N-able, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results; comparisons are with the corresponding 2022 periods. N-able provides cloud-based management, security, backup and recovery software to managed service providers (MSPs) serving small and medium-sized enterprises.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $107.6 million | $93.5 million | $313.5 million | $276.0 million |
| Gross profit | $90.2 million | $78.4 million | $262.9 million | $232.5 million |
| Operating income | $18.4 million | $11.7 million | $48.5 million | $33.1 million |
| Net income | $6.0 million | $0.3 million | $14.1 million | $9.7 million |
| Operating cash flow | $27.5 million | $17.1 million | $58.9 million | $53.0 million |
| Adjusted EBITDA (non-GAAP) | $36.6 million | $28.9 million | $104.2 million | $83.5 million |
Q3 revenue rose 15.0%; subscription revenue, approximately 97.8% of total, increased 15.3%. For the first nine months, revenue grew 13.6% and subscription revenue 13.7%. Growth was attributed mainly to data protection, security, and remote monitoring and management solutions. Gross margin was approximately 83.9% in Q3 versus 83.8% a year earlier, and 83.9% for the nine months versus 84.2%. Operating margin improved to 17.1% from 12.5% in Q3 and to 15.5% from 12.0% year to date. Adjusted EBITDA margin was 34.0% versus 30.9% in Q3 and 33.2% versus 30.3% year to date.
Q3 net income increased substantially from the prior-year quarter, when it was $0.3 million. Higher revenue, lower acquired-intangible amortization, lower other expense and lower income-tax expense contributed; increased research and development, sales and marketing, cost of revenue and interest expense partly offset the improvement. Year-to-date net income rose 44.6%.
Cash, debt and liquidity
- Cash and cash equivalents were $127.4 million at September 30, 2023, up from $98.8 million at December 31, 2022. Cash included $77.0 million in money market funds. Approximately $121.5 million was held by international subsidiaries.
- Nine-month operating cash flow was $58.9 million. Investing cash outflow was $17.2 million, including $10.5 million for property and equipment and $6.7 million for intangible assets. Financing cash outflow was $12.0 million.
- Term-loan principal was $343.0 million; debt net of unamortized discount and issuance costs was $335.5 million, including $3.5 million current. The $60 million revolving facility had no borrowings reported. The term loan’s effective rate was 8.43% at period-end, and borrowings are variable-rate.
- Management said cash and expected operating cash flows should be sufficient for operations and capital expenditure commitments for at least the next 12 months. The company reported compliance with credit-agreement covenants.
Material changes and management commentary
- Annual dollar-based net revenue retention for subscription products was approximately 108%, versus 104% for the trailing 12 months ended September 30, 2022. MSP partners with more than $50,000 of ARR increased 19% year over year to 2,134; these partners represented approximately 55% of ARR, up from 50%.
- Interest expense rose 53.3% in Q3 to $7.8 million and 80.8% year to date to $22.5 million, primarily reflecting higher interest rates. A hypothetical 100-basis-point rate increase would add approximately $3.4 million to annual interest expense based on period-end borrowings.
- Research and development expense increased 23.2% in Q3 and 26.0% year to date, primarily reflecting personnel and related costs. The company had 1,580 employees at quarter-end, versus 1,486 a year earlier.
- The company transitioned its debt benchmark from LIBOR to SOFR effective August 31, 2023; it reported no material financial-statement impact from the transition.
Outlook, risks and unusual items
The filing provides no specific revenue or earnings guidance. Management expects continued investment in sales and marketing, research and development, and security enhancements; it also expects higher reporting costs after losing emerging-growth-company status at year-end 2023.
- On October 4, 2023, N-able entered a non-cancellable agreement for third-party cloud platform and hosting services, effective September 1, with a $39.0 million commitment payable over three years.
- A Delaware stockholder lawsuit challenges provisions of the company’s stockholders’ agreement, including provisions on board composition and the CEO. Oral argument was scheduled for February 6, 2024. Management did not expect pending claims to have a material adverse impact, but said outcomes are uncertain and did not provide an estimated loss.
- Spinpanel acquisition contingent consideration had a fair value of $4.1 million at quarter-end; its remeasurement generated a $0.6 million Q3 gain and a $1.0 million year-to-date gain.
- The company continues to describe cybersecurity, macroeconomic and foreign-exchange exposure, customer retention and expansion, variable-rate debt, and acquisition integration as risks. N-able said the effects of SolarWinds’ 2020 cyber incident on its financial results had diminished, but could persist; it expects additional spending on security measures.
- The company was under IRS examination for 2013 through February 2016 and a Texas tax audit for 2015–2018. No accrued interest or penalties related to unrecognized tax benefits were reported.
Important facts for investors to verify
- Whether subscription growth and improved retention continue, and whether growth remains concentrated among larger MSP partners.
- How variable-rate debt costs affect earnings and cash flow, including future rates and the term-loan repayment schedule.
- The cash-flow effect of the $39.0 million hosting commitment, capitalized software and infrastructure investment.
- Whether rising cloud, hosting and royalty costs, headcount investment, and stock-based compensation pressure margins.
- Developments in the stockholder litigation, tax examinations and any material cybersecurity or other contingencies.
- The extent and cost of new reporting requirements after emerging-growth-company status ends.