And what I mean by that is we've been a direct sales force or a channel sales force depending on the market. In North America, we've had a direct sales channel -- sales force. But in a lot of these markets internationally, we've been using channels. So in 2022, we're going from an Or strategy to an And strategy. We'll begin to augment the different geos and with different motions in North America, we'll be building a channel motion to augment our direct sales team. And internationally, we're adding more boots on the ground to help win the bigger accounts. We talked about that trend that we're seeing, the consolidation that we're seeing where we need folks on the ground to help land those bigger accounts internationally. So that's one. We've been investing in there, and we've actually already started to see some green shoots. The second one is on customer success. Companies are all investing in customer success in one form or another. For us, it's a little bit different. Customer success, it's usually about time to value, time to second SKU, how can I bring this customer to make sure they're fully using my solution. We have that. We also have this other layer. We are also helping the MSPs with their business, pricing, packaging, utilization, automation. MSP is the #1 cost in their BOM, if you will, is labor. So we spend time. We have -- we call them nerds. I have my nerds T-shirt upstairs where we have automation nerds and security nerds and business nerds that are helping the MSPs actually price and package and build a more profitable business. So we put more boots on the ground, more investment there, which is also seeing green shoots. And the way that, that will manifest itself in the financials is we should see a better gross retention number, which helps with that snowball. And we're also seeing a tremendous amount of opportunities being referred to as our customer success people are having business conversations with these MSPs. And so that one -- so both of those initiatives, I expect to see green shoots actually impact in the first half of 2022. And then lastly, and Mr. Adler here. His -- we brought him -- we brought Mike on board to increase our investment in R&D and our product teams and in our R&D teams, why? To help continue to build a scalable platform and then to bring in new products for the MSPs to either use so that they can be more efficient or for them to cross-sell and increase their book of business. And so adding new products in, we have a DNS filtering offering that will be coming in toward the end of this year, beginning of next year. We'll have other offerings coming in, in 2022. And those R&D initiatives take a little bit longer because we need to build the products, build the snowball, but we expect that to happen really in the second half of the year. So we have a very good plan. We're squarely focused on 2022. And with this multipronged approach, I feel good about our ability to accelerate the business methodically throughout the year.

Got it, a multipronged approach with lots of green shoots, that's exciting. So as we kind of take that messaging and work over towards the product portfolio, you gave us a sense of your growth vectors and the approach. But can you give us a sense of which products you're most confident in? And which do you think have the most -- the highest growth potential or value creation potential and why?

Sure. And I'll back up because I skipped over at the beginning. So effectively, MSPs are coming in to our storefront, if you will, and they're looking to purchase what we refer to as a remote monitoring and management platform. In the internal IT space, people think of it more as a unified endpoint management platform. And so MSPs come in and they use that to remotely monitor, manage and secure IT assets. Within there, they can do patching and they can do -- take control like a TeamViewer, a LogMeIn type of tool. That's our base product. And that, I would say, is where the majority of customers are coming into the store. But we also have a backup and disaster recovery offering that's completely cloud-based, many in our space. in the MSP industry and outside of the MSP industry rely on appliances. So a piece of hardware. We don't require a piece of hardware, and it's a full suite that does backup and disaster recovery, but also does data protection as a service as well. So I'm really excited about that, that whole business line, the backup in data protection as a service is outpacing our overall growth. And I'm pretty excited about the road map that we have in 2022 there. And then lastly, security. We have an EDR offering. That's a strategic integration part of our platform that continues to uplift our overall growth. And as we look ahead, the additional security offerings that we bring on to these MSPs to arm them with this layered security approach so that they can retain their customers and grow their wallet share with their customer base, will help carry growth for them but also help carry growth for us. So the 2 areas that I'm probably most excited about is our data protection as a service offerings and then our continued addition of security offerings for these MSPs.

Got it. In general, what sort of uplift do you see a customer -- from a customer when they adopt either of these 2 vectors that you just dove into?

Sure. So I was actually -- and I think this is where you're going, but I was with an MSP in Chicago a couple of weeks back. And as part of their 2022 plan, they're going out to their complete installed base, and they're saying, "Hey, you need -- we will be adopting standardizing, keyword standardizing, these additional security services. If you want to remain a customer of ours, this is the right security posture or this layered security approach that we're having. And by not adding a customer, they're going to grow their book of business anywhere from 15% to 20% just by adding these additional services. Yes, we were talking to a lot of investors and to a lot of folks that even I ask them if they have an MSP or if they're using an outsourced IT staff. And usually, the answer is yes. And then I asked them to take a look at their bill over the last 4 years. Not to get my MSPs in trouble, but to show there's a growth and MSPs continue to grow wallet share because they're adding additional services that are not nice to have, but they're need to have for the small, medium enterprise. Small, medium enterprise, mid-market, they all now very much appreciate and understand that they need something on the detection and protection front from a security point of view. They need something on the back end from a recovery point of view, they need help with monitoring, they need help with collaboration, and they're looking for these MSPs to be their single source of truth for all of their IT needs. And our job really is to provide these MSPs additional platforms and a level of automation so that they can grow their businesses, grow their businesses profitably and add additional services for their 500,000 small medium enterprises that we have across the globe. So that's really the focus.

Okay. So it sounds almost like -- so you guys are becoming like a one-stop shop for all these MSPs to enable their enterprise, their small and medium-sized enterprises, which is exciting. How do you think about -- like what sort of considerations or metrics are you looking at when you consider launching a new product to kind of help continue that velocity that the MSPs are experiencing. What are the considerations that you make?

Yes. No, great question. So we start with the need of the SME. And we say, is this solution going to help the MSP in the aiding of the small, medium enterprise to be productive, to collaborate and to be secure. And so if the SME is -- if that's something that's a need for the SME, then we look for a solution that we can either build, partner or buy, we have a 3-pronged approach, and we have to make sure that it's purpose-built for the MSP. That's not a buzzword. When we say purpose-built, it's architected in a way that's multilevel, multi-tenanted for Mike. That's multi-tenanted, multilevel in a way that an MSP can do their job efficiently. What am I talking about? And MSP might have 500 small, medium enterprises, and that's different than an internal IT department. So an internal IT department to looking at 1 enterprise, maybe it's a couple of different geos, maybe it's a couple of different offices. MSP, they have that times 500. So our platform allows MSPs to zone in into 1 customer, 1 user or look across their entire portfolio and write policies and scripts and automation across all of that, making their jobs much more efficient. So when we're looking at solutions that we can bring to market, we always put that lens, can we make the -- we help the MSP, do their job at scale more efficiently and profitably. And to double click into some of the areas, a lot of the trends that we're looking at, of course, as we move from the closet to the cloud and folks think small, medium enterprise is behind. And in a lot of cases, small, medium enterprise is ahead of that move from the closet to the cloud. So MSPs need to help with the facilitation of the workloads going from a closet to the cloud. Our job is to help the MSP do so efficiently, effectively and profitably. And so we're looking at different initiatives for helping them MSPs with cloud monitoring. And then, of course, we're looking at different initiatives from a security point of view.

Got it. So you mentioned being a platform helping increase automation, helping drive efficiencies for these MSPs. Can you talk about the importance of automation, orchestrating and leveraging AI and ML and what the ROI looks like on those drivers?

Sure. The #1 cost for these MSPs is labor, right? And one of their major tasks is retaining and finding new talent, right? And one of the bigger reasons why an MSP will lose a technician is when the technician is stuck doing a mundane task. So we give MSPs the power to automate in 2 different ways. One, we provide them the fish, and we teach them how to fish. We provide them with scripts inside of our libraries that MSPs can kind of plug and play to automate the mundane tasks, onboarding, updating patch management. And then we also give them this automation platform that they can actually, in a very simple format, customize their own automation scripts. And really the name of the game is to help them remove some of the mundane tasks. Our best MSPs are growing and they do not need to add technicians. That's when we know we're winning. When we can have an MSP that's adding customers, and they're adding customers without the need of adding a technician, they're leveraging the power of our platform to deploy the software to monitor the environment and to secure the environments. And that's really where the lean is. So we look for a lot of this with regards to small MSPs and to the large MSPs. It's actually -- it's regardless of the size. And so we use -- we have these automation nerds, which I mentioned earlier. They're there to help either write PowerShell scripts or even have boot camps so that they can run their own type of automation and go from there.

Right. That's exciting. I guess building upon that, you have a pretty unique vantage point. Taking your perspective, the N-able's platform, what does the future of work look like if you can paint a picture of it. I mean you see all these MSPs, you see hundreds, thousands of small businesses, what does it look like? Where are we going?

Well, if I knew. So look...

Or maybe how are you building the platform to...

No, no. I'd call it hybrid cubed, right? And so when we think about the work experience for the large companies, folks that are in this room for the small shops, it's hybrid cube. What does that mean? We have workforces that are in the office that are working remotely that are hybrid in nature, that creates a challenge for the IT department, but also for the MSP, different operating systems, right? You have your Windows, laptop and you're cool, so you have your Apple device with different operating systems. You might have Linux boxes. That's another version of hybrid. Then we have all these different environments where there's more SaaS applications. So there's more and more workloads in the cloud, in different clouds. That disperses the data, which creates a different problem set. So when we think about how we're going to evolve our platform, we're keeping in mind this concept of this hybrid cubed kind of view. We -- one the pillars and why we win against some of the competitors is this concept around monitoring everything. We're the only shop in the planet that has a strategic partnership with Microsoft to help MSPs manage in tune. We're the only shop in the planet that has a Cisco Meraki integration for automation to help with Cisco devices. We have a very strong Apple platform because of this, the world is going to get more and more hybrid. The world is going to get more and more complex. And N-able needs to be at the center to be that single pane of glass to allow MSPs to deal with whatever the world is going to throw at them. So whether it be remote workforce, whether it be different operating systems, whether it be a different SaaS application. The fact that we can bring all of this data and all of this user experiences all into one single pane of glass that allows the MSP to do their job at scale and efficiently. That's how the MSP wins. And by extension, that's how we win.

Awesome. Well, John, this was wonderful, 30 minutes went pretty quickly here.

Really fast.

Really fast, I know. Well, we enjoyed having you here, and thanks, everyone, for joining us. Enjoy the rest of the conference.

Thank you.

Thanks.