NABL - NYSE

Ladies and gentlemen, thank you for standing by. Welcome to the N-able First Quarter 2024 Earnings Call. [Operator Instructions] I would now like to hand the conference call over to our host, Griffin Gyr, Investor Relations Manager. Please go ahead.

Thanks, everyone, 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 on 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 and the impact of the global economic environment on our business. These statements are based on currently available information and assumptions. 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 released 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 certain GAAP to non-GAAP financial measures discussed on today's call is available in our earnings press release on our Investor Relations website. And now I'll turn the call over to John.

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.

[Operator Instructions] Our first question comes from the line of Mike Cikos of Needham.

Great quarter. Just wanted to circle up. I know we're in this -- the macro remains challenging out there, right? And I think you guys even acknowledge, hello, the SMEs and device count is still constrained, but you guys are obviously executing strongly and do have that confidence to take up the guide here. Can you provide a little bit more color as far as what are some of those early indicators you're seeing? I know you spoke about Empower and what you're seeing on Cove, but some incremental color there would be beneficial as far as what you're seeing from a boots on the ground perspective.

Mike, this is John. Thanks for the question. Look, we do, as Tim mentioned, with the confidence in our guide and for the rest of the year, we continue to see strong indicators. Most notably, our new customer acquisition bookings in customer lands have been up -- they're up year-over-year. That's -- if I think about the almost somewhat to be the future enterprise value of the business, as we bring on these MSPs, and we keep winning in the market, that's when we can get in and begin to start landing and expanding and helping them expand in their SME base. So that's probably the primary most solid indicator is this new customer acquisition uptick, in particular in our in N-central platform, which is for a reminder for the group is the platform where more of our larger MSPs tend to deploy their other software on. So the fact that we're winning at that end of the market at a pace that's better than historically, especially year-over-year, is probably the best indicator.

The next question comes from the line of Jason Ader of William Blair.

Couple of things. First, you talked about the new customer acquisition uptick with N-central. Can you just talk about when you were winning those deals, is it a displacement? Is these customers where you maybe were selling certain things in, and that you've added more elements to the package that you're selling them. Just a little more background on those types of deals, and when you're winning and who you're displacing and why you're winning. That would be helpful thanks.

This is John again. So a couple of things. Historically, and I know you know this from following the space, we were known as an RMM offering with 2 solutions for the lower and the high end. And that was the primary on-ramp onto the business, right? With Cove and with that platform and the fact that that's really just a disruptive technology, at a disruptive price. We're now bringing customers in there. And so we're getting Cove customers to walk in the doors. So now people are on-ramping to N-able with Cove. How that's manifesting itself in our RM category, is a significant amount of our Cove customers are now being cross-sold into the N-central or even into the N-sight platform. So that cross-sell in that pattern is somewhat new for us, but it's accretive -- so we're getting that combination where historically, backup was more of a -- data protection was more of a cross-sell. We're now landing with Cove and going from there. You asked a question about like rip and replace. Look, primarily at the high end, it is a rip and replace. I would say the vast majority at the high end. On the low end, you have some Greenfield and you also have some ancillary folks getting involved. So MSSPs, so security providers now need a monitoring and management platform as well. We're seeing a good amount of internal IT departments now needing a platform that looks and behaves a lot like RRM, -- it has the patching and take control and monitoring capability. So in the classic high-end MSP, it's rip and replace. In the internal IT department, it's actually a little bit more of a Greenfield, because the combination of these offerings are new to an internal IT department and the collection of them are new. Not that the individual solutions are different, but it's the collection, and at the low end they're new. And then lastly, we are having progress with -- right out of the gate, especially with some of our -- actually across the spectrum of small customers and large customers, where we're coming to them. Now that the line between monitoring and security is effectively gone for the MSP. What's an enticing package is we're walking in the door and saying, hello, we have this powerful world-class EDR technology, coupled with the RM that's integrated, that's also helping the land. So we are getting that one-2 punch of monitoring and security right out of the gate in NCA. So it's a collection of all those bits that's really driving it.

The next question comes from the line of Brian Essex of JPMorgan Chase & Co.

Nice set of results this quarter. John, I had a follow-up, you noted a nice rip out of a competitor in your prepared remarks. And I'm just kind of curious, particularly in your over 50,000 customers, can you quantify or give us a sense of the co-penetration? And is this a consistent theme where that's leading to a lot of expansion within your customer base once they get a sense of the platform and what it can do?

The -- so I think we've mentioned this on a call or 2, but we have about 10,000 or so customers using our Cove offering. The one thing I'll caution folks on is when we think about penetration, it's in our business, again, because of the sell-through nature of our business, there's 2 levels of adoption. First, it's the MSPs, and that's that 10,000 number. But then it's what level of penetration do those MSPs are using at their SME level. And we believe with Cove, we're very much in early innings and early levels of penetration there, because unlike RMM, the RMM is effectively an enterprise-wide decision for the MSP. They really just usually have 1 RMM. With the data protection offering, they might inherit 1 to 7, 11 different backup offerings. And so we're happy that we have 10,000 MSPs using Cove. We're not satisfied with the level of penetration we have with the SME. And the fact that we've made all these improvements in the offerings, in particular with our recovery set, in particular with our disaster recovery and our M365. Now we can really go to the MSPs and win that entire estate. It's a huge white space opportunity inside of our base, let's say, data protection and security are 1 and 2 as far as the white space opportunity within the base. So that's how we think about it. And now with our MDR offering, we actually can now expand that white space offering. We can also land those customers. The example I gave in the script is interesting, and we try to give you guys nuggets that show where the model and where the business strategy is heading, in that we won and that customer, not a very big customer, is actually now using our MDR offering, which we believe to be best-in-class, our in N-central offering and the EDR. And so it's that powerful combination of the monitoring and security that we think is a one in one. Obviously, data protection is a part of in this framework. It's a part of the security stack and coupling those in is the right combination for our MSPs. So we continue to see good traction there. You might -- I'm sorry, you made at a second part of your question that I'm not sure I addressed, if you could just remind me what that was?

Yes, I think I would love to get your sense of -- so is Cove typically the tip of the spear of that expansion strategy, as opposed to maybe the other way around or maybe they have EDR and then they're kind of back into Cove?

You know what? It really depends on where the MSP is in their journey. I'd say if it's either going to be Cove or security. And it's -- for us it frankly, it really doesn't matter. We want to show them the breadth and depth of our portfolio. And the fact that these are all integrated into our platform is really the compelling story for the MSPs because it drives that level of efficiency. So in the example that we gave, that was actually a Cove customer, and we expanded them into these other bits. But to my previous statement to Jason, what we're doing now in a lot of our cases is we're bundling up an EDR offering along with our RM offering or we're bundling up our MDR and EDR together. And so providing that type of benefit to the MSP route of the gate is resonating with customers, both in the low end and the high end of the spectrum.

[Operator Instructions] The next question comes from the line of Matthew Hedberg of RBC Capital Markets.

It's Mike Richards on for Matt. Maybe just going back to MDR. I was just wondering how that's tracked relative to your expectations, now that we have over a quarter under our belt, and sort of what you're seeing on the top end of the market versus the lower end of the market, and any competitive dynamics there that were maybe different from what you expected?

Thanks for the question, Mike. So MDR, it's early days. We really kicked this off in the U.S. in Jan -- we had some pre activity a little bit in Q4, and then we went worldwide later on in the first quarter. And it's been exceeding expectations, both on the level of bookings and even more so on the number of lands. And it's been encouraging. On the low end, we're finding a lot of Greenfield, right? And we're really allowing a smaller MSP to now provide security services that are acquired at the SME. And so if you're a small shop, a 5 or 10 person managed service provider and you're trying to stay up with larger MSPs or really even just trying to service your existing customer base. You need a level of security offering and someone that can help you with the 24/7 in keeping an eye on all the threats that are out there. And so we're finding it to be a welcome new offering, combining technology and human services at the low end that allows them to keep their customers safe, but also frankly presents as a much larger capability as an organization. At the high end, we're finding Greenfield. We're also finding some rip-and-replace. There are some legacy vendors in there that are not necessarily bespoke for an MSP. And what I mean by that is our offering is unique in that we provide eyes on glass for MSPs. Some MDR services, it's like a black box service, right? The MSP just kind of gets the output of that, we provide a level of transparency for our managed service providers, which they love because now they can see the same thing that our stock analysts are looking at. And as a result, it's more transparency they can better inform their customers. So it's -- I'll call it a rip and replace, but I actually believe it's more of a next-gen offering that we're providing at the high end, and that's why it's been resonating. So we're quite bullish on it. Again, it's early days, but it's an offering that it's being well received at the low end and the high end.

As there are no additional questions waiting at this time, I'd like to hand the conference back over to John Pagliuca for closing remarks.

Thank you all for joining us today and your continued interest in N-able and look forward to seeing you again in the future.