N-able, Inc. — Q2 2021 Form 10-Q
Business context and reporting period
N-able provides cloud-based software for managed service providers (MSPs), helping them manage and secure small and medium-sized businesses. This unaudited 10-Q covers the quarter and six months ended June 30, 2021. The financial statements are carve-out statements from former parent SolarWinds; N-able completed its spin-off and became an independent public company on July 19, 2021. Historical allocations and results may not represent future standalone costs or performance.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $85.3 million | $73.4 million | $168.5 million | $146.7 million |
| Gross profit / margin | $72.5 million / 85.0% | $58.1 million / 79.1% | $141.7 million / 84.1% | $116.3 million / 79.3% |
| Operating income / margin | $9.9 million / 11.6% | $13.5 million / 18.4% | $15.1 million / 8.9% | $24.1 million / 16.4% |
| Net income (loss) | $0.5 million | $3.2 million | ($3.8 million) | $3.9 million |
| Adjusted EBITDA / margin | $28.2 million / 33.1% | $31.5 million / 42.9% | $55.9 million / 33.2% | $58.6 million / 39.9% |
- Q2 revenue increased 16.2%; subscription revenue rose 16.9% to $82.8 million. For the first half, revenue increased 14.9% and subscription revenue rose 16.0% to $163.5 million. Subscription revenue represented 97% of total revenue in both periods.
- Q2 gross margin improved mainly because acquired-technology amortization declined. Operating income and net income nevertheless fell, with higher operating expenses—particularly separation-related and personnel costs—more than offsetting revenue growth and lower amortization.
- Q2 general and administrative expense included $6.7 million of separation costs; first-half expense included $13.1 million. Reported non-GAAP operating income and Adjusted EBITDA also exclude specified items, including spin-off costs and stock-based compensation.
- Cash from operations was $23.1 million for the first half, down from $45.6 million. Investing cash outflow was $15.0 million; financing cash outflow was $57.8 million, including $68.6 million of repayments to affiliates. Cash declined to $49.6 million at June 30 from $99.8 million at year-end.
- At June 30, total assets were $1.04 billion and total liabilities $405.5 million. Related-party debt due to SolarWinds was $304.0 million, down from $372.7 million at year-end. Q2 net interest expense was $6.1 million; first-half net interest expense was $12.6 million.
- On July 19, N-able entered into $410 million of secured credit facilities: a $350 million term loan and $60 million revolving facility. It also issued 20.6 million shares in a private placement for approximately $225 million gross proceeds. The filing says approximately $216 million of net placement proceeds and $16.5 million of net term-loan proceeds were distributed to SolarWinds; it also planned to distribute cash above $50 million during Q3.
Material changes versus the prior period
- Revenue growth reflected new MSP partners and expansion among existing partners, including adoption of additional solutions. Annual dollar-based net revenue retention was approximately 110%, versus 109% a year earlier. MSP partners with more than $50,000 of ARR increased to 1,647 from 1,252, and their share of ARR rose to 46% from approximately 38%.
- Operating expenses rose 40.7% in Q2 and 37.4% in the first half. Sales and marketing and R&D spending increased as N-able expanded hiring and marketing; G&A growth included separation costs and higher personnel and stock-based compensation.
- Lower acquired-technology amortization reduced cost of revenue, but cloud infrastructure and hosting costs increased. First-half cash from operations was also affected by working-capital movements, including higher prepaid expenses and lower accounts payable, and reduced accrued related-party interest payable.
- The effective tax rate was 87.7% in Q2 and 303.3% for the first half, primarily reflecting lower pretax income and a U.S. deferred-tax-asset valuation allowance.
Outlook, commentary, and risks
The filing provides no specific financial guidance. Management said June 30 cash and operating cash flows were expected to be sufficient for operations and capital expenditures for at least the next 12 months, while noting uncertainty from COVID-19. Management also expected standalone public-company and separation costs to increase, and planned continued investment in sales, R&D, and cybersecurity.
- Cybersecurity: SolarWinds’ Cyber Incident affected the shared environment while N-able was part of SolarWinds. SolarWinds reported no Sunburst code in N-able products, but investigations identified possible access to N-able systems and files, including files that may have contained source code, MSP partner information, or product activation data. N-able reported adverse effects on new subscription sales and expansion rates in the first half, and expects further security spending. SolarWinds indemnification is subject to the separation agreements.
- Separation and financing: Standalone costs, transition-service dependence, execution of system and operational separation, and the terms of the new debt facilities could affect future results and liquidity. The carve-out financial statements do not capture the full future standalone cost or financing structure.
- Tax and legal matters: The company warns that the spin-off could fail to qualify for intended tax treatment, potentially triggering substantial tax and indemnity obligations. IRS and Texas tax audits were ongoing; management said ordinary-course legal matters were not expected to have a material adverse effect, but outcomes are uncertain.
- Other risks: COVID-19 and economic conditions, customer retention and consumption-based revenue variability, competition, foreign exchange, international operations, data privacy, and execution of growth plans may affect results. The company was controlled by its sponsors after the spin-off and relied on emerging-growth-company and controlled-company governance exemptions.
Important facts for investors to verify
- Post-spin cash, debt, interest expense, facility terms, and any distributions to SolarWinds; reconcile the July financing and cash movements with subsequent filings.
- Standalone operating costs after transition services, including separation expenses, public-company costs, and cybersecurity investment.
- Whether MSP partner growth, approximately 110% net retention, and larger-partner ARR contribution continue, and whether Cyber Incident effects on new sales and expansion abate.
- Cash conversion and margin trends: first-half operating cash flow and Adjusted EBITDA declined despite revenue growth; assess the role of working capital and excluded non-GAAP items.
- Developments in the Cyber Incident investigations, any notices or claims, indemnification coverage, and the company’s security remediation progress.
- Outcome of tax audits and continued qualification of the spin-off for tax-free treatment, including possible indemnification exposure.