N-ABLE, INC. 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. , 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 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
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 and Distribution date ofJuly 19, 2021 are Consolidated Financial Statements prepared on a "carve-out" basis. Our financial statements for the period fromJuly 20, 2021 forward are Consolidated Financial Statements based on our reported results as a standalone company. The Consolidated Financial Statements atJune 30, 2022 and for the three and six months endedJune 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 atDecember 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 endedDecember 31, 2021 and 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 Financial Statements for further details. 21 --------------------------------------------------------------------------------
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 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 and Distribution Agreement"), we have not recorded any contingent liabilities with respect to the Cyber Incident as ofJune 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 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 six months endedJune 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 -------------------------------------------------------------------------------- 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 ofJuly 19, 2021 are Consolidated Financial Statements prepared on a "carve-out" basis. Our financial statements for the period fromJuly 20, 2021 forward are Consolidated Financial Statements based on our reported results as a standalone company. Through the Separation and Distribution date ofJuly 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 endedJune 30, 2022 and 2021, respectively. As ofJune 30, 2022 , we had approximately 25,000 customers. Additionally, as ofJune 30, 2022 , we had 1,818 MSP partners with annualized recurring revenue ("ARR") over$50,000 on our platform, up from 1,647 as ofJune 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 ofJune 30, 2021 to approximately 50% of our total ARR as ofJune 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 endedJune 30, 2022 was$4.3 million compared to net income of$0.5 million for the three months endedJune 30, 2021 . The increase in net income for the three months endedJune 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 endedJune 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 endedJune 30, 2022 and 2021, respectively. 23 --------------------------------------------------------------------------------
Cash Flow
We have built our business to generate strong cash flow over the long term. For the three months endedJune 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 endedJune 30, 2022 and 2021, respectively, and cash payments for income taxes of$3.1 million and$2.6 million for the three months endedJune 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 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 Financial Statements. The total number of employees fully dedicated to our business was 1,448, 1,399, and 1,327 as ofJune 30, 2022 ,December 31, 2021 andJune 30, 2021 , respectively. Our stock-based compensation expense increased during the three and six months endedJune 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 throughJune 30, 2022 . Our travel costs increased during the three and six months endedJune 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. 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 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 intoU.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
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
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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
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
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$0.2 million in the three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 , primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period. Income Tax Expense Three Months Ended June 30, 2022 2021 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Income before income taxes$ 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 endedJune 30, 2022 decreased by$1.0 million as compared to the three months endedJune 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 theU.S. For additional discussion about our income taxes, see Note 7. Income Taxes of the Notes to Consolidated Financial Statements. 27 --------------------------------------------------------------------------------
Comparison of the Six Months Ended
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 endedJune 30, 2022 compared to the six months endedJune 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 endedJune 30, 2022 compared to the six months endedJune 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 endedJune 30, 2022 and 2021, respectively, and was driven primarily by strong customer retention and expansion in our MSP products.
Other Revenue. Other revenue decreased
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.
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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
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-------------------------------------------------------------------------------- Interest expense, net decreased by$5.2 million , or 41.5%, in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 , primarily due to repayment of borrowings under our long-term related party debt and the impact of lower interest rates under the Credit Agreement compared to our long-term related party debt. See Note 4. Relationship with Parent and Related Entities and Note 5. Debt of the Notes to Consolidated Financial Statements for further details regarding our related party debt.`
Other Income (Expense), Net
Six Months Ended
2022 2021
Percentage of Percentage of
Amount Revenue Amount Revenue Change
(in thousands, except percentages)
Other income (expense), net$ 1,234 0.7 %$ (583) (0.3) %$ 1,817 Other income (expense), net increased by$1.8 million in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period. Income Tax Expense Six Months Ended June 30, 2022 2021 Percentage of Percentage of Amount Revenue Amount Revenue Change (in thousands, except percentages) Income before income taxes$ 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 endedJune 30, 2022 increased by$0.1 million as compared to the six months endedJune 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 theU.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 ofJune 30, 2022 . As our sales and operating cash flows are primarily generated by international entities in theUnited Kingdom andCanada , our international subsidiaries held approximately$84.8 million of cash and cash equivalents, of which 87.4%, 7.5% and 2.5% were held inUnited 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 ourU.S. entities in a tax-efficient manner. The Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminatesU.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, onJuly 19, 2021 , certain subsidiaries of the Company entered into a credit agreement (the "Credit Agreement") withJPMorgan 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"). OnJuly 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 toSolarWinds 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 ofJune 30, 2022 andDecember 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 endedSeptember 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 endedJune 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 toSolarWinds Holdings, Inc. and had no remaining related party debt due toSolarWinds Holdings, Inc. as ofJune 30, 2022 andDecember 31, 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. In connection with the Separation and Distribution, we repaid this debt in full. 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. In connection with the Separation and Distribution, we repaid this debt in full. Interest expense related to the activity withSolarWinds Holdings, Inc. was$6.1 million and$12.6 million for the three and six months endedJune 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 --------------------------------------------------------------------------------
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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