N-able, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. N-able provides cloud-based software and security, automation, and backup solutions to managed service providers (MSPs) serving small and medium-sized businesses. Figures are unaudited; dollar amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $106.1 | $91.6 | $205.9 | $182.5 |
| Gross profit | $89.1 | $77.5 | $172.7 | $154.1 |
| Operating income | $15.8 | $10.3 | $30.2 | $21.4 |
| Net income | $4.5 | $4.3 | $8.0 | $9.4 |
| Adjusted EBITDA (non-GAAP) | $34.9 | $27.6 | $67.7 | $54.6 |
| Adjusted EBITDA margin (non-GAAP) | 32.9% | 30.1% | 32.9% | 29.9% |
- Q2 revenue grew 15.8%; subscription revenue grew 15.6% to $103.4 million and represented 97.4% of revenue. Management attributed subscription growth primarily to data protection and security solutions.
- Q2 gross margin was approximately 84.0%, versus 84.5% a year earlier. GAAP operating margin rose to 14.9% from 11.2%; net margin was approximately 4.3% versus 4.7%.
- For the six months, operating cash flow was $31.4 million, down from $35.9 million. Investing cash outflow was $11.6 million, versus $7.8 million; financing cash outflow was $9.2 million, versus $6.7 million. Cash increased $10.3 million to $109.2 million.
- At June 30, cash was $109.2 million, current assets $183.6 million, and current liabilities $73.6 million. Approximately $104.9 million of cash was held by international subsidiaries.
- Debt was $343.9 million principal, or $336.0 million net of issuance costs; $3.5 million was classified as current. The term loan’s effective rate was 8.48%, and the revolving facility had no borrowings. The company reported compliance with debt covenants.
Changes from the prior comparable period
- Q2 operating income increased $5.5 million, while net income rose only $0.2 million. Higher revenue and lower acquired-intangible amortization supported operating income; higher interest and tax expense limited net income growth.
- Q2 interest expense nearly doubled to $7.5 million, primarily due to higher floating interest rates. The six-month increase was $7.4 million.
- Q2 research and development expense increased 32.8% to $20.2 million, largely from higher personnel costs. Cost of revenue rose 20.1%, including higher cloud hosting and royalty costs.
- Six-month net income declined despite higher operating income, mainly reflecting increased interest and income tax expense. The effective tax rate rose to 53.8% from 38.1% for the six-month periods.
- Annual dollar-based net revenue retention was approximately 105%, compared with 106% a year earlier; management cited adverse foreign-exchange movements as the principal reason for the decrease. MSP partners with more than $50,000 ARR increased 18.9% to 2,162.
Outlook, risks, and unusual items
- The filing gives no specific 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 expected interest rates on variable-rate debt to continue increasing during 2023. A hypothetical 100-basis-point increase was estimated to add approximately $3.4 million in annual interest expense at June 30. The debt benchmark is scheduled to transition from LIBOR to SOFR after August 31, 2023.
- Management expects additional spending on product development, security, monitoring, and authentication enhancements. It also expects increased reporting costs after losing emerging growth company status at year-end 2023.
- Cybersecurity remains a risk. N-able reported continued security enhancements and said the effects of the SolarWinds cyber incident on its financial results had diminished, but could continue. Under the separation agreement, SolarWinds generally indemnifies N-able for cyber-incident liabilities, subject to specified exceptions.
- A stockholder filed a Delaware Chancery Court complaint challenging provisions of the stockholders’ agreement and seeking class-action certification. N-able said it believes the claims lack merit; management did not expect pending matters to have a material financial impact, but said outcomes are uncertain.
- Spinpanel contingent consideration was remeasured to $4.8 million, producing a $0.6 million Q2 gain. The acquisition earn-out may reach $10.0 million through July 2025. Separately, a 2022 acquired-technology arrangement includes up to $2.5 million of contingent payments.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth and retention remain resilient, particularly given retention’s slight decline and the role of foreign exchange.
- How floating-rate debt costs evolve after the SOFR transition, and the effect on cash flow and net income.
- Whether higher cloud, royalty, research and development, and security costs affect gross or operating margins.
- The timing and final amounts of acquisition-related contingent payments, including the Spinpanel earn-out.
- Developments in the stockholder lawsuit, cyber-related indemnification arrangements, and the expected cost of losing emerging growth company exemptions.