Hello, and welcome to the N-able Third Quarter 2023 Earnings Call. My name is Alex, and I will be coordinating the call today. [Operator Instructions]. I'd now hand over to your host, Griffin Gyr, Investor Relations Manager. Please go ahead..

Thanks, operator and welcome everyone to N-able's third quarter 2023 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.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, 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 certain GAAP to non-GAAP financial measures discussed on today's call is available in our earnings press release at our Investor Relations website. And now I will turn the call over to John..

Thank you, Griffin. Welcome everyone and thank you for joining us today. As the age of the managed service provider advances the IT outsourcing market remains strong. There are a few key factors for this.

IT is getting more complex and expensive as organizations look to realize the benefit of digital operations, modernize their legacy systems, and meet growing regulatory requirements. This trifecta of challenges distracts organizations from their core operations and can push them to outsource and augment their IT needs to MSPs.

N-able was formed with this in mind. Our unwavering mission to empower MSPs with purpose built technology positions us favorably with the expanding small and medium enterprise IT ecosystem by helping partners meet these challenges head on.

We believe our third quarter results highlight the strength of our market and cement our standings as a leading software provider to MSPs. Despite an uncertain macro environment, we exceeded top and bottom line guidance with revenue of $107.6 million, growing 15% year-over-year or 13% on constant currency basis.

And adjusted EBITDA of $36.6 million representing an adjusted EBITDA margin of 34%, our highest margin ever as a standalone public company. And as Tim will elaborate, we were maintaining our full year 2023 constant currency revenue guide of 13% and raising the midpoint of our full year 2023 adjusted EBITDA guide from $136.3 million to $139.5 million.

We accomplished all of this while laying the ground work for future success. Our team has advanced important strategic initiatives and we are particularly excited to announce that we are entering into a new product category, bringing N-able Managed Detection and Response to market this month.

Our relentless determination to bring value to the MSP community requires adapting to fast changing technology needs through focused product innovation.

With our approximately 25,000 MSPs ranging in size from sole proprietors to global publicly traded technology service providers, we believe we have a unique line of sight into the dynamic market landscape and I want to discuss three prominent trends influencing our product development, focus, and strategy. First, consolidation and modernization.

Second, the movement up market. And third, increasing security standards. First, we see technology consolidation in modernization driving customer behavior. In an uncertain economic environment MSPs have an eye on operational efficiency and solutions with proven ROI.

Our integrated platform and leading technology solutions align with MSP needs helping to reduce tool straw and unlock their growth.

We believe our text suite of top tier RMM, data protection, and security solutions coupled with our multi tentative platform and external integrations strongly positions us to satisfy MSPs desires to consolidate and modernize their tech stack. A second trend is MSPs going up market.

Large enterprises face many of the same IT challenges as SMBs and are increasingly turning to MSPs to augment or run their IT or security operations. We believe this means a larger, addressable market for both MSPs and N-able. And our product and go to market investments aim to enable MSPs to realize this opportunity.

The scalability, automation and efficiency of our solutions appeal to upmarket focused MSPs and we continue to raise the bar to position N-able as a leader in this evolving market segment.

A great byproduct of the MSP up market trend is the capabilities we develop to help win MSPs win up market, also better position our teams to land mid-size in large IT departments directly. While our core focus is our MSP partners, we continue to pursue direct IT sales opportunistically and are seeing positive momentum in this part of our business.

Now turning to our third trend, increasing security standards. The significant business impact of a successful cyberattack has long placed security as a top IT priority. In addition to MSPs buying security solutions to protect from MSPs assets [ph] they also face growing global compliance requirements that serve as a tailwind to security demand.

Here the message is clear, security is shifting from an option to a requirement. With our robust and recently expanded suite of security options spanning endpoint protection, mail protection, content filtering, and more we provide a layered security approach that is built to fulfill regulatory requirements and safeguard the modern digital enterprise.

We made exciting progress in the last quarter to advance our product suite to capitalize on these trends and I want to share these updates and the encouraging market feedback we received.

Starting with Cove, we have invested considerably in developing our technology to further Cove's ability to scale into larger domains and help further Cove's ability to scale into larger domains and help MSPs move up market.

A third quarter deal involving the displacement of a known upmarket competitor and representing our largest initial Cove land ever at over 500,000 of ARR at scale speaks to our success here. Another excellent example of Cove's market traction comes from a recent MSP customer with 11 legacy data protection solutions.

Understanding the risks and headaches of a multi-vendor approach, they decided to consolidate on Cove. The MSP thoroughly evaluated each product and specifically commented on Cove's strong technical performance, intuitive technician-friendly interface, and ability to meet data sovereignty requirements with Cove data centers located worldwide.

With sophisticated attacks often going beyond an organization's core network, and now targeting data storage copies, the distinction between data protection and security is increasingly blurry. Modern data protection solutions can't just restore data, they must keep data safe, and Cove was built with this in mind.

Because of our cloud-first approach, customers' data copies are not exposed to a local network, which reduces the attack surface and gives our customers peace of mind. The market is responding to Cove's innovation.

Our 2023 new customer cohort is the best ever, and our Cove Microsoft 365 backup solution is now protecting over 1.8 million users growing at approximately 48% year-over-year.

Cove is also receiving industry recognition and we are delighted to share that Canalys, a global technology research firm, recently named Cove a champion in their managed backup and recovery leadership matrix. On the RMM front, we remain laser focused on meeting MSPs where it's messiest.

We simplify the complexity of hybrid environments, users, and devices, going beyond the confines of traditional RMMs. This means delivering a modern, end-to-end, unified IT management platform. We made significant progress on this vision in the third quarter.

We released a refreshed user interface, unveiling a new asset inventory view, which comes on the heels of the analytics feature and enhanced Apple management capabilities we released earlier this year. These advancements give technicians deeper insight into their IT environment and enable them to manage their IT stacks better.

This can translate to tangible business impact. Our powerful capabilities bolster MSP's ability to go upmarket and service large organizations with disparate operating systems while realizing the benefit of consolidation. Our approach is resonating with customers and we are seeing steady demand in this segment.

Turning to security, we continue to advance our security suite and are particularly excited about our entry into managed detection and response. MDR is a unique marriage in the security industry, combining cutting edge technology with human oversight and expertise to give organizations advanced protection.

This combination solves a deep pain point for our customers because threats are increasing, but organizations cannot manage those threats alone. Alert fatigue, staying ahead of the involving threat environment, and staffing challenges mean organizations need help.

In a recent poll we conducted with thousands of our MSPs, they expressed a strong desire for MDR from N-able. Industry research firms also validate the MDR market, with Canalys recently stating that the cybersecurity services opportunity for partners will be larger than selling cybersecurity technology this year.

MDR is much more than managed EDR, because MDR goes beyond the endpoint, providing broad security visibility and response across the customer's entire IT ecosystem, including their users, cloud applications, and network. This is powerful. Adding MDR broadens our appeal as a one-stop shop for security solutions and services.

And we have the backing of a strategic partner in this space, born from the front lines of national cyber defense with multi-tenanted cloud-native modern architecture. We believe this is a significant opportunity, and perhaps most telling. Since commercializing this technology, customer engagement has met our high expectations.

In addition to delivering more solutions, we are focused on a superior customer experience. To this end, we recently enhanced our integration framework, improving functionality across our security offerings.

This enhanced framework also expands our ecosystem breadth, facilitating faster time to market with vendors that want to expand their go-to-market reach through an enabled partnership. Across the security spectrum, from MDR to mail, security remains mission critical, and we are committed to helping propel our customer security journey forward.

With these trends powering demand, we are investing and operating for the long-term and are focused on delivering great technology that positions N-able to advance the age of the MSP. Our operational efforts and strategic goals are all focused within the framework of our sell-to and sell-through business model.

We refer to our MSP customers as partners as we leverage the reach of our approximately 25,000 MSPs to gain access and sell our solutions to over 500,000 small and medium-sized businesses. This partnership enables a multi-pronged growth algorithm which allows us to reach the SME at healthy profit margins. When we land an MSP, we grow.

When an MSP lands a customer, we grow. And when an MSP customer adds an employee, we grow. And when we bring a new service to market, we unlock the potential to grow across that MSP and SME base.

These elements of our model form the building blocks of our growth algorithm, which are MSP retention, cross-selling of new services to existing MSPs, MSP device growth, and lastly, N-able adding new MSPs. And I want to discuss operational updates in the third quarter regarding each of these components.

Starting with N-able adding new MSPs, our new customer engine continues to be strong. While we're only three quarters through the year, the 2023 customer cohort dollars are the best ever since we became a public company. We are reaching new customers who are choosing to partner with N-able.

This success, despite an uncertain macro environment reflects the strength of our compelling value proposition and is a testament to the efforts of our go-to-market teams. Education leads to adoption, and the N-able -- was out in force in the market, connecting with customers.

In the third quarter alone, we hosted seven roadshows across North America, sponsored 11 global industry events, and hosted over 50 head nerd boot camps, reaching thousands of partners and prospects. In addition to helping land new MSPs, our efforts to educate our partners on the value of our offerings help drive their expansion.

And we saw steady cross-sell in the quarter. With our solution set spanning RMM, data protection, and security, enabled MSPs have a low friction path to expansion. Our average revenue per partner is growing as customers buy more of our solution. And there's steady penetration and uptake across our product set.

We see a rich opportunity for further penetration with multi-billion dollar cross-sell potential in our existing base. While cross-sell and NCA are healthy, the uncertain macro environment is weighing on partner device growth and retention. We are seeing tighter IT budgets and slower device growth.

We believe tighter budgets have led to rationalization and optimization of existing spend. That said, there are numerous bright spots in our operational effort to retain and expand customers. Our partner success organization scored their highest ever customer satisfaction score on technical support.

We see continued demand for our N-able head nerds who are partner evangelists and subject matter experts. And as part of our ongoing mission to constantly improve every aspect of the customer experience, we launched a new partner success center, N-ableMe, and have already engaged with nearly 13,000 partners through the center.

We invest in these elements of our business because we grow as our partners grow. With the MSPs acting as an extension of our sales force, we efficiently access SME IT spend, and our third quarter adjusted EBITDA margin was the highest in our public history, which serves as a strong testament to the effectiveness of our strategy.

Great technology and superior operational execution are the lifeblood of our business, but our people and culture are the oxygen. One key focus area is our continued diversity, equality, and belonging journey.

As one recent example, we hosted a global, cross-functional women leadership summit to help drive cultural transformation and execution excellence, and further develop our women leaders. We were also honored to be recognized by Comparably, a leading workplace, culture, and corporate brand reputation platform, with three awards in the quarter.

With that, I would like to turn the call over to Tim to discuss our financial results and outlook, then I will circle back to some closing remarks.

Tim?.

Thank you, John and thank you all for joining us today. Our third quarter results were strong, exceeding guidance on both the top and bottom lines. Steady demand for our platform, solutions, and strong cost management highlighted by our highest ever adjusted EBITDA margin as a public company, helped drive our outperformance.

Looking ahead, we believe our market remains durable, and while we are mindful of the macro environment, our business model, with multiple growth vectors and a clear strategic focus remains well-positioned to capitalize on the growing demand for MSPs.

For our third quarter results, total revenue was $107.6 million, representing approximately 15% year-over-year growth or approximately 13% on a constant currency basis. Subscription revenue was $105.2 million, representing approximately 15% year-over-year growth or approximately 13% on a 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 $2.4 million up approximately 2% year-over-year.

We ended the quarter with 2,134 partners that contribute $50,000 or more of ARR, which is up approximately 19% year-over-year. Partners with over $50,000 of ARR now represent approximately 55% of our total ARR, up from approximately 50% a year ago.

Looking at net retention for the third quarter, dollar-based net revenue retention, which is calculated on a trailing 12-month basis, was approximately 108% or 110% on a constant currency basis.

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. Third quarter gross margin was 84.6% compared to 84.8% in the same period in 2022.

Third quarter adjusted EBITDA was $36.6 million, up approximately 27% year-over-year, representing approximately 34% adjusted EBITDA margin. Unleveraged free cash flow was $30.2 million in the third quarter, and CAPEX, inclusive of $2 million of capitalized software development costs was $5.5 million, or 5.1% of revenue.

Non-GAAP earnings per share was $0.09 in the quarter, based on 186 million weighted average diluted shares. We ended the quarter with approximately $127 million of cash and an outstanding loan principal balance of approximately $343 million, representing net leverage of approximately 1.6 times.

Approximately 46% of our revenue was outside of North America in the quarter. Turning to our financial outlook, as John discussed, we see tailwinds in our market and believe in the long-term opportunity for N-able.

As we look to the near term, we see macro uncertainty creating caution in SME IT budgets, with organizations seeking to optimize spend in a tighter budgetary environment, which we have reflected in our guidance.

And while our R&D engine continues to bring critical, robust solutions to MSPs, our growth expectations are reflective of the time to market for these new products which we continue to work to accelerate.

With that in mind, for the fourth quarter of 2023 we expect total revenue in the range of $106.5 million to $107 million representing approximately 11% to 12% year-over-year growth, or approximately 10% to 11% on a constant currency basis.

We expect fourth quarter adjusted EBITDA in the range of $35 million to $35.5 million, representing an adjusted EBITDA margin of approximately 33%.

For the full year 2023, we now expect total revenue of $420 million to $420.5 million, maintaining the midpoint of our prior full-year guidance, representing approximately 13% year-over-year growth on both a reported and constant currency basis.

We are raising our adjusted EBITDA outlook, and now expect full year adjusted EBITDA of $139.2 million to $139.7 million, up approximately 22% year-over-year at the midpoint, and representing an approximately 33% adjusted EBITDA margin.

There have been changes to the foreign exchange environment since our last outlook and I want to take a moment to reconcile the impact of these changes on our guidance. In our previous call, we assumed FX rates for the Euro and Pound of 1.07 and 1.25, respectively.

Using updated FX rates for the remainder of the year of 1.05 for the Euro, and 1.22 for the Pound, and updating other currencies to reflect the current rate environment translate to a negative impact on revenue of approximately $1.1 million for the fourth quarter.

We believe our ability to maintain the midpoint of our full year 2023 revenue guidance and raise full year 2023 adjusted EBITDA guidance despite these FX headwinds, speaks to our operational strength.

We reiterate that we expect CAPEX, which includes capitalized software development costs of approximately $8.5 million will be approximately 6% of total revenue for 2023. We also expect adjusted EBITDA conversion to unlevered free cash flow to be approximately 65% for the full year.

We expect total weighted average diluted shares outstanding of approximately 187 million for the fourth quarter and 186 million for the full year. Finally, we expect our non GAAP tax rate to be approximately 23% in the fourth quarter, and 25% for the full year. In closing, we are pleased with our strong third quarter.

Looking forward while we are mindful of the macro uncertainty, we believe we are uniquely positioned to benefit from the robust long-term addressable market opportunity. We have a proven track record of execution.

Our customer base is diversified by region and industry and the IT management, security and data protection solutions we provide are high IT priorities. The addition of our new MDR offering adds another gear to the business model.

With our strong adjusted EBITDA margins, free cash flow, and balance sheet, we have considerable capital allocation flexibility to invest strategically to meet the needs of our market. Now, I will turn it over to John for closing remarks..

Thanks, Tim. We scaled our business to new heights in the third quarter, and made progress on critical strategic initiatives. As we march forward on our quest to advance the age of the MSP, our vision is clear and we believe the opportunity is vast.

The SME IT ecosystem we serve is large and growing and our differentiated model, which efficiently cracks the code to the trillion dollar plus SME IP market by providing enterprise grade technology to MSPs delivers both growth and profit.

With our clear strategy, and appealing market opportunity providing direction and energy to over 1500 plus N-ableites, our sharp focus is on driving operational excellence and continuing to deliver great technology to MSPs. And with that, we will open up the line for questions. Operator..

Thank you. [Operator Instructions]. Our first question for today comes from Mike Cikos of Needham. Your line is now open. Please go ahead..

Hey team, thanks for taking the questions here. Great to see the revenue beat here and then the maintenance of that revenue guide as well as the EBITDA, the beaten race for the full year that we're seeing here despite some of those FX headwinds that I know that Tim had addressed earlier.

I think there's probably two different angles but both of these questions are kind of getting at the new customer engine that we're talking to and John, appreciate the comments as well, as far as that growth algorithm. The first question is really tied to the macro.

And I know that you guys are saying, hey, the calendar 2023 customer cohort is a choice cohort from a dollar perspective when thinking about those new customers for the company as a publicly traded company since a spin.

I guess in the context of macro, can you help us think about -- I know you guys are saying that it's potentially a more cautionary environment, is that cautionary comments demonstrating even on a quarter-to-quarter basis that things might be more difficult versus where we were 90 days ago? That's the first question.

I do have a follow up beyond the macro..

Thanks, Mike and appreciate you following the stock, I'm looking forward to talking to you and your team a little more tomorrow. So on the quarter-on-quarter comment, look we purposely wanted to spell out the growth algorithm just to remind folks that we have this multifaceted approach.

As you mentioned, the NCA part of the algorithm was quite strong, it was quite strong in Q3, even compared to Q2. There's really no major difference in the macro environment that we're necessarily seeing from Q2 to Q3, like quarter-over-quarter performance.

I would say it's more Mike of like a little bit of a continuation of the same where we're seeing MSPs looking to hit their targets, both their top line and their bottom line targets and the way that they're achieving that is more through cross sell of additional services, rather than adding SMEs.

And so that's where we're seeing a little bit of that moderated device ads coming up. And so I'd say it's a continuation of really the moderated device ad, and a little bit more of a focus on where they're spending their money as it relates to licenses, licensing costs, across their broader portfolio..

Got it and thank you for the color there. And then the second question, this one comes back to the new customers, but through the lens of almost competition here.

And so I just wanted to see, is there any change on the competitive front, obviously, we are some quarters removed from the Data [ph] acquisition, is there any benefit coming to N-able through that? And then the secondary pieces, obviously, you guys are talking about the MDR offering and what that does for N-able, but I have to imagine in some sense that that elevates you guys at a competitive level.

So any feedback that you guys are receiving since the MDR, I know you had some bullish comments in the prepared remarks, but just wanted to see if I can get any incremental color on those two pieces? Thank you..

Yeah, on the NCA, I'd say we continue to see a strong uptick in our core data protection offering.

So when we spun the business out a couple of years back, we looked at Cove and data protection as a category, there is tremendous opportunity; one, from the category and what we're seeing as the demand from the MSP base, but two, we have a differentiated offering from a technology and from a TCO, total cost of ownership.

So we decided a couple of years back to invest in the new brand, bring back up to the front, as we called it internally, and really started pushing the COVID initiative and suite as more of an NCA, new customer offering as opposed to just a cross sell offering.

And really, we're starting to see the fruit of all that hard work from our go to market teams and the brand and our product leadership continuing to differentiate that offering. So overall, across the geos I would say we're pretty consistent.

But if I had to point to one headline, or bright spot, it's really that Cove’s data protection offering having success in new customers. On the MDR front, yeah, we are bullish.

This is an offering that we've been studying in the market, that we've been studying for quite some time and wanted to make sure that we found an offering that could, by itself, differentiate N-able compared to all the competitive landscape. And we think this will help Mike, both on our cross sell.

As you know, we have a large security offering and so MSPs look to N-able, and they trust N-able with the security offerings. So we expect them to continue to trust N-able with the MDR offering. But also this will help us with NCA, new customer acquisition.

And even some of our early conversations with some of the MSPs in the market, if they're not in the market for data protection offering or an RMM offering we're having now a conversation with them on MDR. And so we're quite excited as to what this offering brings both in terms of cross sell, but also new customer acquisition.

So look for further updates as we get into 2024 there..

That's great to hear. Thank you..

Thank you. Our next question comes from Jason Ader of William Blair. Your line is now open. Please go ahead..

Yeah, thank you. Good morning, guys. I just wanted to ask about the RMM business drill down on that a little bit.

Just for modeling purposes, can you just remind us what you've said publicly about how big RMM is as percentage of your revenue?.

Hey Jason, this is Tim. Thanks for the question.

Drilling down on the RMM business, in terms of what we said, historically, in terms of size of the business, we don't just go to the size of the underlying kind of product lines within the business, but we have given color on just kind of stack ranking them and just how to think about the components of the overall business. So RMM is number one.

Data protection is number two, and security is number three. And the combination of data protection and security is bigger than RMM. So they're all sizable product lines within the business..

Got you, okay. And then on the RMM side, it sounds like it's sort of a continuation of some of the pressure on device growth. We've heard sort of in the market, that there's also been a fair amount of pressure on pricing, sort of per device pricing.

And I'm wondering just what -- how have those dynamics shifted over time, I don't know if it's a competitive situation where some people in the market are kind of bombing the price.

But what I guess, what is the strategy to grow RMM in a week or macro environment, let's just assume that we're going to be in a sort of same tighter environment through 2024, how do you guys counteract maybe some of that pressure, on device growth or on pricing, I don't want to put words in your mouth but if you could comment on the pricing environment there and then also just what the strategy would be to grow RMM in a weaker macro environment, putting aside the strength that you're seeing in DP and security?.

Thanks, Jason, hey, this is John P. So when we -- one of the reasons by the way that we don't really disclose revenue by type is we look at the broader opportunity from the LTV of the MSP.

And so if you think about the opportunity on the NSP, and I know you're familiar with our Investor Relations deck, we typically say, hey, per device that's around mid $20 per device type of opportunity. By the way, now with MDR that opportunity is now in the low 30s, right. So that's why we're so excited about MDR.

But when you think about the stack, RMM depending on what offering they have, that could be $1 to $3 of that $30 back up and data protection is a material piece. Security is from an opportunity stack point of view, probably the largest one. And so what we tried to do was focus on the word adoption, as opposed to just revenue by RMM.

And so for us, this is not too dissimilar to some of our competitors, where we're looking to land and get the trust of the MSP. Historically, the front door coming into N-able for MSPs has been RMM. And so that's when they would come in, and then we would go and add and cross sell from there.

But now with data protection, we're finding a different rhythm and a different pattern. We're actually landing with Cove and now we're cross selling into RMM. We hope and expect to do that with MDR, as well. That will give at least three, potentially four different lanes or avenues into N-able from the cross sell motion.

And then we can begin building that trust in that value with the MSPs to get that stack up to about that $30 per device or $30 per user per month type of opportunity. So for us, the focus really is not necessarily on the RMM revenue, it's on the RMM adoption, but more so it's on the N-able MSP partner relationship, so we can unlock that 30 bucks.

If you take that $30 and you smash at times the roughly 8 million devices that we have, and multiply that by 12, you get that $2 billion to $3 billion opportunity. And that's where the -- that's where the real the game is going to be won.

For us it's all about landing the customer regardless of what path and then through trust and showing the value of the platform and how we can help them with their TCO, their total cost of ownership and help with their efficiency play add more and more services to the MSP. So that's really the strategy.

And a slight -- the slight, I'd say evolution there, three or four years ago it was, hey, come in to N-able through RMM, one of our two RMMs, today it's coming through one of those two leading RMMs or through data protection. And then tomorrow it will be through MDR and other types of security offerings.

So that's why we're excited on how we think about the overall $2.83 billion opportunity that's just within our customer base today..

Got you, makes sense.

And I just want to understand sort of the evolution that you just referred to, is that evolution partly due to the pricing over the last five plus years that $1 to $3, that that's actually been coming down and therefore you guys have had to sort of broaden or is there something -- or is it just more the needs of the market have shifted?.

I'd say this, the stack, the opportunity stack has gotten larger, right. When I think about the market, I often refer to it as the X and Y axis. And on the X axis are all the services. And if you're a business or any company, if you have one service that you're going to market with, well, then you are laser focused on particularly that price point.

But as we add services and the TAM increases by the X axis, well now you have a little bit more of a strategy as to what you're playing for. What we're really playing for are making sure that we're lending the MSP and helping them add more small medium enterprises.

So you're willing to take a different cost mix for the different offerings, because you're not just focused on one offering. It's one of the benefits, I'd say of becoming a bigger, more of a platform story, adding data protection, adding security, we now can focus on the bigger LTV.

So I don't think it's necessarily that the need for RMM has diminished. I just believe that that tech stack has gone up just by itself. I've been in this business for about 10 years, that tech stack might have started about $15 or so years ago.

Now that we're adding things in endpoint security, we're adding things like managed detection and response, we're adding things like Office 365 backup, the value of the tech stack continues to increase, which somewhat changes the strategy and the tactics that you want to go and really acquire those customers because they're of a more value to you to land them and grow them..

Makes sense, thanks. Thanks for that. Appreciate it..

Thank you. [Operator Instructions]. Our next question comes from Matt Hedberg of RBC Capital Markets. Your line is now open. Please go ahead..

Great guys, thanks for taking my questions. John, in your prepared remarks I believe you said, that having a direct relationship -- a direct IT relationships with certain customers could make sense. I presume these are fairly large customers.

Just wondering if you could provide a little bit more detail on that strategy and sort of where do you draw the line between letting an MSP handle everything and more of a direct relationship?.

Hey Matt, thanks. Great question. Yeah, what I was referring to there is that internal IT department.

And so if you think about our offerings now, whether it's our Cove data protection offering or the remote monitoring and management, those used cases are very similar and scratch a similar itch with the internal IT department, especially where there's more of a robo framework, remote office, branch office folks are working from home, they're in a hybrid environment, different geos, different offices.

And the IT professional is under the same type of scrutiny and performance issues as an MSP. And what's that all about, efficiency. And an MSP or an internal IT department has that same need where they can leverage our tools, our platform via our automation and do more with less. So the used case and the personas are very similar.

We've been finding that our offerings have had quite, excuse me, have had success for quite some time.

And we're really just leaning in a little bit more with a more of a specialized sales and go to market team there, because what we're finding is we were not necessarily marketing or selling to that mid-market enterprise, but they were buying from us.

And in 2023 we really began a little bit more of a focused effort to talk to that persona, understand what that persona needs, and setting up a sales and marketing motion that satisfies their needs. And so it's been a success overall, that part of the business has been one of our bright spots, for sure.

And as far as your second question on the line, there's not really a line, if an internal IT department is choosing to manage their own digital assets themselves then N-able will provide them that software. The benefit of our tools and the same thing with our MDR offering, is we allow MSPs to co-manage with these customers.

And so if you're a CIO of an internal IT department, you can choose to use in our central RM platform or Cove data protection. And then you can bring in a MSP to augment. So both your internal team and your managed service provider, your IP consultant, both can have eyes on glass and see the same environment.

And so what's happening now, Matt I mentioned with Jason's question that I always refer to our TAM, as the X axis on the services and the Y axis is the size of the customers.

And because of both our direct motion to internal IT departments, but also as a result of MSPs landing larger and larger customers, our TAM is increasing, that Y axis and the size of enterprise that enable servicing is getting bigger and this concept of a co-managed environment where a CIO is saying, hey, look, I have my own IT.

My own IT staffing issues, let me pull in an MSP to augment some of these services that I need. And I can do so and actually save some budget as well. And so we're finding that to be a healthy formula.

So the fact that our platform allows both MSPs and internal IT departments to either do it separately or together in a co-managed model just really resonates with these personas that are both trying to solve the same thing, doing more with less, keeping their digital assets protected, productive, and so that their workforce can do so in a collaborative manner.

So the personas are similar and our platforms are perfectly really built and architected for that type of persona..

That's super helpful John, seems like a nice incremental catalyst as well next year, as you kind of continue that motion. And then maybe one for Tim, NRR I think it looks like it ticked up maybe 100 basis points on a constant currency perspective from Q2. Obviously, this it's a trailing 12-month metric.

But, with that slight improvement how do you see that perhaps trending into Q4, I mean, could it move up a little bit if there's a little bit of Q4 budget flush because obviously there's an impact on maybe 2024 as a result of that, but just kind of curious on your thoughts there?.

Yeah, on the trailing 12 month, it was slightly up I would say. On the quarter it was pretty consistent Q3 versus Q2. I wouldn't say historically we haven't seen like a budget flush end of the year from an MSP perspective to lend to any type of unnatural acceleration from an NRR perspective.

And as I would say, as we think about NRR and Q4 I would expect it to be fairly consistent. It's been a pretty steady metric, we did get a slight increase due to the timing of some of the price change in Q2, that will live with us kind of through the second quarter of next year.

But we aren't modeling any significant change from an NRR perspective quarter-over-quarter..

Got it? Thanks a lot, guys..

Thank you. Our next question comes from Brian Essex of J.P. Morgan. Your line is now open. Please go ahead..

Hi, good afternoon. Thank you for taking the question. And great to see the incremental operating margin expansion.

Maybe on that point, Tim, if you could help us understand some of the levers behind some of the cost controls that you had in the quarter, it looks like operating expenses actually declined sequentially, which initially looks like it might be seasonal but then when we dig into some of the I guess drivers of that, some of them may be different.

Maybe you can help us understand what levers did you pull in the quarter, how sustainable are they, and how you think about operating leverage as we kind of start to look into 2024?.

Yeah, absolutely. Looking across the P&L, I think we've touched on this historically. But we see leverage opportunities across kind of all three aspects, whether it be G&A, sales and marketing, and R&D.

If you look at 2023, we've made a bigger investment into R&D strategically to drive new -- an accelerated pace of new product being introduced to our partner base in 2023 and beyond. I expect us to be able to get leverage on that incremental investment that we made in 2023 on that line.

G&A again, that line has been pretty flat since we spun the business out. And continue to expect to get leverage there, over the short, medium, and long-term.

And then the last piece is sales and marketing where I would say, we're always scrutinizing and making sure we're getting the proper ROI from a sales and marketing perspective, breaking down our spend into deciles, and optimizing where we see the ROI is not up to our standard.

So, that's a continuous process that we've looked at, kind of since we've been a public company, on the sales and marketing front, and we expect to continue to do that. But stack ranking the opportunity for leverage across the P&L, I would say one -- as G&A.

Two would be in sales and marketing, and three would be in R&D, but opportunity on all three, nonetheless..

Got it, that's super helpful. Maybe if I could circle back on MDR, to follow up.

Any sense that you might have in terms of any pent up demand and how long you might be -- you may have been, I guess, seeding your installed base for that and what you anticipate ultimate penetration rate might be?.

Sure, it's -- we know from talking to our customers, and we hit this a little bit on the prepared remarks. So we did a pretty sizable customer survey where we asked them what their bigger focus areas were for 2023 and 2024. And cybersecurity services was very much top of mind.

And from talking to our customers and even looking at the survey results, we believe that there's a good amount of opportunity. And the good news here, Brian is that they're for both our small MSPs and our large MSPs. So on your adoption, I believe that it'll cover the broader install base.

And so that the double click into that is, what type of uptick will the MSPs have as they roll this out to their small and medium enterprise.

And so we believe, as there's more of a driver from a compliance point of view, and by the way, if we back up there's two things that are really driving this; one, when companies are looking to get cyber insurance, there's a much more focus overall on the stack and being able to be able to not just protect, but also to detect and respond across the base.

This is helping MSPs. And the second thing there's a big push from a compliance point of view. So security, really before was a decision how -- what is the level of risk, I'm willing to take as a small medium enterprise or as an MSP.

And now with compliance, what used to be maybe a sliding scale from a risk aversion, or a range of gray is now more black and white and binary.

If you want to be compliant, whether you're in the healthcare industry, or FinTech, whether you're in a certain geography like in the UK with cyber essentials, if you want to play in that market, as a small medium enterprise, you need to be compliant. And they're pretty specific as to what that need is and what those requirements are.

So that's driving a lot of the need for the cybersecurity services to pop up at the small medium enterprise. And we're seeing it across the geographies and across the verticals that our MSPs participate in and across the different sizes. So we're quite bullish on the opportunity.

It'll take some time as the MSPs roll this out and get comfortable with the motion themselves. But we're quite bullish, that it will have a broad appeal to our install base..

Great, great color. Thank you..

Thank you. At this time, we currently have no further questions. So I'll hand back to John Pagliuca for any further remarks..

Thank you all for participating in our quarterly call and for the questions and looking forward to talking to you all at the beginning of 2024. Take care..

Thank you for joining today's call. You may now disconnect your lines..