N-ABLE, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated and Combined Financial Statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical consolidated and combined financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially and adversely from those anticipated in the forward-looking statements. Please see the section entitled "Safe Harbor Cautionary Statement" above and the risk factors discussed in "Item 1A. Risk Factors" below for a discussion of the uncertainties, risks and assumptions associated with these statements. The following discussion and analysis also includes a discussion of certain non-GAAP financial measures. For a description and reconciliation of the non-GAAP measures discussed in this section, see "Non-GAAP Financial Measures." OverviewN-able, Inc. , aDelaware corporation, and its subsidiaries ("Company", "we," "us" and "our") is a leading global provider of cloud-based software solutions for managed service providers ("MSPs"), enabling them to support digital transformation and growth within small and medium-sized enterprises ("SMEs"), which we define as those enterprises having less than 1,000 employees. With a flexible technology platform and powerful integrations, N-able makes it easy for MSPs to monitor, manage, and protect their end-customer systems, data, and networks. Our growing portfolio of security, automation, and backup and recovery solutions is built for IT services management professionals. N-able simplifies complex ecosystems and enables customers to solve their most pressing challenges. In addition, we provide extensive, proactive support-through enriching partner programs, hands-on training, and growth resources-to help MSPs deliver exceptional value and achieve success at scale. Through our multi-dimensional land and expand model and global presence, we are able to drive strong recurring revenue growth, profitability and retention. Separation from SolarWinds OnAugust 6, 2020 , SolarWinds Corporation ("SolarWinds" or "Parent") announced that its board of directors had authorized management to explore a potential spin-off of its MSP business into our company, a newly created and separately traded public company, and separate into two distinct, publicly traded companies (the "Separation"). OnJuly 19, 2021 , SolarWinds completed the Separation through a pro-rata distribution (the "Distribution") of all the outstanding shares of our common stock it held to the stockholders of record of SolarWinds as of the close of business onJuly 12, 2021 (the "Record Date"). Each SolarWinds stockholder of record received one share of our common stock,$0.001 par value, for every two shares of SolarWinds common stock,$0.001 par value, held by such stockholder as of the close of business on the Record Date. SolarWinds distributed 158,020,156 shares of our common stock in the Distribution, which was effective at11:59 p.m., Eastern Time , onJuly 19, 2021 . The Distribution reflected 316,040,312 shares of SolarWinds common stock outstanding onJuly 12, 2021 at a distribution ratio of one share of our common stock for every two shares of SolarWinds common stock. In addition, onJuly 19, 2021 , and prior to completion of the Distribution, we issued 20,623,282 newly-issued shares of our common stock in connection with a private placement of N-able's common stock (the "Private Placement"). As a result of the Distribution, we became an independent public company and our common stock is listed under the symbol "NABL" on theNew York Stock Exchange . Our financial statements for the periods through the Separation date ofJuly 19, 2021 are Combined Financial Statements prepared on a "carve-out" basis. Our financial statements for the period fromJuly 20, 2021 throughSeptember 30, 2021 are Consolidated Financial Statements based on our reported results as a standalone company. The Consolidated and Combined Financial Statements atSeptember 30, 2021 and for the three and nine months endedSeptember 30, 2021 and 2020 are unaudited, but in our opinion include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented. The Combined Balance Sheet atDecember 31, 2020 was derived from audited financial statements. The results reported in these Consolidated and Combined Financial Statements should not necessarily be taken as indicative of results that may be expected for the entire year. The financial information included herein should be read in conjunction with the financial statements and notes in our registration statement on Form 10 (File No. 001-40297), initially filed with theSecurities and Exchange Commission ("SEC") onMarch 29, 2021 , as amended by Amendment No. 1 filed onApril 6, 2021 , Amendment No. 2 filed onApril 14, 2021 , Amendment No. 3 filed onMay 27, 2021 , and Amendment No. 4 filed onJune 15, 2021 (the "Form 10"). The Form 10 includes a preliminary information statement that describes the Distribution and provides information regarding our business and management. The Registration Statement was declared effective by theSEC at3:00 p.m. Central Time onJune 25, 2021 . The final information statement was furnished as exhibit 99.3 to the Form 8-K we filed with theSEC onJuly 12, 2021 (the "Information Statement"). See Note 2. Summary of Significant Accounting Policies and Note 4. Relationship with Parent and Related Entities of the Notes to Consolidated and Combined Financial Statements for further details. Impacts of COVID-19 21 -------------------------------------------------------------------------------- The impact from the rapidly changing market and economic conditions due to the coronavirus disease 2019 ("COVID-19") pandemic on our business is uncertain. Prior to the Separation, SolarWinds, of which we were a part, initially responded to the COVID-19 pandemic by executing its business continuity plan and transitioning nearly all of its workforce to a remote work environment to prioritize the safety of its personnel. We have maintained a similar plan following the Separation, and substantially all of our workforce is still working remotely and, to date, we have not incurred significant disruptions to our business operations as a result of this transition. We believe that the COVID-19 pandemic creates both opportunities and challenges for our business. As a result of the pandemic, we have seen an acceleration of digital transformation efforts among SMEs with increased demand for secure, modern remote work environments. We believe this will support long-term demand for services offered by our MSP partners. The pandemic also has resulted in significant volatility, uncertainty and disruption in the global economy, in particular for SMEs. As a result of the impact of the COVID-19 pandemic, we experienced a deceleration in our year-over-year subscription revenue growth rate in the second quarter of 2020 as compared to our growth rates in prior periods. We attribute this deceleration primarily to increased churn and downgrades from existing MSP partners and slower MSP partner adds. Beginning in the third quarter of 2020, and continuing through the third quarter of 2021, we began to see improvement in our business, primarily as a result of better stability in our MSP partner base, expansion with certain existing MSP partners and the addition of new MSP partners. We are unable to predict the long-term impact that the pandemic may have on our business, results of operations and financial condition due to numerous uncertainties, including the duration of the pandemic, actions that may be taken by governmental authorities around the world in response to the pandemic, the impacts on the businesses of our MSP partners and their customers and other factors identified in the section entitled Item 1A. Risk Factors in this Quarterly Report on Form 10-Q. We will continue to evaluate the nature and extent of the impacts of the COVID-19 pandemic on our business, results of operations and financial condition. SolarWinds Cyber Incident As previously disclosed, SolarWinds was the victim of a cyberattack on its Orion Software Platform and internal systems, or the Cyber Incident. SolarWinds has not identified Sunburst in any of its more than 70 non-Orion products and tools, including, as previously disclosed, any of our N-able solutions. SolarWinds, together with its partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident. As SolarWinds previously disclosed in its investigatory updates, it has substantially completed this process and believes the threat actor is no longer active in its environments. In response to the Cyber Incident and in connection with the separation, we are working to further enhance security, monitoring and authentication of our solutions. Specifically, we have implemented in-product security enhancements to the N-able portfolio of products, including, multi-factor authentication, unified single sign-on services, and secure secret vaults. We have also introduced new identity and access controls, scanning and remediation technologies and standards and monitoring tooling across our enterprise IT and production environments. We expect to incur additional expenses in future periods related to continued enhancements to our security measures across our solutions. Of the expenses SolarWinds recorded related to the Cyber Incident through the Separation date ofJuly 19, 2021 , none have been allocated to the N-able business and, as a result of the indemnification provisions under the Separation and Distribution Agreement entered into in connection with the Separation and Distribution (the "Separation Agreement"), we have not recorded any contingent liabilities with respect to the Cyber Incident as ofSeptember 30, 2021 . In addition, as a result of the Cyber Incident, SolarWinds is subject to numerous lawsuits and governmental investigations or inquiries. To date, we have not been separately named in such lawsuits and investigations, but in the future we may become subject to lawsuits, investigations or inquiries related to the Cyber Incident. In such event, subject to the terms of the Separation Agreement, SolarWinds would indemnify us for costs we may incur. We believe the Cyber Incident has caused reputational harm to SolarWinds and also had an adverse impact on our reputation, new subscription sales and net retention rates. In 2021, we have experienced an adverse impact to new subscription sales and expansion rates relative to historical levels. We believe this was due in part to our decision in response to the Cyber Incident to temporarily reduce investments in demand generation activities throughJanuary 2021 , as well as a result of certain MSP partners delaying their purchasing decisions as they assessed the potential impact of the Cyber Incident. However, we also have seen consistency among renewal rates with our larger MSP partners and have not observed material adverse trends with respect to the usage of our solutions. In addition, following our resumption of regular demand generation activities inFebruary 2021 , we were encouraged by engagements with both prospective and existing MSP partners. In general our sales cycles and time from contract to revenue recognition are primarily short in nature and based on trends through the first three quarters of 2021, we believe that the adverse impacts of the Cyber Incident on our financial results will diminish over time in the absence of new discoveries or events. Nevertheless, there is risk that the Cyber Incident may continue to have an adverse impact on our 22 -------------------------------------------------------------------------------- business in future periods, and to the extent such impact continues, including as a result of new discoveries or events, it could have an adverse effect on our business, results of operations, cash flows or financial position. Results of Operations Our financial statements for the periods through the Separation date ofJuly 19, 2021 are Combined Financial Statements prepared on a "carve-out" basis. Our financial statements for the period fromJuly 20, 2021 throughSeptember 30, 2021 are Consolidated Financial Statements based on our reported results as a standalone company. Throughout the periods covered by the Combined Financial Statements, we operated as a part of SolarWinds. Therefore, stand-alone financial statements have not historically been prepared for us. The accompanying historical Consolidated and Combined Financial Statements have been prepared from SolarWinds' historical accounting records and are presented on a stand-alone basis as if our business' operations had been conducted independently from SolarWinds. The Consolidated and Combined Financial Statements present our historical results of operations in accordance with GAAP. Prior to the Separation, N-able comprised certain stand-alone legal entities for which discrete financial information was available. As SolarWinds recorded transactions at the legal entity level, for the legal entities which were shared between the N-able business and other SolarWinds operations for which discrete financial information was not available, allocation methodologies were applied to certain accounts to allocate amounts to us as discussed in Note 1. Organization and Nature of Operations of the Notes to Consolidated and Combined Financial Statements. The Consolidated and Combined Statements of Operations include all revenue and costs directly attributable to N-able as well as an allocation of expenses related to facilities, functions and services provided by SolarWinds prior to the Separation. These corporate expenses have been allocated to our business based on direct usage or benefit, where identifiable, with the remainder allocated based on headcount where appropriate. These allocations are primarily reflected within operating expenses in our Consolidated and Combined Statements of Operations. We believe the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to, or the benefit received by, us during the periods presented. However, these allocations may not be indicative of the actual expenses we would have incurred as a stand-alone company during the periods prior to the Separation or of the costs we will incur in the future. See Note 4. Relationship with Parent and Related Entities of the Notes to Consolidated and Combined Financial Statements for further details of the allocated costs. Third Quarter Financial Highlights Revenue We deliver a platform of integrated solutions that enables our MSP partners to manage and secure the IT environments and assets for their SME end customers, as well as more efficiently manage their own businesses. Our total revenue was$88.4 million and$76.3 million for the three months endedSeptember 30, 2021 and 2020, respectively. As ofSeptember 30, 2021 , we had approximately 25,000 customers. Additionally, as ofSeptember 30, 2021 , we had 1,662 MSP partners with annualized recurring revenue ("ARR") over$50,000 on our platform, up from 1,331 as ofSeptember 30, 2020 , representing an increase of 25%. Over the same period, MSP partners with over$50,000 of ARR on our platform grew from approximately 40% of our total ARR as ofSeptember 30, 2020 to 46% of our total ARR as ofSeptember 30, 2021 . We determine ARR as the annualized recurring revenue as of the last month of a given period. We calculate ARR by multiplying the recurring revenue and related usage revenue, excluding the impacts of credits and reserves, recognized during the final month of the reporting period from both long-term and month-to-month subscriptions by twelve. We use ARR, and in particular, ARR attributable to MSP partners with over$50,000 of ARR, to enhance the understanding of our business performance and the growth of our relationships with our MSP partners. Profitability We have grown while maintaining high levels of operating efficiency. Our net income for the three months endedSeptember 30, 2021 was$1.9 million compared to a net loss of$1.1 million for the three months endedSeptember 30, 2020 . The increase in net income for the three months endedSeptember 30, 2021 was primarily due to an increase in revenue and a decrease in both the cost of amortization of acquired technologies and interest expense. Our Adjusted EBITDA was$29.7 million and$31.4 million for the three months endedSeptember 30, 2021 and 2020, respectively. 23 -------------------------------------------------------------------------------- Cash Flow We have built our business to generate strong cash flow over the long term. For the three months endedSeptember 30, 2021 and 2020, cash flows from operations were$3.1 million and$25.2 million , respectively. The decrease in cash provided by operating activities for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 was primarily due to a decrease in due to and from affiliates of$20.0 million . Our cash flows from operations were reduced by cash payments for interest of$3.2 million and$8.3 million for the three months endedSeptember 30, 2021 and 2020, respectively, and cash payments for income taxes of$4.7 million and$3.3 million for the three months endedSeptember 30, 2021 and 2020, respectively. Components of Our Results of Operations Revenue Our revenue consists of the following: •Subscription Revenue. We primarily derive subscription revenue from the sale of subscriptions to the SaaS solutions that we host and manage on our platform. Our subscriptions provide access to the latest versions of our software platform, technical support and unspecified software upgrades and updates. Subscription revenue for our SaaS solutions is generally recognized ratably over the subscription term once the service is made available to the MSP partner or when we have the right to invoice for services performed. In addition, our subscription revenue includes sales of our self-managed solutions, which are hosted and managed by our MSP partners. Subscriptions of our self-managed solutions include term licenses, technical support and unspecified software upgrades. Revenue from the license performance obligation of our self-managed solutions is recognized at a point in time upon delivery of the access to the licenses and revenue from the performance obligation related to the technical support and unspecified software upgrades of our subscription-based license arrangements is recognized ratably over the agreement period. We generally invoice subscription agreements monthly based on usage or in advance over the subscription period on either a monthly or annual basis. •Other Revenue. Other revenue consists primarily of revenue from the sale of our maintenance services associated with the historical sales of perpetual licenses. MSP partners with maintenance agreements are entitled to receive technical support and unspecified upgrades or enhancements to new versions of their solutions on a when-and-if-available basis for the specified agreement period. We expect maintenance revenue to decrease as a proportion of our total revenue over time. Cost of Revenue •Cost of Revenue. Cost of revenue consists of technical support personnel costs, public cloud infrastructure and hosting fees, royalty fees and an allocation of overhead costs for our subscription revenue and maintenance services. We allocate facilities, depreciation, benefits and IT costs based on headcount. •Amortization of Acquired Technologies. We amortize to cost of revenue capitalized costs of technologies acquired in connection with the take private transaction of SolarWinds in early 2016 and our acquisitions. Operating Expenses Operating expenses consist of sales and marketing, research and development and general and administrative expenses as well as amortization of acquired intangibles. Personnel costs include salaries, bonuses and stock-based compensation and related employer-paid payroll taxes, as well as an allocation of our facilities, depreciation, benefits and IT costs. For the periods through the Separation date ofJuly 19, 2021 , SolarWinds provided facilities, information technology services and certain corporate and administrative services to us. Expenses relating to these services have been allocated to Nable and are reflected in the Consolidated and Combined Financial Statements. The total number of employees fully dedicated to our business was 1,335, 1,177, and 1,153 as ofSeptember 30, 2021 ,December 31, 2020 , andSeptember 30, 2020 , respectively. Our stock-based compensation expense increased during the three and nine months endedSeptember 30, 2021 as compared to the corresponding periods of the prior fiscal year primarily due to the impact of both the conversion of existing unvested and unexercised equity awards in connection with the Separation and new equity awards granted to employees during the three months endedSeptember 30, 2021 . Our travel costs declined in 2020 and remained at a decreased level during the first three quarters of 2021 due to COVID-19 and we expect this to continue for the duration of the pandemic. •Sales and Marketing. Sales and marketing expenses primarily consist of related personnel costs, including our sales, marketing and partner success teams. Sales and marketing expenses also include the cost of digital marketing programs such as paid search, search engine optimization and management and website maintenance and design. We expect to continue to hire personnel globally to drive new MSP partner adds, expand with existing MSP partners and pursue initiatives designed to help our MSP partners succeed and grow. 24 -------------------------------------------------------------------------------- •Research and Development. Research and development expenses primarily consist of related personnel costs. We expect to continue to grow our research and development organization domestically and internationally and also to incur additional expenses associated with our enhancements of security, monitoring and authentication of our solutions. •General and Administrative. General and administrative expenses primarily consist of personnel costs for executives, finance, legal, human resources and other administrative personnel, general restructuring charges and other acquisition-related costs, professional fees and other general corporate expenses. We expect our general and administrative expense to increase primarily as a result of the increased costs associated with being a stand-alone public company and costs associated with our separation from SolarWinds. •Amortization of Acquired Intangibles. We amortize to operating expenses capitalized costs of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016 and our acquisitions. Other Income (Expense) Other income (expense) primarily consists of interest expense related to our related party debt and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts. Foreign Currency As a global company, we face exposure to adverse movements in foreign currency exchange rates. Fluctuations in foreign currencies impact the amount of total assets, liabilities, revenue, operating expenses and cash flows that we report for our foreign subsidiaries upon the translation of these amounts intoU.S. dollars. See Item 1A. Risk Factors for additional information on how foreign currency impacts our financial results. Income Tax Expense Income tax expense consists of domestic and foreign corporate income taxes related to the sale of subscriptions. Our effective tax rate will be affected by many factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, valuation allowance, uncertain tax positions, stock based compensation, permanent nondeductible book and tax differences, shifts in the allocation of income earned throughout the world and changes in overall levels of income before tax. Comparison of the Three Months EndedSeptember 30, 2021 and 2020 Revenue Three Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Subscription revenue$ 86,100 97.4 %$ 73,692 96.6 %$ 12,408 Other revenue 2,323 2.6 2,607 3.4 (284) Total subscription and other revenue$ 88,423 100.0 %$ 76,299 100.0 %$ 12,124 Total revenue increased$12.1 million , or 15.9%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , driven by our security and data protection solutions. Based on MSP partner location, revenue fromNorth America was approximately 51% and 53% of total revenue for the three months endedSeptember 30, 2021 and 2020, respectively. Revenue from theUnited Kingdom was approximately 11% of total revenue for each of the three months endedSeptember 30, 2021 and 2020, respectively. Other thanNorth America and theUnited Kingdom , no single region accounted for 10% or more of our total revenue during these periods. Subscription Revenue. Subscription revenue increased$12.4 million , or 16.8%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Our increase in subscription revenue was driven by the addition of new MSP partners and an increase in revenue from existing MSP partners as they added new SME customers and adopted new solutions. Our subscription revenue increased slightly as a percentage of our total revenue for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Our annual dollar-based net revenue retention rate for our subscription products was approximately 110% and 109% for the trailing twelve-month periods endedSeptember 30, 2021 and 2020, respectively, and was driven primarily by strong customer retention and expansion in our MSP products. To calculate our annual dollar-based net revenue retention rate, we first identify the MSP partners with active paid subscriptions in the last month of the prior-year period, or the base partners. We then divide 25 -------------------------------------------------------------------------------- the subscription revenue in the last month of the current-year period attributable to the base partners by the revenue attributable to those base partners in the last month of the prior-year period. Our dollar-based net revenue retention rate for a particular period is then obtained by averaging the rates from that particular period with the results from each of the prior eleven months. Our calculation includes any expansion revenue and is net of any contraction or cancellation, but excludes credits and revenue attributable to any MSP partner who was not a partner with a paid subscription in the prior period. Other Revenue. Other revenue decreased$0.3 million , or 10.9%, for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 due to decreases in sales of our perpetual licenses, and the related maintenance agreements. As of the three months endedMarch 31, 2020 , we have discontinued perpetual license upgrades. Cost of Revenue Three Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Cost of revenue$ 11,279 12.8 %$ 9,839 12.9 %$ 1,440 Amortization of acquired technologies 1,017 1.2 6,181 8.1 (5,164) Total cost of revenue$ 12,296 13.9 %$ 16,020 21.0 %$ (3,724) Total cost of revenue decreased in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to a decrease of$5.2 million in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016 and a decrease in personnel costs of$0.2 million , partially offset by an increase in royalties and public cloud infrastructure and hosting fees of$1.0 million , an increase in depreciation and other amortization of$0.5 million , and an increase in stock-based compensation expense of$0.2 million . Operating Expenses Three Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Sales and marketing$ 30,178 34.1 %$ 21,017 27.5 %$ 9,161 Research and development 14,649 16.6 10,413 13.6 4,236 General and administrative 19,888 22.5 13,661 17.9 6,227 Amortization of acquired intangibles 1,640 1.9 6,027 7.9 (4,387) Total operating expenses$ 66,355 75.0 %$ 51,118 67.0 %$ 15,237 Sales and Marketing. Sales and marketing expenses increased$9.2 million , or 43.6%, primarily due to an increase in personnel costs of$3.4 million , which includes an increase in stock-based compensation expense of$2.8 million , an increase in marketing program costs of$1.3 million , costs associated with our separation from SolarWinds of$0.7 million , and an increase in contract services costs of$0.5 million . We increased our sales and marketing employee headcount to support the sales of additional solutions and drive growth in the business. Research and Development. Research and development expenses increased$4.2 million , or 40.7%, primarily due to an increase in personnel costs of$2.8 million , which includes an increase in stock-based compensation expense of$2.0 million , an increase in contract services costs of$1.5 million , and$0.1 million of costs associated with our separation from SolarWinds. We increased our worldwide research and development employee headcount to expedite delivery of enhancements and new solutions to our MSP partners. General and Administrative. General and administrative expenses increased$6.2 million , or 45.6%, primarily due to$3.0 million in costs associated with our separation from SolarWinds, a$2.6 million increase in personnel costs, which includes an increase in stock-based compensation expense of$1.2 million , and an increase of$1.3 million in contract services costs. We increased our worldwide general and administrative employee headcount in connection with the Separation. Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased$4.4 million , or 72.8%, primarily due to a decrease in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016 and the impact of changes in foreign currency exchange rates. 26 -------------------------------------------------------------------------------- Interest Expense, Net Three Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Interest expense, net$ (3,111) (3.5) %$ (6,724) (8.8) %$ 3,613 Interest expense, net decreased by$3.6 million , or 53.7%, in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , primarily due to repayment of borrowings under our long-term related party debt and the impact of lower interest rates under the Credit Agreement compared to our long-term related party debt. See Note 4. Relationship with Parent and Related Entities and Note 5. Debt of the Notes to Consolidated and Combined Financial Statements for additional information regarding our related party debt. Other (Expense) Income, Net Three Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Other (expense) income, net$ (884) (1.0) %$ (292) (0.4) %$ (592) Other (expense) income, net decreased by$0.6 million in the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period. Income Tax Expense Three Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Income before income taxes$ 5,777 6.5 %$ 2,145 2.8 %$ 3,632 Income tax expense 3,904 4.4 3,274 4.3 630 Effective tax rate 67.6 % 152.6 % (85.0) % Our income tax expense for the three months endedSeptember 30, 2021 increased by$0.6 million as compared to the three months endedSeptember 30, 2020 . The effective tax rate decreased to 67.6% for the period primarily due to an increase in income before income taxes and due to the valuation allowance recognized on the deferred tax assets in theU.S. For additional discussion about our income taxes, see Note 7. Income Taxes of the Notes to Consolidated and Combined Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. Comparison of the Nine Months EndedSeptember 30, 2021 and 2020 Revenue Nine Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Subscription Revenue$ 249,592 97.1 %$ 214,667 96.3 %$ 34,925 Other revenue 7,361 2.9 8,324 3.7 (963) Total subscription and other revenue$ 256,953 100.0 %$ 222,991 100.0 %$ 33,962 27 -------------------------------------------------------------------------------- Total revenue increased$34.0 million , or 15.2%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , driven by our security and data protection solutions. Based on MSP partner location, revenue fromNorth America was approximately 51% and 53% of total revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Revenue from theUnited Kingdom was approximately 11% and 10% of total revenue for the nine months endedSeptember 30, 2021 and 2020, respectively. Other thanNorth America and theUnited Kingdom , no single region accounted for 10% or more of our total revenue during these periods. Recurring Revenue Subscription Revenue. Subscription revenue increased$34.9 million , or 16.3%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Our increase in subscription revenue was driven primarily by an increase in revenue from existing MSP partners as they added new SME customers and adopted new solutions. Our subscription revenue increased slightly as a percentage of our total revenue for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . Our annual dollar-based net revenue retention rate for our subscription products was approximately 110% and 109% for the trailing twelve-month periods endedSeptember 30, 2021 and 2020, respectively, and was driven primarily by strong customer retention and expansion in our MSP products. Other Revenue. Other revenue decreased$1.0 million , or 11.6%, for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to decreases in sales of our perpetual licenses and the related maintenance agreements. As of the three months endedMarch 31, 2020 , we have discontinued perpetual license upgrades. Cost of Revenue Nine Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Cost of revenue$ 34,366 13.4 %$ 28,366 12.7 %$ 6,000 Amortization of acquired technologies 4,758 1.9 18,056 8.1 (13,298) Total cost of revenue$ 39,124 15.2 %$ 46,422 20.8 %$ (7,298) Total cost of revenue decreased in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to a decrease of$13.3 million in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016, partially offset by an increase in royalties and public cloud infrastructure and hosting fees related to our subscription products of$3.5 million , an increase in depreciation and other amortization of$2.0 million , and personnel costs to support new MSP partners and additional solution offerings of$0.5 million , which includes an increase of less than$0.3 million in stock-based compensation expense. Nine Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Sales and marketing$ 80,390 31.3 %$ 58,424 26.2 %$ 21,966 Research and development 39,192 15.3 31,933 14.3 7,259 General and administrative 61,480 23.9 35,190 15.8 26,290 Amortization of acquired intangibles 11,935 4.6 17,761 8.0 (5,826) Total operating expenses$ 192,997 75.1 %$ 143,308 64.3 %$ 49,689 Sales and Marketing. Sales and marketing expenses increased$22.0 million , or 37.6%, primarily due to an increase in personnel costs of$9.8 million , which includes an increase of$3.4 million in stock-based compensation expense, an increase in marketing program costs of$5.7 million , a$0.8 million increase in costs associated with our separation from SolarWinds, and an increase in contract services costs of$0.6 million . We increased our sales and marketing employee headcount to support the sales of additional solutions and drive growth in the business. Research and Development. Research and development expenses increased$7.3 million , or 22.7%, primarily due to an increase in personnel costs of$4.8 million , which includes an increase of$0.7 million in stock-based compensation expense, an 28 -------------------------------------------------------------------------------- increase in contract services costs of$2.2 million , and a$0.6 million increase in costs associated with our separation from SolarWinds. We increased our worldwide research and development employee headcount to expedite delivery of enhancements and new solutions to our MSP partners. General and Administrative. General and administrative expenses increased$26.3 million , or 74.7%, primarily due to$16.1 million in costs associated with our separation from SolarWinds and a$10.2 million increase in personnel costs, which includes an increase of$4.1 million in stock-based compensation expense, as well as an increase of$1.5 million in contract services costs. We increased our worldwide general and administrative employee headcount in connection with the Separation. Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased$5.8 million , or 32.8%, primarily due to a decrease in amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016, partially offset by the impact of changes in foreign currency exchange rates. Interest Expense, Net
Nine Months Ended
2021 2020
Percentage of Percentage of
Amount Revenue Amount Revenue Change
(in thousands, except percentages)
Interest expense, net $ (15,711) (6.1) % $ (21,459) (9.6) % $ 5,748
Interest expense, net decreased by $5.7 million , or 26.8%, in the nine months
ended September 30, 2021 compared to the nine months ended September 30, 2020 ,
primarily due to repayment of borrowings under our long-term related party debt
and the impact of lower interest rates under the Credit Agreement compared to
our long-term related party debt. See Note 4. Relationship with Parent and
Related Entities and Note 5. Debt of the Notes to Consolidated and Combined
Financial Statements for further details regarding our related party debt.
Other Expense, Net
Nine
Months Ended
2021 2020
Percentage of Percentage of
Amount Revenue Amount Revenue Change
(inthousands, except percentages)
Other expense, net$ (1,467) (0.6) %$ (458) (0.2) %$ (1,009) Other expense, net increased by$1.0 million in the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period. Income Tax Expense Nine Months Ended September 30, 2021 2020 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Income before income taxes$ 7,654 3.0 %$ 11,343 5.1 %$ (3,689) Income tax expense 9,597 3.7 8,560 3.8 1,037 Effective tax rate 125.4 % 75.5 % 49.9 % Our income tax expense for the nine months endedSeptember 30, 2021 increased by$1.0 million as compared to the nine months endedSeptember 30, 2020 . The effective tax rate increased to 125.4% for the period primarily due to a decrease in income before income taxes and due to the valuation allowance recognized on the deferred tax assets in theU.S. For additional discussion about our income taxes, see Note 7. Income Taxes of the Notes to Consolidated and Combined Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q. 29 -------------------------------------------------------------------------------- Non-GAAP Financial Measures In addition to financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding, and aid in the period-to-period comparison, of our performance. We believe that these non-GAAP financial measures provide supplemental information that is meaningful when assessing our operating performance because they exclude the impact of certain amounts that our management and board of directors do not consider part of core operating results when assessing our operational performance, allocating resources, preparing annual budgets and determining compensation. Accordingly, these non-GAAP financial measures may provide insight to investors into the motivation and decision-making of management in operating the business. Investors are encouraged to review the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure included below. While we believe that these non-GAAP financial measures provide useful supplemental information, non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, their most comparable GAAP measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be comparable to similarly titled measures of other companies due to potential differences in their financing and accounting methods, the book value of their assets, their capital structures, the method by which their assets were acquired and the manner in which they define non-GAAP measures. Items such as the amortization of intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition related adjustments, spin-off costs related to associated with our separation from SolarWinds, as well as the related tax impacts of these items can have a material impact on our GAAP financial results. Non-GAAP Operating Income and Non-GAAP Operating Margin We provide non-GAAP operating income and related non-GAAP operating margins excluding such items as stock-based compensation expense and related employer-paid payroll taxes, amortization of acquired intangible assets, acquisition related costs, spin-off costs and restructuring costs and other. Management believes these measures are useful for the following reasons: •Stock-Based Compensation Expense and Related Employer-Paid Payroll Taxes. We provide non-GAAP information that excludes expenses related to stock-based compensation and related employer-paid payroll taxes associated with our employees' participation in SolarWinds' stock-based incentive compensation plans. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock-based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not necessarily correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and related employer-paid payroll taxes, management excludes these expenses when analyzing the organization's business performance. •Amortization of Acquired Intangible Assets. We provide non-GAAP information that excludes expenses related to purchased intangible assets associated with our acquisitions. We believe that eliminating this expense from our non-GAAP measures is useful to investors because the amortization of acquired intangible assets can be inconsistent in amount and frequency and is significantly impacted by the timing and magnitude of our acquisition transactions, which also vary in frequency from period to period. Accordingly, we analyze the performance of our operations in each period without regard to such expenses. •Acquisition Related Costs. We exclude certain expense items resulting from acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing non-GAAP measures that exclude acquisition related costs allows investors to better review and understand the historical and current results of our continuing operations and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments. •Spin-off Costs. We exclude certain expense items resulting from the spin-off into a newly created and separately traded public company. These costs include legal, accounting and advisory fees, system implementation costs and other incremental separation costs incurred by us related to the spin-off. The spin-off transaction results in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing non-GAAP measures that exclude these costs facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. 30 -------------------------------------------------------------------------------- •Restructuring Costs and Other. We provide non-GAAP information that excludes restructuring costs such as severance and the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit activities. These costs are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these costs for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. Three Months Ended
September
30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except margin data)
GAAP operating income $ 9,772 $ 9,161 $ 24,832 $ 33,260
Stock-based compensation expense and related
employer-paid payroll taxes 11,885 6,205 21,357 12,187
Amortization of acquired technologies 1,017 6,180 4,758 18,056
Amortization of acquired intangibles 1,640 6,027 11,935 17,761
Acquisition related costs - - (87) 40
Spin-off costs 2,404 1,480 14,552 1,480
Restructuring costs and other 1 235 131 302
Non-GAAP operating income $ 26,719 $ 29,288 $ 77,478 $ 83,086
GAAP operating margin 11.1 % 12.0 % 9.7 % 14.9 %
Non-GAAP operating margin 30.2 % 38.4 % 30.2 % 37.3 %
Adjusted EBITDA and Adjusted EBITDA Margin
We regularly monitor adjusted EBITDA and adjusted EBITDA margin, as they are
measures we use to assess our operating performance. We define adjusted EBITDA
as net income or loss, excluding amortization of acquired intangible assets and
developed technology, depreciation expense, income tax expense (benefit),
interest expense, net, unrealized foreign currency (gains) losses, acquisition
related costs, spin-off costs, stock-based compensation expense and related
employer-paid payroll taxes and restructuring costs and other. We define
adjusted EBITDA margin as adjusted EBITDA divided by total revenue. Adjusted
EBITDA has limitations as an analytical tool, and you should not consider it in
isolation or as a substitute for analysis of our results as reported under GAAP.
Some of these limitations include:
•although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized may have to be replaced in the future, and adjusted
EBITDA does not reflect cash capital expenditure requirements for such
replacements or for new capital expenditure requirements;
•adjusted EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
•adjusted EBITDA does not reflect the significant interest expense, or the cash
requirements necessary to service interest or principal payments, on our related
party debt;
•adjusted EBITDA does not reflect tax payments that may represent a reduction in
cash available to us; and
•other companies, including companies in our industry, may calculate adjusted
EBITDA differently, which reduces its usefulness as a comparative measure.
31
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Because of these limitations, you should consider adjusted EBITDA alongside
other financial performance measures, including operating income and net income
(loss) and our other GAAP results. In evaluating adjusted EBITDA, you should be
aware that in the future we may incur expenses that are the same as or similar
to some of the adjustments in this presentation. Our presentation of adjusted
EBITDA should not be construed as an inference that our future results will be
unaffected by the types of items excluded from the calculation of adjusted
EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and
the use of the term varies from others in our industry.
Three Months Ended September
30, Nine Months Ended September 30,
2021 2020 2021 2020
(in thousands, except margin data)
Net income (loss) $ 1,873 $ (1,129) $ (1,943) $ 2,784
Amortization 3,225 12,208 17,261 35,817
Depreciation 2,544 2,092 7,796 5,942
Income tax expense 3,904 3,274 9,597 8,560
Interest expense, net 3,111 6,724 15,711 21,459
Unrealized foreign currency losses (gains) 728 273 1,195 1,359
Acquisition related costs - - (87) 40
Spin-off costs 2,404 1,480 14,550 1,480
Stock-based compensation expense and related
employer-paid payroll taxes 11,885 6,205 21,357 12,187
Restructuring costs and other 1 235 132 302
Adjusted EBITDA $ 29,675 $ 31,362 $ 85,569 $ 89,930
Adjusted EBITDA margin 33.6 % 41.1 % 33.3 % 40.3 %
Liquidity and Capital Resources
Cash and cash equivalents were $61.6 million as of September 30, 2021 . As our
sales and operating cash flows are primarily generated by international entities
in the United Kingdom and Canada , our international subsidiaries held
approximately $61.1 million of cash and cash equivalents, of which 66.9%, 12.9%
and 11.2% were held in United States Dollars, Euros, and British Pound Sterling,
respectively. We intend either to invest our foreign earnings permanently into
foreign operations or to remit these earnings to our U.S. entities in a
tax-efficient manner. The Tax Act imposed a mandatory transition tax on
accumulated foreign earnings and eliminates U.S. federal income taxes on foreign
subsidiary distribution.
Our primary source of cash for funding operations and growth has been through
cash provided by operating activities. Given the uncertainty in the rapidly
changing market and economic conditions related to the COVID-19 pandemic, we
continue to evaluate the nature and extent of the impact to our business and
financial position. However, despite this uncertainty, we believe that our
existing cash and cash equivalents and our cash flows from operating activities
will be sufficient to fund our operations and meet our commitments for capital
expenditures for at least the next twelve months.
In connection with the Separation and Distribution, on July 19, 2021 , certain
subsidiaries of the Company entered into a credit agreement (the "Credit
Agreement") with JPMorgan Chase, Bank, N.A . as administrative agent and
collateral agent and the lenders from time to time party thereto. The Credit
Agreement provides for $410.0 million of first lien secured credit facilities
(the "Credit Facilities"), consisting of a $60.0 million revolving credit
facility (the "Revolving Facility"), and a $350.0 million term loan facility
(the "Term Loan"). On July 19, 2021 , prior to the completion of the
Distribution, the Company distributed approximately $16.5 million , representing
the proceeds from the Term Loan, net of the repayment of related party debt due
to SolarWinds Holdings, Inc. , payment of intercompany trade payables, and fees
and other transaction-related expenses, to SolarWinds. The Revolving Facility
will primarily be available for general corporate purposes. We had total
borrowings, net of debt issuance costs, of $339.3 million as of September 30,
2021 . See Note 5. Debt of the Notes to Consolidated and Combined Financial
Statements for further details regarding the Credit Agreement.
In addition, as contemplated by the Separation and Distribution agreement, cash
in excess of $50.0 million was distributed by the Company to SolarWinds during
the three months ended September 30, 2021 .
Although we are not currently a party to any material definitive agreement
regarding potential investments in, or acquisitions of, complementary
businesses, applications or technologies, we may enter into these types of
arrangements, which could reduce our cash and cash equivalents, require us to
seek additional equity or debt financing or repatriate cash generated
32--------------------------------------------------------------------------------
by our international operations. Additional funds from financing arrangements may not be available on terms favorable to us or at all. Related Party Indebtedness Due to affiliates within long-term liabilities in the Consolidated and Combined Balance Sheets represents N-able's related party debt due toSolarWinds Holdings, Inc. of$372.7 million as ofDecember 31, 2020 . In connection with the Separation and Distribution, we repaid this related party debt and we had no remaining related party debt due toSolarWinds Holdings, Inc. as ofSeptember 30, 2021 . OnFebruary 25, 2016 , we entered into a loan agreement withSolarWinds Holdings, Inc. with an original principal amount of$250.0 million and a maturity date ofFebruary 25, 2023 . Borrowings under the loan agreement bear interest at a floating rate which is equal to an adjusted London Interbank Offered Rate ("LIBOR") for a three-month interest period plus 9.8%. Prepayments of borrowings under the loan are permitted. As ofDecember 31, 2020 ,$228.5 million in borrowings were outstanding. In connection with the Separation and Distribution, we repaid this debt and no borrowings were outstanding as ofSeptember 30, 2021 . OnMay 27, 2016 , we entered into an additional loan agreement withSolarWinds Holdings, Inc. The loan agreement, as amended, has an original principal amount of$200.0 million and a maturity date ofMay 27, 2026 . Borrowings under the loan agreement bear interest at a fixed rate of 2.24%. Prepayments of borrowings under the loan are permitted. As ofDecember 31, 2020 ,$144.2 million in borrowings were outstanding. In connection with the Separation and Distribution, we repaid this debt and no borrowings were outstanding as ofSeptember 30, 2021 . Interest expense related to the activity withSolarWinds Holdings, Inc. was$3.1 million and$6.7 million for the three months endedSeptember 30, 2021 and 2020, respectively. Interest expense related to the activity withSolarWinds Holdings, Inc. was$15.7 million and$21.5 million for the nine months endedSeptember 30, 2021 and 2020, respectively. The repayment of principal for these related party borrowings is reflected as a financing activity in the Consolidated and Combined Statements of Cash Flows. See Note 4. Relationship with Parent and Related Entities of the Notes to Consolidated and Combined Financial Statements for further details regarding our borrowings due to affiliates. Summary of Cash Flows Summarized cash flow information is as follows:
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