N-able, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. N-able provides cloud-based software, security, automation, and backup solutions to managed service providers (MSPs) serving small and medium-sized businesses.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $99.8 million | $90.9 million |
| Gross profit / margin | $83.6 million / 83.8% | $76.6 million / 84.3% |
| Operating income / margin | $14.3 million / 14.4% | $11.1 million / 12.2% |
| Net income / diluted EPS | $3.5 million / $0.02 | $5.1 million / $0.03 |
| Adjusted EBITDA / margin (non-GAAP) | $32.7 million / 32.8% | $27.0 million / 29.7% |
| Operating cash flow | $10.6 million | $13.1 million |
- Revenue grew 9.9%, driven primarily by subscription growth in data protection and security. Subscription revenue was $97.4 million, or 97.6% of total revenue.
- Gross margin declined about 0.5 percentage points, as higher royalties, cloud hosting, depreciation, and personnel costs more than offset lower acquired-technology amortization. Operating margin improved about 2.2 points.
- Net income fell despite higher revenue and operating income, principally because net interest expense more than doubled to $7.2 million and income tax expense increased to $4.6 million. The effective tax rate rose to 56.4% from 40.7%.
- Cash used in investing activities was $5.6 million, including $3.4 million for property and equipment and $2.2 million for intangible assets. Cash used in financing was $5.9 million; cash decreased $0.8 million during the quarter.
- At March 31, cash and cash equivalents were $98.1 million; current assets were $162.6 million and current liabilities $63.9 million. Debt was $344.8 million principal, or $336.5 million net of issuance costs, with $3.5 million classified as current. The $60 million revolver had no borrowings. The term loan carried a 7.95% effective rate and is floating-rate.
Changes, outlook, and risks
- Annual dollar-based subscription net revenue retention was approximately 103%, down from 108% a year earlier; management attributed the decline primarily to adverse foreign exchange movements. MSP partners with more than $50,000 in ARR increased 11.7% to 1,936.
- 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 filing provides no specific quarterly or annual revenue or earnings guidance.
- Management expects interest rates on variable-rate debt to continue increasing in 2023. A hypothetical 100-basis-point rate increase would raise annual interest expense by approximately $3.4 million at quarter-end debt levels.
- Security-related investment is expected to continue. N-able reported that SolarWinds’ investigation found no SUNBURST malware in N-able products; the company noted prior reputational and sales impacts and possible continuing risk. Under its separation agreement, SolarWinds generally indemnifies N-able for Cyber Incident liabilities, subject to exceptions.
- A stockholder filed a Delaware Chancery Court complaint in March 2023 challenging provisions of the Stockholders’ Agreement and seeking class-action certification. N-able considers the claims without merit; management cannot estimate any loss and does not expect pending matters to materially affect the financial statements.
- Spinpanel contingent consideration was valued at $5.3 million at quarter-end, with a $0.2 million loss recognized in the quarter. The company also has up to $2.5 million of milestone payments related to a 2022 technology-asset acquisition.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The company stated there were no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether subscription growth and MSP expansion can offset the decline in retention and any further foreign-exchange pressure.
- How rising floating interest rates affect interest expense, cash generation, and debt repayment capacity.
- Whether the unusually high effective tax rate persists or changes as the geographic mix of earnings shifts.
- The outcome and potential cost of the Stockholders’ Agreement litigation, and the scope of SolarWinds’ Cyber Incident indemnification.
- Progress and costs from security investment, and the performance and contingent payments associated with the Spinpanel and technology-asset acquisitions.