2023-05-20 02:46:23 ET
Summary
- N-able is a prominent supplier of advanced software for MSPs to remotely manage client environments and provide security and backup solutions.
- The increasing complexity of networks and rising security threats create a growing demand for technology that can automate and expand infrastructure and security management.
- I assign a hold rating to the stock.
Investment Thesis
Small businesses lack the resources to maintain an in-house IT department, so they often rely on external managed service providers (MSPs) for their IT requirements. These MSPs typically handle the needs of multiple companies simultaneously, necessitating advanced software for remote monitoring, management, security, backup, and client relationship management. N-able, Inc. ( NABL ) is a leading software provider that caters to these needs. The separation from SolarWinds presents an opportunity for N-able to concentrate on growth and profitability optimization. Although I remain optimistic on N-able's end markets and demand outlook for the future, the company's valuation is broadly in-line with its peers, and I see limited upside from current levels. Hence, I assign a hold rating to the stock for now.
Q1 2023: Executing through challenging macro
N-able exceeded expectations in terms of revenue and profitability due to the management's strong execution and healthy demand in the MSP sector. The company's performance in the quarter, coupled with a favourable currency outlook, led to an increase in its revenue guidance for the fiscal year 2023. Although NDRR (Net Dollar Retention Rate) was lower at 103% for the quarter, this was partly due to a foreign exchange impact. The company also experienced healthy growth with their larger MSP partners, who now account for 52% of total ARR. N-able's customers did not face as much macroeconomic pressure in the first quarter compared to others in the software industry. Looking ahead to the second half of 2023, the company expects growth to be driven by the success of recent product introductions and the overall increase in MSP demand.
While revenue growth for N-able is getting better, it is still below the projected 15% to 17% YoY growth range set when the company spun out from Solarwinds. The trailing-twelve-month dollar retention rate stands at 103% (108% when adjusted for constant currency), which continues to hinder reported revenue growth. The company is targeting a 110% NDRR with approximately 90% of its business derived from existing customers. Better customer retention, a greater rate of new customer acquisition, and expansion within the installed base remain levers for improving NDRR ahead.
Highly Competitive Position Based on a Strong Technology Platform
N-able has a strong presence in the market, supporting over 25,000 MSPs that cater to more than 500,000 SMBs in the United States. In comparison, this is approximately 8,000 more MSP partners than its close competitor, Datto. Datto's main focus lies in backup and recovery solutions using an on-premise appliance approach, which generates higher revenue but at lower gross margins. On the other hand, N-able's primary strength lies in its remote monitoring and management ((RMM)) platform, along with a strategic emphasis on cloud data backup and recovery. While N-able's professional services automation ((PSA)) offering is excellent, the company further enhances its market position by integrating with other leading PSAs available. This comprehensive platform, coupled with integrations into top security solutions such as its reselling partnership with SentinelOne, has enabled N-able to offer the most comprehensive solution for MSPs.
Large TAM with Growing Demand
According to management, N-able addresses a TAM of around $23 billion, expected to grow to $44 billion by 2025. Based on my view, I anticipate that approximately 25% of SMBs will eventually opt for MSP services. To provide some context, there are over 30 million businesses in the US, with more than 6 million of them consisting of 1 to 100 employees. Additionally, in April 2023 , the Census Bureau reported over 400k million new business formation applications.
Valuation
I believe the issue for NABL is that investors are concerned about the durability of growth serving SMBs. Very few software companies in the space have warranted premium valuations like INTU, but in light of the improving economic backdrop for SMBs, this can change. The change will not likely take place overnight but could be a gradual improvement driven by solid earnings performance. While I maintain a favorable outlook for NABL's markets, valuation relatively in-line with Security peers coupled with revenue deceleration and margin contraction keeps me conservative and hence I assign a hold rating to the stock.
Conclusion
N-able has positioned itself as a prominent supplier of advanced software that empowers managed services providers to remotely oversee and manage client environments, offer security and backup solutions, and manage client interactions. As networks grow more intricate and the number of threats rises, along with the risk of disruptions, there is a growing need for technology that can automate and expand infrastructure and security management. Although I hold an optimistic view of N-able's markets, the company's valuation is comparable to its peers in the security sector, and its revenue growth is slowing down while margins are contracting. Therefore, I assign a hold rating to the stock.
For further details see:
N-able: Empowering Small Businesses Through Advanced MSP Software