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N-ABLE, INC.

(NABL)
  Report
Delayed Nyse  -  04:00 2022-10-05 pm EDT
9.850 USD   -0.51%
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N-ABLE, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/11/2022 | 09:14am EDT
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere in this Quarterly Report
on Form 10-Q. In addition to historical consolidated 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."

Overview


N-able, Inc., a Delaware 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 for 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 and profitability.

Separation from SolarWinds


On August 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").

On July 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 on July 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 at 11:59
p.m., Eastern Time, on July 19, 2021. The Distribution reflected 316,040,312
shares of SolarWinds common stock outstanding on July 12, 2021 at a distribution
ratio of one share of our common stock for every two shares of SolarWinds common
stock. In addition, on July 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 the New York
Stock Exchange.

Our financial statements for the periods through the Separation and Distribution
date of July 19, 2021 are Consolidated Financial Statements prepared on a
"carve-out" basis. Our financial statements for the period from July 20, 2021
forward are Consolidated Financial Statements based on our reported results as a
standalone company. The Consolidated Financial Statements at June 30, 2022 and
for the three and six months ended June 30, 2022 and 2021 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 Consolidated
Balance Sheet at December 31, 2021 was derived from audited financial
statements. The results reported in these Consolidated 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 audited Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2021 and the financial
statements and notes in our registration statement on Form 10 (File No.
001-40297), initially filed with the Securities and Exchange Commission ("SEC")
on March 29, 2021, as amended by Amendment No. 1 filed on April 6, 2021,
Amendment No. 2 filed on April 14, 2021, Amendment No. 3 filed on May 27, 2021,
and Amendment No. 4 filed on June 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 the SEC at 3:00 p.m. Central Time on June 25, 2021.
The final information statement was furnished as exhibit 99.3 to the Form 8-K we
filed with the SEC on July 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 Financial Statements for
further details.

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Impacts of COVID-19


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 and Distribution, 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 Distribution, 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 second quarter of 2022, we
have seen the impact on revenue growth continue to dissipate.

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 our Annual
Report on Form 10-K for the year ended December 31, 2021. 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
confirmed to us that it has concluded its internal investigations related to 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 and
Distribution, 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 and Distribution date of July 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 and Distribution Agreement"), we
have not recorded any contingent liabilities with respect to the Cyber Incident
as of June 30, 2022. 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 and Distribution 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 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 through January 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 in
February 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 six months ended June 30, 2022, 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

                                       22

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impact on our 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 and Distribution
date of July 19, 2021 are Consolidated Financial Statements prepared on a
"carve-out" basis. Our financial statements for the period from July 20, 2021
forward are Consolidated Financial Statements based on our reported results as a
standalone company. Through the Separation and Distribution date of July 19,
2021, we operated as a part of SolarWinds. Therefore, stand-alone financial
statements were not historically prepared for us. The accompanying historical
Consolidated 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
Financial Statements present our historical results of operations in accordance
with GAAP.

Prior to the Separation and Distribution, 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 in the Notes to
Consolidated Financial Statements.

The Consolidated 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 and Distribution. 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 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 and Distribution
or of the costs we will incur in the future. See Note 4. Relationship with
Parent and Related Entities of the Notes to Consolidated Financial Statements
for further details of the allocated costs.

Second 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
$91.6 million and $85.3 million for the three months ended June 30, 2022 and
2021, respectively.

As of June 30, 2022, we had approximately 25,000 customers. Additionally, as of
June 30, 2022, we had 1,818 MSP partners with annualized recurring revenue
("ARR") over $50,000 on our platform, up from 1,647 as of June 30, 2021,
representing an increase of 10.4%. Over the same period, MSP partners with over
$50,000 of ARR on our platform grew from approximately 46% of our total ARR as
of June 30, 2021 to approximately 50% of our total ARR as of June 30, 2022. 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 ended June 30, 2022 was $4.3 million compared to net
income of $0.5 million for the three months ended June 30, 2021. The increase in
net income for the three months ended June 30, 2022 was primarily due to an
increase in revenue, a decrease in amortization of both acquired technologies
and intangibles, and a decrease in interest expense. Our Adjusted EBITDA,
calculated as net income of $4.3 million and net income of $0.5 million for the
three months ended June 30, 2022 and 2021, respectively, excluding amortization
of acquired intangible assets and developed technology of $2.7 million and $5.3
million, respectively, depreciation expense of $3.2 million and $2.6 million,
respectively, income tax expense of $2.3 million and $3.3 million, respectively,
interest expense, net of $3.8 million and $6.1 million, respectively, unrealized
foreign currency losses of $0.2 million and less than $0.1 million,
respectively, acquisition related costs of $0.3 million and $(0.1) million,
respectively, spin-off costs of $0.4 million and $6.0 million, respectively,
stock-based compensation expense and related employer-paid payroll taxes of
$10.0 million and $4.4 million, respectively, and restructuring costs and other
of $0.4 million and $0.1 million, respectively, was $27.6 million and $28.2
million for the three months ended June 30, 2022 and 2021, respectively.

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Cash Flow


We have built our business to generate strong cash flow over the long term. For
the three months ended June 30, 2022 and 2021, cash flows from operations were
$22.7 million and $9.9 million, respectively. Our cash flows from operations
were reduced by cash payments for interest of $3.1 million and $11.4 million for
the three months ended June 30, 2022 and 2021, respectively, and cash payments
for income taxes of $3.1 million and $2.6 million for the three months ended
June 30, 2022 and 2021, 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 and Distribution date of July 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 Financial Statements.
The total number of employees fully dedicated to our business was 1,448, 1,399,
and 1,327 as of June 30, 2022, December 31, 2021 and June 30, 2021,
respectively. Our stock-based compensation expense increased during the three
and six months ended June 30, 2022 as compared to the corresponding period 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 Distribution and new equity awards granted to employees following
the Separation and Distribution through June 30, 2022. Our travel costs
increased during the three and six months ended June 30, 2022 as compared to the
corresponding period of the prior fiscal year, which reflected reduced travel
due to COVID-19.

•Sales and Marketing. Sales and marketing expenses primarily consist of related
personnel costs, including our sales, marketing, partner success and product
management 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, as well as the cost of events for
existing and prospective customers. We expect to continue to grow our sales and
marketing organization domestically and internationally to drive new MSP partner
adds, expand with existing MSP partners and pursue initiatives designed to help
our MSP partners succeed and grow.

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•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 bringing new product offerings to market and
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,
business applications 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 the Separation and Distribution.

•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 Expense

Other expense primarily consists of interest expense related to our credit agreement and related party debt and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts. See Item 3. Quantitative and Qualitative Disclosures About Market Risk for additional information on how interest rates impact our financial results.

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 into U.S.
dollars. See Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 Ended June 30, 2022 and 2021

Revenue

                                                                   Three Months Ended June 30,
                                                         2022                                          2021
                                                                Percentage of                              Percentage of
                                            Amount                 Revenue               Amount               Revenue               Change

                                                                (in thousands, except percentages)
Subscription revenue                   $      89,369                     97.5  %       $ 82,821                     97.0  %       $ 6,548
Other revenue                                  2,258                      2.5             2,519                      3.0             (261)
Total subscription and other revenue   $      91,627                    100.0  %       $ 85,340                    100.0  %       $ 6,287


Total revenue increased $6.3 million, or 7.4%, for the three months ended June
30, 2022 compared to the three months ended June 30, 2021, primarily driven by
our security and data protection solutions. Based on MSP partner location,
revenue from the United States was approximately 48.4% and 45.1% of total
revenue for the three months ended June 30, 2022 and 2021, respectively. Revenue
from the United Kingdom was approximately 10.4% and 11.1% of total revenue for
the three months ended June 30, 2022 and 2021, respectively. Other than the
United States and the United Kingdom, no single country accounted for 10% or
more of our total revenue during these periods.

Subscription Revenue. Subscription revenue increased $6.5 million, or 7.9%, for
the three months ended June 30, 2022 compared to the three months ended June 30,
2021. 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 ended June
30, 2022 compared to the three months ended June 30, 2021.

Our annual dollar-based net revenue retention rate for our subscription products
was approximately 106% and 110% for the trailing twelve-month periods ended June
30, 2022 and 2021, 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

                                       25

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the MSP partners with active paid subscriptions in the last month of the
prior-year period, or the base partners. We then divide 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 by $0.3 million, or 10.4%, for the three
months ended June 30, 2022 compared to the three months ended June 30, 2021, due
to decreases in sales of maintenance agreements for our perpetual licenses.
During the three months ended March 31, 2020, we discontinued perpetual license
upgrades.

Cost of Revenue

                                                                   Three Months Ended June 30,
                                                         2022                                          2021
                                                                Percentage of                              Percentage of
                                            Amount                 Revenue               Amount               Revenue               Change

                                                                (in thousands, except percentages)
Cost of revenue                        $      13,624                     14.9  %       $ 11,783                     13.8  %       $ 1,841
Amortization of acquired technologies            545                      0.6             1,037                      1.2             (492)
Total cost of revenue                  $      14,169                     15.5  %       $ 12,820                     15.0  %       $ 1,349


Total cost of revenue increased $1.3 million, or 10.5%, for the three months
ended June 30, 2022 compared to the three months ended June 30, 2021, primarily
due to an increase in royalties and public cloud infrastructure and hosting fees
of $1.0 million, an increase in personnel costs of $0.3 million, which includes
an increase in stock-based compensation expense of $0.1 million, an increase in
allocated costs of $0.3 million, and an increase in depreciation and other
amortization of $0.3 million, partially offset by a decrease of $0.5 million in
amortization of intangible assets acquired in connection with the take private
transaction of SolarWinds in early 2016.

Operating Expenses

                                                                    Three Months Ended June 30,
                                                          2022                                          2021
                                                                 Percentage of                              Percentage of
                                             Amount                 Revenue               Amount               Revenue               Change

                                                                 (in thousands, except percentages)
Sales and marketing                     $      32,020                     34.9  %       $ 24,498                     28.7  %       $ 7,522
Research and development                       15,241                     16.6            12,501                     14.6            2,740
General and administrative                     18,440                     20.1            21,364                     25.0           (2,924)
Amortization of acquired intangibles            1,460                      1.6             4,276                      5.0           (2,816)
Total operating expenses                $      67,161                     73.3  %       $ 62,639                     73.3  %       $ 4,522


Sales and Marketing. Sales and marketing expenses increased $7.5 million, or
30.7%, primarily due to a net increase in personnel costs of $4.8 million, which
includes an increase in stock-based compensation expense of $6.0 million, an
increase of $1.0 million in allocated facilities and IT costs to support our
standalone domestic and international operations following our separation from
SolarWinds, an increase in marketing program costs of $1.0 million, an increase
in travel costs of $0.3 million, and an increase in professional fees of $0.2
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 $2.7
million, or 21.9%, primarily due to an increase in personnel costs of $1.8
million, which includes an increase in stock-based compensation expense of $1.0
million, an increase of $0.5 million in subscription costs, an increase of $0.4
million in allocated facilities and IT costs to support our standalone domestic
and international operations following our separation from SolarWinds, and an
increase of $0.3 million in contract services costs, partially offset by an
increase in capitalized internal-use software costs of $0.3 million and a
decrease in professional fees of $0.3 million. 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 decreased $2.9
million, or 13.7%, primarily due to a decrease in costs associated with our
separation from SolarWinds of $6.3 million, partially offset by an increase of
$1.6 million

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in personnel costs, which includes an increase in stock-based compensation expense of $2.0 million, an increase of $1.5 million in depreciation of leasehold improvements, computers, furniture and equipment to support our domestic and international office locations following our separation from SolarWinds, and an increase of $0.2 million in contract services costs. We increased our worldwide general and administrative employee headcount in connection with the Separation and Distribution.


Amortization of Acquired Intangibles. Amortization of acquired intangibles
decreased $2.8 million, or 65.9%, 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.

Interest Expense, Net

                                                                        

Three Months Ended June 30,

                                                               2022                                          2021
                                                                      Percentage of                              Percentage of
                                                  Amount                 Revenue               Amount               Revenue               Change

                                                                      (in thousands, except percentages)
Interest expense, net                        $      (3,845)                    (4.2) %       $ (6,082)                    (7.1) %       $ 2,237


Interest expense, net decreased by $2.2 million, or 36.8%, in the three months
ended June 30, 2022 compared to the three months ended June 30, 2021, 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 Financial Statements for
additional information regarding our related party debt.

Other Income (Expense), Net

                                                                             Three Months Ended June 30,
                                                                   2022                                         2021
                                                                         Percentage of                              Percentage of
                                                     Amount                 Revenue               Amount               Revenue               Change

                                                                        

(in thousands, except percentages)


Other income (expense), net                      $        175                      0.2  %       $    (54)                    (0.1) %       $    229


Other income (expense), net increased by $0.2 million in the three months ended
June 30, 2022 compared to the three months ended June 30, 2021, 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 June 30,
                                                            2022                                        2021
                                                                  Percentage of                             Percentage of
                                              Amount                 Revenue               Amount              Revenue               Change

                                                                  (in thousands, except percentages)
Income before income taxes                $     6,627                       7.2  %       $ 3,745                      4.4  %       $ 2,882
Income tax expense                              2,300                       2.5            3,283                      3.8             (983)
Effective tax rate                               34.7   %                                   87.7  %                                  (53.0) %


Our income tax expense for the three months ended June 30, 2022 decreased by
$1.0 million as compared to the three months ended June 30, 2021. The effective
tax rate decreased to 34.7% for the period primarily due to an increase in
income before income taxes and a decrease in the amount of the unbenefited loss
in the U.S. For additional discussion about our income taxes, see Note 7. Income
Taxes of the Notes to Consolidated Financial Statements.

                                       27

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Comparison of the Six Months Ended June 30, 2022 and 2021


Revenue

                                                                      Six Months Ended June 30,
                                                           2022                                           2021
                                                                   Percentage of                               Percentage of
                                             Amount                   Revenue                Amount               Revenue               Change

                                                                  (in thousands, except percentages)
Subscription Revenue                   $    178,004                         97.5  %       $ 163,492                     97.0  %       $ 14,512
Other revenue                                 4,483                          2.5              5,038                      3.0              (555)
Total subscription and other revenue   $    182,487                        100.0  %       $ 168,530                    100.0  %       $ 13,957


Total revenue increased $13,957, or 8.3%, for the six months ended June 30, 2022
compared to the six months ended June 30, 2021, driven by our security and data
protection solutions. Based on MSP partner location, revenue from the United
States was approximately 47.8% and 45.4% of total revenue for the six months
ended June 30, 2022 and 2021, respectively. Revenue from the United Kingdom was
approximately 10.7% and 11.0% of total revenue for the six months ended June 30,
2022 and 2021, respectively. Other than North America and the United Kingdom, no
single region accounted for 10% or more of our total revenue during these
periods.

Recurring Revenue


Subscription Revenue. Subscription revenue increased $14.5 million, or 8.9%, for
the six months ended June 30, 2022 compared to the six months ended June 30,
2021. 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 six months ended June 30, 2022 compared
to the six months ended June 30, 2021.

Our annual dollar-based net revenue retention rate for our subscription products
was approximately 106% and 110% for the trailing twelve-month periods ended June
30, 2022 and 2021, respectively, and was driven primarily by strong customer
retention and expansion in our MSP products.

Other Revenue. Other revenue decreased $0.6 million, or 11.0%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to decreases in sales of our perpetual licenses and the related maintenance agreements. During the three months ended March 31, 2020, we discontinued perpetual license upgrades.

Cost of Revenue

                                                                    Six Months Ended June 30,
                                                         2022                                         2021
                                                               Percentage of                              Percentage of
                                           Amount                 Revenue               Amount               Revenue               Change

                                                               (in thousands, except percentages)
Cost of revenue                        $     26,905                     14.7  %       $ 23,087                     13.7  %       $ 3,818
Amortization of acquired technologies         1,527                      0.8             3,741                      2.2           (2,214)
Total cost of revenue                  $     28,432                     15.6  %       $ 26,828                     15.9  %       $ 1,604


Total cost of revenue increased $1.6 million, or 6.0%, for the six months ended
June 30, 2022 compared to the six months ended June 30, 2021, primarily due to
an increase in royalties and public cloud infrastructure and hosting fees
related to our subscription products of $2.4 million, an increase in personnel
costs to support new MSP partners and additional solution offerings of $0.7
million, which includes an increase of less than $0.3 million in stock-based
compensation expense, an increase in depreciation and other amortization of $0.6
million, and an increase in allocated costs of $0.2 million, partially offset by
a decrease of $2.2 million in amortization of intangible assets acquired in
connection with the take private transaction of SolarWinds in early 2016.

                                       28

--------------------------------------------------------------------------------
Operating Expenses

                                                                       Six Months Ended June 30,
                                                            2022                                           2021
                                                                    Percentage of                               Percentage of
                                              Amount                   Revenue                Amount               Revenue               Change

                                                                   (in thousands, except percentages)
Sales and marketing                     $     63,074                         34.6  %       $  50,212                     29.8  %       $ 12,862
Research and development                      30,626                         16.8             24,543                     14.6             6,083
General and administrative                    36,069                         19.8             41,592                     24.7            (5,523)
Amortization of acquired intangibles           2,921                          1.6             10,295                      6.1            (7,374)
Total operating expenses                $    132,690                         72.7  %       $ 126,642                     75.2  %       $  6,048


Sales and Marketing. Sales and marketing expenses increased $12.9 million, or
25.6%, primarily due to a net increase in personnel costs of $8.6 million, which
includes an increase of $11.5 million in stock-based compensation expense, an
increase of $2.8 million in allocated facilities and IT costs to support our
standalone domestic and international operations following our separation from
SolarWinds, an increase in contract services costs of $0.7 million, an increase
in travel costs of $0.5 million, and an increase in marketing program costs of
$0.2 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 $6.1
million, or 24.8%, primarily due to an increase in personnel costs of $4.1
million, which includes an increase of $1.8 million in stock-based compensation
expense, an increase of $1.1 million in subscription costs, an increase of $0.8
million in contract services costs, and an increase of $0.8 million in allocated
facilities and IT costs to support our standalone domestic and international
operations following our separation from SolarWinds, partially offset by an
increase in capitalized internal-use software costs of $0.6 million. 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 decreased $5.5
million, or 13.3%, primarily due to a decrease of $12.2 million in costs
associated with our separation from SolarWinds, partially offset by a
$3.1 million increase in personnel costs, which includes an increase of
$3.0 million in stock-based compensation expense, an increase of $3.0 million in
depreciation of leasehold improvements, computers, furniture and equipment to
support our domestic and international office locations following our separation
from SolarWinds, and an increase in taxes other than income taxes of $0.4
million. We increased our worldwide general and administrative employee
headcount in connection with the Separation and Distribution.

Amortization of Acquired Intangibles. Amortization of acquired intangibles
decreased $7.4 million, or 71.6%, 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.

Interest Expense, Net

                                                                             Six Months Ended June 30,
                                                                 2022                                            2021
                                                                          Percentage of                               Percentage of
                                                    Amount                   Revenue                Amount               Revenue               Change

                                                                        (in thousands, except percentages)
Interest expense, net                        $     (7,371)                         (4.0) %       $ (12,600)                    (7.5) %       $ 5,229


                                       29
--------------------------------------------------------------------------------

Interest expense, net decreased by $5.2 million, or 41.5%, in the six months
ended June 30, 2022 compared to the six months ended June 30, 2021, 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 Financial Statements for
further details regarding our related party debt.`

Other Income (Expense), Net

Six Months Ended June 30,

                                                                   2022                                        2021
                                                                         Percentage of                             Percentage of
                                                     Amount                 Revenue               Amount              Revenue               Change

                                                                        

(in thousands, except percentages)


Other income (expense), net                      $      1,234                      0.7  %       $  (583)                    (0.3) %       $ 1,817


Other income (expense), net increased by $1.8 million in the six months ended
June 30, 2022 compared to the six months ended June 30, 2021 primarily due to
the impact of changes in foreign currency exchange rates related to various
accounts for the period.

Income Tax Expense

                                                                         Six Months Ended June 30,
                                                               2022                                           2021
                                                                        Percentage of                             Percentage of
                                               Amount                      Revenue               Amount              Revenue               Change

                                                                     (in thousands, except percentages)
Income before income taxes                $     15,228                            8.3  %       $ 1,877                      1.1  %       $ 13,351
Income tax expense                               5,800                            3.2            5,693                      3.4               107
Effective tax rate                                38.1   %                                       303.3  %                                  (265.2) %


Our income tax expense for the six months ended June 30, 2022 increased by $0.1
million as compared to the six months ended June 30, 2021. The effective tax
rate decreased to 38.1% for the period primarily due to an increase in income
before income taxes and a decrease in the amount of the unbenefited loss in the
U.S. For additional discussion about our income taxes, see Note 7. Income Taxes
of the Notes to Consolidated Financial Statements.

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 the Separation and Distribution, 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

                                       30

--------------------------------------------------------------------------------

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 N-able's 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 costs incurred by us related to the Separation and Distribution. 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.

•Restructuring Costs and Other. We provide non-GAAP information that excludes
restructuring costs such as severance, certain employee relocation costs, 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 June 30,               Six Months Ended June 30,
                                                    2022                 2021                 2022                2021

                                                                   (in thousands, except margin data)
GAAP operating income                         $      10,297           $  9,881          $     21,365           $ 15,060

Stock-based compensation expense and related
employer-paid payroll taxes                           9,974              4,350                18,758              9,472
Amortization of acquired technologies                   545              1,037                 1,527              3,741
Amortization of acquired intangibles                  1,460              4,276                 2,921             10,295
Acquisition related costs                               269                (87)                  269                (87)
Spin-off costs                                          420              6,033                   954             12,148
Restructuring costs and other                           357                117                   429                130
Non-GAAP operating income                     $      23,322           $ 25,607          $     46,223           $ 50,759
GAAP operating margin                                  11.2   %           11.6  %               11.7   %            8.9  %
Non-GAAP operating margin                              25.5   %           30.0  %               25.3   %           30.1  %


                                       31
--------------------------------------------------------------------------------

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 losses (gains), acquisition
related costs, spin-off costs, stock-based compensation expense and related
employer-paid payroll taxes and restructuring and other costs. 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.


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 June 30,               Six Months Ended June 30,
                                                          2022                 2021                 2022                2021

                                                                         (in thousands, except margin data)
Net income (loss)                                   $       4,327                462          $      9,428             (3,816)
Amortization                                                2,694              5,313                 5,837             14,036
Depreciation                                                3,201              2,646                 6,396              5,252
Income tax expense                                          2,300              3,283                 5,800              5,693
Interest expense, net                                       3,845              6,082                 7,371             12,600

Unrealized foreign currency losses (gains)                    228                 46                  (597)               467
Acquisition related costs                                     269                (87)                  269                (87)
Spin-off costs                                                420              6,033                   954             12,148

Stock-based compensation expense and related
employer-paid payroll taxes                                 9,974              4,350                18,758              9,472
Restructuring costs and other                                 357                117                   429                130
Adjusted EBITDA                                     $      27,615           $ 28,245          $     54,645           $ 55,895
Adjusted EBITDA margin                                       30.1   %           33.1  %               29.9   %           33.2  %


Liquidity and Capital Resources


Cash and cash equivalents were $86.6 million as of June 30, 2022. As our sales
and operating cash flows are primarily generated by international entities in
the United Kingdom and Canada, our international subsidiaries held approximately
$84.8 million of cash and cash equivalents, of which 87.4%, 7.5% and 2.5% 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

                                       32

--------------------------------------------------------------------------------

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 is
primarily available for general corporate purposes. We had total borrowings of
$337.9 million and $338.9 million as of June 30, 2022 and December 31, 2021,
respectively, net of debt issuance costs of $9.4 million and $10.2 million,
respectively. See Note 5. Debt of the Notes to Consolidated 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 by our
international operations. Additional funds from financing arrangements may not
be available on terms favorable to us or at all.

During the three months ended June 30, 2022, we did not have any relationships
with unconsolidated organizations or financial partnerships, such as structured
finance or special purpose entities that would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.

Related Party Indebtedness

In connection with the Separation and Distribution, we repaid all related party
debt due to SolarWinds Holdings, Inc. and had no remaining related party debt
due to SolarWinds Holdings, Inc. as of June 30, 2022 and December 31, 2021.

On February 25, 2016, we entered into a loan agreement with SolarWinds Holdings,
Inc. with an original principal amount of $250.0 million and a maturity date of
February 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. In connection with the Separation and
Distribution, we repaid this debt in full.

On May 27, 2016, we entered into an additional loan agreement with SolarWinds
Holdings, Inc. The loan agreement, as amended, has an original principal amount
of $200.0 million and a maturity date of May 27, 2026. Borrowings under the loan
agreement bear interest at a fixed rate of 2.24%. Prepayments of borrowings
under the loan are permitted. In connection with the Separation and
Distribution, we repaid this debt in full.

Interest expense related to the activity with SolarWinds Holdings, Inc. was $6.1
million and $12.6 million for the three and six months ended June 30, 2021. The
repayment of principal for these related party borrowings is reflected as a
financing activity in the Consolidated Statements of Cash Flows.

                                       33

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See Note 4. Relationship with Parent and Related Entities of the Notes to Consolidated Financial Statements for further details regarding our borrowings due to affiliates.

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