N-able, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparative period is Q1 2023. N-able provides cloud-based security, automation, backup and IT management software to managed service providers (MSPs) serving small and medium-sized businesses.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $113.7 million | $99.8 million |
| Gross profit / gross margin | $95.5 million / 83.9% | $83.6 million / 83.8% |
| Operating income / margin | $20.5 million / 18.0% | $14.3 million / 14.4% |
| Net income | $7.5 million | $3.5 million |
| Diluted EPS | $0.04 | $0.02 |
| Cash from operating activities | $4.2 million | $10.6 million |
| Cash used in investing / financing | $5.1 million / $11.9 million | $5.6 million / $5.9 million |
Revenue grew 14.0%; subscription revenue rose 14.4% to $111.5 million and represented 98.0% of revenue. Management attributed subscription growth mainly to data protection, security and remote monitoring and management products, including long-term committed contracts. Gross margin was broadly stable. GAAP operating margin improved, while adjusted EBITDA increased to $39.6 million from $32.7 million; adjusted EBITDA margin was 34.8% versus 32.8%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $139.2 million at March 31, 2024, down from $153.0 million at year-end 2023; cash declined $13.8 million during the quarter.
- Debt was $341.3 million principal, or $334.5 million net of unamortized discount and issuance costs. The term loan’s effective rate was 8.35%; no revolving-facility borrowings were outstanding. The term loan matures in July 2028.
- Debt is variable-rate. Management estimated that a 100-basis-point rate increase would add approximately $3.4 million to annual interest expense. Cash interest paid in Q1 was $7.3 million.
- Management said cash, operating cash flows and borrowing capacity should be sufficient for operations and capital expenditure commitments for at least the next 12 months. The company reported compliance with debt covenants.
- Operating cash flow fell year over year, principally reflecting working-capital movements, including lower accrued liabilities and higher prepaid expenses and other assets. Investing cash use mainly reflected property, equipment and intangible-asset purchases.
Material changes and management commentary
- Annual dollar-based net revenue retention was approximately 111%, up from 103%. MSP partners with more than $50,000 of ARR increased 13% to 2,187; their share of ARR rose from approximately 52% to 56%. The company reported approximately 25,000 customers.
- Sales and marketing expense rose 10.0% and research and development expense rose 17.4%, mainly due to personnel costs and related investment. General and administrative expense decreased 1.7%, including a $1.4 million gain from remeasurement of Spinpanel acquisition contingent consideration.
- Net income growth reflected higher revenue, lower acquired-intangible amortization and lower general and administrative expense, partly offset by higher research and development, sales and marketing, cost of revenue, interest and taxes.
- Foreign currency translation produced a $10.4 million other comprehensive loss, versus $5.7 million of income in Q1 2023. Other income declined to $0.3 million, partly due to less favorable foreign-exchange effects.
Outlook, risks and contingencies
- The filing provides no specific quantitative revenue or earnings guidance. Management expects continued investment in sales and marketing, research and development, product offerings and security enhancements.
- Risks discussed include economic uncertainty and potentially reduced IT spending; retention, renewal and expansion of MSP partners; competition and product execution; cybersecurity incidents; foreign exchange; and variable-rate indebtedness. Management said the SolarWinds cyber incident’s adverse effects on N-able’s reputation, new sales and retention had diminished, but could persist or recur. N-able expects further security-related spending.
- A stockholder lawsuit challenges provisions of the company’s Stockholders’ Agreement, including governance and CEO-related provisions. Management does not expect pending claims to materially affect the financial statements, but says outcomes are uncertain and a loss estimate is not available.
- Potential Spinpanel acquisition earn-out liability was valued at $2.2 million at quarter-end; its remeasurement generated a $1.4 million gain in Q1 2024. A separate $1.0 million contingent amount related to acquired software assets remained accrued.
- The effective tax rate was 43.3%, down from 56.4%; management attributed the decrease mainly to a smaller unbenefited U.S. loss. The company said it did not expect to be subject to Pillar Two rules in 2024.
Important facts for investors to verify
- Whether subscription growth and improved retention continue, and how much growth reflects usage, committed contracts and foreign-exchange movements.
- Whether operating cash flow recovers after the quarter’s working-capital outflows and elevated financing cash use.
- How variable-rate debt, interest costs and scheduled principal repayments affect future cash generation and financial flexibility.
- Whether increased investment in sales, R&D and cybersecurity supports growth without pressuring margins.
- Developments in the Stockholders’ Agreement litigation, Spinpanel earn-out valuation, and any future cyber-incident-related claims or costs.