N-able, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

N-able, Inc. provides cloud-based software solutions for managed service providers (MSPs), empowering them to support digital transformation and growth for small and medium sized businesses (SMBs).

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

N-able is a global software company that primarily serves Managed Service Providers (MSPs). They offer a suite of cloud-based software solutions that enable MSPs to remotely monitor, manage, and secure the IT systems of small and medium-sized businesses (SMBs).

  • Revenue Distribution: N-able’s revenue comes primarily from subscriptions to its software solutions, often sold through a tiered model that offers different levels of functionality and support to MSPs based on their requirements and end clients’ needs. It derives a significant portion of its revenue from the United States, the United Kingdom, and other locations across Europe, with smaller contributions from other regions of the world. The subscription business provides recurring revenue streams with high visibility.
    • A look at their latest financials shows about 40% of revenue from the US and Canada, and 60% internationally.
  • Industry Trends: The MSP industry is rapidly evolving, with increasing demand for managed IT services due to the complexity of cybersecurity threats and the need for businesses to focus on their core competencies. The increasing use of cloud technologies, rising adoption of remote work, and growing sophistication of cyberattacks are driving growth in the MSP sector.
    • Growth in the MSP market is expected to continue, with some reports citing growth at 12-13% over the next 4 years.
  • Competitive Landscape: The MSP software market is competitive, with various vendors offering similar solutions. N-able competes with larger established players and smaller niche vendors, such as ConnectWise, Datto, Kaseya, and SolarWinds. Competition is based on factors like product functionality, ease of use, scalability, integration capabilities, customer support, and pricing.
    • The market in general appears to have a “top 10” of different MSP software providers.
  • What Makes N-able Different: N-able differentiates itself through its integrated platform, its focus on MSPs, and its commitment to partner success. They also have specialized offerings for specific MSP needs such as remote monitoring, security, and data protection, and data backup. Additionally, a big part of N-Able is their support and training structure for their partners, which they often highlight in earnings calls.
    • Their focus and strategies are very much dependent on the long-term partnerships they create with their MSP clients.
  • Financial Performance: N-able has been experiencing strong topline growth, primarily driven by growth in subscription revenue, new MSP partner additions, and cross-selling efforts. They are also increasingly moving their larger clients to annual contracts. The company emphasizes that they generate strong free cash flow, which helps the expansion of the platform and reinvestment in the business. Margins have been relatively stable, but are slightly lowered because of increasing personnel costs.
  • Recent Concerns and Problems: N-able has faced increased competition, especially from well funded cybersecurity startups that offer security products with good integration. There is also risk due to the volatility of the macroeconomy. In addition, their share price had been declining for the past year and a half. The management has acknowledged a slow down in net adds but have noted that existing customer churn is low, and are confident in their product portfolio, which has been enhanced with security solutions.
  • Latest Information and Management Commentary

In their latest earnings call, the management mentioned that in the last three months their share price increased by 30% after a decline in the last few quarters. They are citing the large amount of cash generated by the company as a factor in the increased investor confidence. They reiterated that their new contracts focus on longer commitments. They mentioned in detail the importance of “landing new partners and expanding with current partners”, with increased emphasis on the latter. They intend on expanding further into the European market.

Their priorities currently, include adding new functionality, such as automation capabilities, that would allow MSPs to be more efficient in their operations, especially considering a low availability of manpower. N-Able has also been working to improve their integration with Microsoft.

Moat Rating: 3 / 5

N-able possesses a “narrow moat” due to switching costs and intangible assets which makes their solutions difficult to replace.

  • Switching Costs: N-able’s MSP partners typically invest a significant amount of time and resources integrating its software into their operations, which creates a high barrier to exit as switching costs are high. Switching to a competitor would not only require a substantial effort to integrate a new system but also require additional time and resources training employees on the new platform, along with the risk of migration related issues. This creates a strong incentive for MSPs to stick with N-able’s platform even if competitors offer slightly cheaper solutions.
  • Intangible Assets (Proprietary Software): N-able has a unique, proprietary software platform, which requires time and money to replicate. They spend on R&D to further expand the platform. There are no significant IP related aspects of their platform, but building a software platform with so many different features and integration layers is very time and cost-intensive. This is especially difficult to copy because the integrations often require customized elements that are unique to the individual companies and their clients. However, these advantages are not as strong as those in a “wide moat” because it does not enjoy a monopolistic position or near-monopolistic position in the industry.

  • Network effects: Although some network effects can be observed due to increasing adoption of new capabilities by their client, they don’t create a strong enough network to create a wider moat. Their clients do not connect directly or meaningfully, which limits the strength of these effects.

  • Cost advantage: There are not any noticeable cost advantages when it comes to operation. They’re mostly a software company.

Risk to the Moat and Business Resilience:

While the moat provides a level of protection, N-able faces several risks that could harm its moat and business: * Increased Competition: The MSP software space is becoming more competitive, with a growing number of new entrants offering disruptive solutions. Competition from larger players could pressure N-able’s market share and margins. * Technological Disruption: Rapid technological advancements, especially in cloud computing, AI, or cybersecurity, could make N-able’s current solutions obsolete, or reduce its advantage in its product offering. * Customer Churn: High switching costs aren’t permanent barriers. MSPs may also decide to move to competitors if their needs change, or if the solutions provided by N-able don’t properly meet them. * Macroeconomic Weakness: Economic downturns can lead to businesses delaying or forgoing IT spending, negatively impacting the growth of N-able’s revenues.

  • Business Resilience: N-able has a pretty reliable subscription-based recurring revenue model, which will cushion it during market crashes. They also focus on a long term strategy, creating long-term agreements with clients to minimize churn. Finally, they have a cash-positive balance sheet. In general, they are in a stable condition.

Financial Analysis

N-able’s financials showcase positive revenue growth, driven by recurring subscription revenues, an efficient customer acquisition strategy, and increased focus on upselling to new products. The revenue growth has been good for most of their history. However, their operating margins have been relatively low. Their balance sheet, has been strengthening over the years with increased cash and marketable securities, coupled with reduced levels of debt. N-able also generates very strong cash flow from their operations which further supports the company’s long-term prospects. Here is a more detailed look:

  • Revenue: N-able has demonstrated robust revenue growth over the past several years. This growth is largely attributable to the increasing adoption of their cloud-based software solutions and increased sales to existing and new MSP clients. The company focuses on annual contracts for large businesses to provide a more consistent and predictable revenue stream.
  • Profitability: The gross margins for N-able is solid, but have been partially offset by investments in research and development and sales and marketing activities. The operating margins have also been relatively low because of the increasing personnel cost. As the company scales up, operating margins are expected to improve.
  • Cash Flow: N-able generates healthy free cash flow, driven by the high recurring nature of their subscription-based revenues. This cash flow provides them resources to invest in growth initiatives and strategic acquisitions. The cash flow is mainly from recurring sales of their software solutions, and does not rely on things like asset sales to create revenue.
  • Balance Sheet: N-able has a strong balance sheet, characterized by manageable debt levels and an increasing cash pile. They hold a lot of their assets in form of “cash and marketable securities”, which provides stability and flexibility. The company maintains enough liquidity to cover day-to-day operations and invest in growth activities.
  • Recent Accounting Practices: They use a mix of GAAP and non-GAAP measures to measure performance and also use metrics based on software growth.

Understandability Rating: 2 / 5

While the basic concept of N-able’s business is easy to understand, i.e., providing managed services, a deeper understanding is more complex because of specialized metrics, and some of their operations are not readily available or understandable for a regular investor.

Balance Sheet Health Rating: 4 / 5

N-able has an overall healthy balance sheet with manageable debt, increased cash reserves, and continued improvements in liquidity and solvency ratios, as well as consistent free cash flows. However, it has a relatively high debt/equity ratio, which needs to be looked at.