N-able, Inc. — Q3 2022 Form 10-Q
Business and period: N-able provides cloud-based security, automation, backup and IT management software to managed service providers (MSPs) serving small and medium-sized businesses. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with the same 2021 periods. The 2021 comparison includes pre-spin-off carve-out results through July 19, 2021.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $93.5 million | $88.4 million | $276.0 million | $257.0 million |
| Operating income | $11.7 million | $9.8 million | $33.1 million | $24.8 million |
| GAAP operating margin | 12.5% | 11.1% | 12.0% | 9.7% |
| Net income (loss) | $0.3 million | $1.9 million | $9.7 million | $(1.9) million |
| Adjusted EBITDA and margin | $28.9 million; 30.9% | $29.7 million; 33.6% | $83.5 million; 30.3% | $85.6 million; 33.3% |
Q3 subscription revenue was $91.2 million, up 5.9%; nine-month subscription revenue was $269.2 million, up 7.9%. Gross profit was $78.4 million in Q3 and $232.5 million year to date. Gross margin was approximately 83.9% in Q3 versus 86.1% a year earlier, and 84.2% for nine months versus 84.8%.
Q3 interest expense was $5.1 million, up from $3.1 million, and other expense was $1.8 million, primarily reflecting foreign exchange movements. Effective tax rates were unusually high: 93.9% for Q3 and 51.6% for nine months. Diluted EPS was $0.00 for Q3 and $0.05 for nine months, rounded as presented.
Operating cash flow for the first nine months was $53.0 million, compared with $26.2 million; investing cash outflow was $22.5 million and financing cash outflow $7.6 million. Cash rose to $87.7 million from $66.7 million at year-end 2021. Cash paid for interest and taxes was $10.2 million and $13.2 million, respectively. Management said cash and operating cash flows should fund operations and capital commitments for at least the next 12 months.
At September 30, 2022, term-loan principal was $346.5 million, with $337.5 million of debt reported net of issuance costs; the revolver was undrawn. The term loan’s effective rate was 6.07%, up from 3.50% at year-end 2021. A 100-basis-point rate increase would raise annual interest expense by approximately $3.5 million. The facilities are secured, include restrictive covenants, and mature in 2026 (revolver) and 2028 (term loan). The company reported covenant compliance. Cash less reported debt was approximately $(249.7) million.
Changes, outlook and risks
- Revenue grew 5.8% in Q3 and 7.4% for nine months, driven mainly by security and data protection offerings and partner expansion. Annual dollar-based net revenue retention declined to 104% from 110%; management attributed the decrease primarily to adverse foreign-exchange movements. MSP partners with more than $50,000 ARR increased 7.5% year over year to 1,786.
- Q3 GAAP operating income improved, but net income and Adjusted EBITDA declined. Higher hosting and royalty fees, personnel costs, research and development, and interest expense weighed on results. Nine-month sales and marketing and R&D spending increased, while G&A and acquired-intangible amortization fell, partly because the prior-year comparison included spin-off costs.
- Foreign currency translation reduced equity by $57.2 million during the first nine months; the company also cited FX as a drag on profitability and retention. The stronger U.S. dollar may continue to pressure reported results.
- Spinpanel was acquired July 1 for consideration of up to approximately $20 million, including up to $10 million contingent on revenue metrics through July 2025. Its results were described as immaterial to the period. Contingent consideration was valued at $5.3 million at quarter-end, including a $0.2 million Q3 loss.
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management expects continued investment in sales, R&D, product development and security controls, and anticipates the SolarWinds transition-services agreement will end around December 31, 2022.
- Principal risks include adverse economic conditions and reduced IT spending, customer retention and expansion, foreign-exchange and variable-rate debt exposure, cybersecurity and reputational impacts, acquisition integration, and the tax and indemnification provisions associated with the SolarWinds separation. Management said SolarWinds’ Cyber Incident has adversely affected reputation, new sales and retention, but expects the impact to diminish absent new developments; SolarWinds indemnifies N-able for specified related liabilities.
- Ordinary-course legal matters were not expected by management to have a material adverse effect, though outcomes remain uncertain. IRS and Texas tax audits were ongoing; the Canadian audit described was closed without adjustment. Two Thoma Bravo-designated directors resigned effective November 2, 2022; the filing said the resignations were not due to disagreements with the company.
Investor verification priorities
- Assess whether subscription growth and retention can stabilize, separating currency effects from underlying customer expansion.
- Review margin trends and the drivers of rising cloud, royalty, staffing and security-related costs; compare GAAP results with management’s adjusted measures.
- Monitor floating-rate debt, interest expense, covenant headroom, amortization and the large term-loan maturity beyond 2026.
- Track cash conversion and the use of cash, including Spinpanel earn-out payments and future acquisition or investment needs.
- Verify the eventual tax-audit outcomes, contingent-consideration remeasurement, and any developments in cybersecurity, SolarWinds indemnification or director governance.