N-able, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparison is with Q1 2021. N-able provides cloud-based software and related services to managed service providers (MSPs), helping them manage and secure small and medium-sized businesses. The prior-year period preceded N-able’s July 2021 separation from SolarWinds and was prepared on a carve-out basis, which may limit comparability.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $90.9 million | $83.2 million |
| Gross profit / gross margin | $76.6 million / 84.3% | $69.2 million / 83.2% |
| Operating income / margin | $11.1 million / 12.2% | $5.2 million / 6.2% |
| Net income (loss) | $5.1 million | $(4.3) million |
| Diluted earnings (loss) per share | $0.03 | $(0.03) |
| Cash flow from operations | $13.1 million | $13.2 million |
| Cash and cash equivalents, at period end | $70.4 million | $111.2 million |
Revenue increased 9.2%; subscription revenue rose 9.9% to $88.6 million and represented 97.6% of total revenue. Gross margin improved by about 1.1 percentage points. Operating income increased as revenue grew and acquired-asset amortization and spin-off costs fell. Sales and marketing and research and development expenses increased, reflecting higher personnel costs and investment in growth and product development.
Adjusted EBITDA, a non-GAAP measure, was $27.0 million, compared with $27.7 million; margin declined to 29.7% from 33.2%. Non-GAAP operating income was $22.9 million versus $25.2 million, and non-GAAP operating margin was 25.2% versus 30.2%. These measures exclude specified costs and should be considered alongside GAAP results.
Liquidity, debt and cash flow
Operating cash flow was essentially unchanged year over year. Investing activities used $3.8 million, primarily for property, equipment and intangible assets; financing activities used $4.8 million, including $4.6 million for tax withholding on restricted stock and $0.9 million of debt repayments. Cash increased $3.7 million during the quarter.
At March 31, 2022, debt principal was $348.3 million, with $338.4 million reported net of unamortized discount and issuance costs; the revolver was undrawn. The term loan has a floating rate, with a reported effective rate of 3.51%. The company reported covenant compliance. Management stated that cash and expected operating cash flow should fund operations and capital expenditure commitments for at least the next 12 months.
Changes, outlook and risks
- Growth was attributed primarily to security and data protection solutions, new MSP partners, and expansion among existing partners. The number of MSP partners with over $50,000 in ARR rose 14.7% year over year to 1,733; they accounted for about 48% of ARR, versus 43% a year earlier. Subscription dollar-based net revenue retention was approximately 108%, compared with 109%.
- Net income turned positive from a year-ago loss, aided by lower acquired-asset amortization and interest expense. Interest expense declined $3.0 million, primarily following repayment of related-party debt and lower borrowing rates. Q1 2021 also included $6.1 million in spin-off costs, compared with $0.5 million in Q1 2022.
- The filing provides no specific numerical full-year guidance. Management expects continued investment in sales and marketing, research and development, and security enhancements; it also expects general and administrative costs associated with operating as a standalone public company. The transition services agreement with SolarWinds was expected to run through around December 31, 2022.
- Risks highlighted include foreign exchange movements, rising interest rates on floating-rate debt, international operating and regulatory exposure, and geopolitical disruption affecting Belarus and Ukraine, including potential impacts to research and development. A hypothetical 100-basis-point rate increase would raise annual interest expense by approximately $3.5 million.
- N-able described ongoing security enhancements following SolarWinds’ cyber incident. SolarWinds had not identified the incident in N-able products, and the separation agreement provides for SolarWinds to indemnify N-able for specified related liabilities. N-able nevertheless noted possible reputational and commercial effects and future security-related costs.
- Foreign-currency translation reduced goodwill by $7.4 million and generated a $9.2 million other comprehensive loss in the quarter. The company reported no pending legal proceeding expected by management to have a material adverse effect; tax audits and examinations were ongoing in several jurisdictions.
Important facts for investors to verify
- Whether subscription growth, partner expansion and retention remain durable, especially given retention eased to 108% from 109%.
- How higher sales and R&D spending, stock-based compensation, and standalone-company costs affect GAAP profitability and non-GAAP margins.
- Debt maturity and floating-rate exposure, including the distinction between $348.3 million of principal and $338.4 million of reported net debt.
- Whether international geopolitical, currency, privacy and regulatory risks disrupt operations or product development, and whether cyber-related impacts or costs emerge.
- The effects of the carve-out basis of Q1 2021 results when assessing year-over-year comparisons.