N-able, Inc. — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022. N-able provides cloud-based software and security, automation, backup and recovery solutions to managed service providers (MSPs) serving small and medium-sized businesses. The company became independent from SolarWinds in July 2021; the comparable 2021 periods are pre-separation carve-out results, so some cost comparisons may not represent like-for-like standalone operations.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $91.6 million | $85.3 million | $182.5 million | $168.5 million |
| Operating income | $10.3 million | $9.9 million | $21.4 million | $15.1 million |
| Net income (loss) | $4.3 million | $0.5 million | $9.4 million | $(3.8) million |
| Diluted EPS | $0.02 | $0.00 | $0.05 | $(0.02) |
| Adjusted EBITDA | $27.6 million | $28.2 million | $54.6 million | $55.9 million |
| Adjusted EBITDA margin | 30.1% | 33.1% | 29.9% | 33.2% |
- Q2 subscription revenue was $89.4 million, up 7.9%; total revenue increased 7.4%. Growth was attributed primarily to security and data-protection solutions, new MSP partners, and expansion among existing partners. Subscription revenue was 97.5% of Q2 revenue.
- Q2 gross margin was approximately 84.5%, compared with 85.0% a year earlier. GAAP operating margin was 11.2% versus 11.6%; net margin was approximately 4.7% versus 0.5%.
- For the six months, operating cash flow was $35.9 million, investing cash outflow $7.8 million, and financing cash outflow $6.7 million. Cash increased $19.9 million to $86.6 million.
- At June 30, cash was $86.6 million and current assets were $143.4 million against current liabilities of $58.5 million. Debt principal was $347.4 million, with $337.9 million reported net of unamortized discount and issuance costs; no revolving borrowings were outstanding. The term loan’s effective rate was 4.57%. The company reported compliance with debt covenants.
- Foreign-currency translation reduced comprehensive income by $25.8 million in Q2 and $34.9 million for the six months. The six-month cash-flow exchange-rate effect was a $1.5 million reduction.
Changes versus comparable periods
- Six-month revenue rose 8.3%, while subscription revenue rose 8.9%. Annual dollar-based net revenue retention declined to approximately 106% from 110% for the trailing twelve months ended June 30.
- Q2 net income improved to $4.3 million from $0.5 million, reflecting higher revenue, lower acquired-intangible amortization, and lower interest expense. Six-month net income improved from a $3.8 million loss to $9.4 million income.
- Despite higher GAAP operating income, adjusted EBITDA and its margin decreased year over year in both Q2 and the six-month period. Q2 sales and marketing expense rose 30.7% and research and development rose 21.9%; general and administrative expense fell 13.7%, partly due to lower separation costs. Stock-based compensation also increased.
- Six-month operating cash flow increased from $23.1 million to $35.9 million; investing outflow fell from $15.0 million to $7.8 million. Comparisons are affected by the 2021 pre-separation period and related-party activity.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management said cash and operating cash flows should be sufficient for operations and capital-expenditure commitments for at least the next 12 months.
- Management expects continued investment in sales and marketing, research and development, new products, and security enhancements; standalone-company costs may also increase. The filing says the COVID-19 impact on revenue growth had continued to dissipate through Q2 2022, but longer-term effects remained uncertain.
- Management cited potential effects from macroeconomic uncertainty, inflation, rising interest rates, geopolitical events, foreign-exchange movements, customer spending delays, and competition. A hypothetical 100-basis-point rate increase would raise annual interest expense by approximately $3.5 million, given variable-rate debt.
- The SolarWinds cyber incident had adversely affected reputation, new subscription sales and retention in prior periods. N-able reported no identified incident in its products and no contingent liability recorded as of June 30; SolarWinds indemnification obligations apply subject to the separation agreement. N-able expects further security-related spending.
- On July 1, 2022, after quarter-end, N-able acquired Spinpanel for consideration of up to approximately $20 million, including up to $10 million contingent on revenue metrics through July 2025; the purchase was funded with cash on hand.
- Management said ordinary-course legal matters were not expected to have a material adverse impact, while noting outcomes are uncertain. IRS and Texas tax examinations were disclosed; a Canadian tax audit was closed without adjustments.
Important facts for investors to verify
- Whether revenue growth and product expansion can offset the decline in net retention, and how retention trends develop in subsequent filings.
- Drivers of the lower adjusted EBITDA margin, including sales and R&D investment, stock-based compensation, and recurring standalone-company costs; review non-GAAP reconciliations alongside GAAP results.
- Debt terms, floating-rate exposure, covenant headroom, and cash availability, including the effect of foreign-currency exposure and the Spinpanel acquisition.
- Spinpanel’s final purchase accounting, contingent consideration, and contribution to results after acquisition.
- Any developments in the disclosed tax examinations, cyber-related risks or indemnification, and other contingencies.