N-able, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise.
Business context and reporting period
N-able provides cloud-based software for managed service providers (MSPs), serving small and medium-sized enterprises. SolarWinds completed the spin-off on July 19, 2021. Consequently, results through that date are presented on a carve-out combined basis, while subsequent results reflect N-able as a standalone company; historical comparisons may not represent standalone costs or performance.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $88.4 | $76.3 | $257.0 | $223.0 |
| Gross profit | $76.1 | $60.3 | $217.8 | $176.6 |
| Operating income | $9.8 | $9.2 | $24.8 | $33.3 |
| Net income (loss) | $1.9 | $(1.1) | $(1.9) | $2.8 |
| Adjusted EBITDA (non-GAAP) | $29.7 | $31.4 | $85.6 | $89.9 |
- Q3 revenue grew 15.9%; subscription revenue grew 16.8% to $86.1 million. For nine months, revenue grew 15.2% and subscription revenue grew 16.3%. Growth was attributed principally to security and data protection products, new MSP partners, and expansion among existing partners.
- Gross margin was approximately 86.1% in Q3 versus 79.0% a year earlier, and 84.8% for nine months versus 79.2%. Lower acquired-technology amortization was a major contributor. GAAP operating margin was 11.1% in Q3 versus 12.0%, and 9.7% for nine months versus 14.9%.
- Q3 net income improved from a loss, helped by higher revenue and lower amortization and interest expense. Nine-month net income turned to a loss as operating income declined and tax expense exceeded pretax income.
- Adjusted EBITDA margin was 33.6% in Q3 versus 41.1%, and 33.3% for nine months versus 40.3%. These are non-GAAP measures and exclude, among other items, stock compensation, amortization, and spin-off costs.
- Cash from operations was $26.2 million for nine months, down from $69.5 million; Q3 cash from operations was $3.1 million versus $25.2 million. Nine-month investing cash outflow was $22.3 million, including $19.4 million of property and equipment purchases; financing cash outflow was $40.5 million.
- Cash and equivalents were $61.6 million at September 30, down from $99.8 million at December 31, 2020. Management said cash and operating cash flows should fund operations and capital commitments for at least 12 months.
- Debt at quarter-end was $350 million principal on the term loan, or $339.3 million net of discount and issuance costs; no revolver borrowings were outstanding, with $60 million available. The term loan had a 3.50% effective rate. The company repaid $372.7 million of SolarWinds related-party debt in connection with the separation.
- Deferred revenue totaled $10.4 million. Subscription products’ trailing-twelve-month net revenue retention was approximately 110%, versus 109% a year earlier. MSP partners with more than $50,000 ARR increased 25% to 1,662; the company reported approximately 25,000 customers.
Material changes and unusual items
- Sales and marketing, R&D, and general and administrative expenses rose year over year in Q3, reflecting hiring, higher stock-based compensation, marketing and contract costs, and standalone/separation expenses. Nine-month G&A included $16.1 million of separation costs; Q3 spin-off costs were $2.4 million and nine-month spin-off costs were $14.6 million.
- Stock-based compensation increased following conversion of SolarWinds awards and new N-able awards. The award conversion generated $1.7 million of incremental Q3 expense.
- Acquired-technology amortization fell substantially year over year, supporting gross profit. Interest expense also declined as the company repaid related-party debt and moved to the new credit agreement.
- Nine-month income tax expense was $9.6 million despite pretax income of $7.7 million, producing a 125.4% effective tax rate. The company cited lower pretax income and a U.S. deferred-tax-asset valuation allowance.
Outlook, risks, and contingencies
- The filing provides no specific numerical revenue or earnings guidance. Management expects continued investment in sales and marketing, R&D, security enhancements, and standalone public-company infrastructure; it also expects higher G&A costs associated with operating independently.
- Management reported improving MSP partner stability, expansion, and new partner additions since Q3 2020, while noting COVID-19 uncertainty. COVID-related estimates did not result in material financial statement adjustments as of the reporting date.
- The SolarWinds cyber incident remains a material business and reputational risk. N-able said SolarWinds had not identified the Sunburst malware in N-able products, but the threat actor had access to the shared environment and may have accessed or exfiltrated files and personnel emails. N-able said the incident had adversely affected reputation, new sales, and expansion rates; it had not recorded a contingent liability and cited SolarWinds’ indemnification obligations, subject to the separation agreements. Further costs or impacts remain possible.
- The new credit agreement includes restrictive covenants and a conditional maximum first-lien net leverage covenant. N-able reported compliance with all covenants at September 30, 2021. Variable-rate debt, foreign exchange exposure, and substantial indebtedness remain risks.
- The company identified potential tax exposure if the separation fails to qualify as tax-free and possible indemnity obligations to SolarWinds. It also disclosed ongoing IRS and Texas tax audits; management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain.
- Other key risks include standalone transition and transition-services dependence, customer renewals and retention, competition, international operations, and the Sponsors’ controlling influence. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether subscription growth, 110% net revenue retention, and growth in larger MSP partners persist, and how much growth comes from usage-based revenue.
- Cash generation after the separation, ongoing standalone costs, cash distributions to SolarWinds, and the company’s ability to service and manage its floating-rate debt.
- The extent of future spin-off, security, and stock-based compensation costs and their effect on GAAP operating margins and cash flow.
- Any subsequent developments in the cyber incident, related customer impacts, indemnification coverage, or potential claims and investigations.
- Progress on standalone systems and transition services, and any developments affecting the tax-free treatment of the separation or related tax audits.