Summary
- N-able's 4Q22 results exceeded expectations with solid growth and profitability, driven by high demand for MSPs and better penetration within existing customers.
- Overall, the positive outlook for NABL's growth in 2023 remains intact. However, investors should keep an eye on NABL's LTM dollar retention metric.
- I continue to expect the need for automated and scalable infrastructure and security management to rise.
Recommendation
N-able ( NABL ) solution, as I mentioned in my previous post , is tailored to meet the requirements of managed service providers (MSPs) in terms of remote monitoring and management of client environments, provisioning of security and backup, and administration of client relationships. Small businesses often lack the capital to hire full-time IT departments with the manpower to deal with the wide range of IT problems that arise and need to be fixed. MSP business models aim to fill this void. MSPs cater to this setting by providing scalable, high-end technology and services across an extensive network. I expect the need for automated and scalable infrastructure and security management to rise as network complexity, threat volume, and disruption probability all rise. With the 4Q22 results out, I continue to see potential in NABL's markets and hold a positive (buy) outlook for the stock.
Thoughts on results
NABL pulled off a solid beat and raise quarter. With MSP demand remaining high and the company maintaining healthy cost discipline, NABL exceeded expectations in both growth and profitability this quarter. Despite maintaining high single-digit growth at 7% y/y, embedded in the growth was ~5 ppts of FX headwind, which I expect to moderate in FY23. Net dollar retention was more or less stable with modest drop (LTM basis), gross revenue retention was up, and the number of MSPs on the platform with an annual recurring revenue of more than $50,000 was up solidly, despite the negative effects of currency fluctuations. In 2023, I believe secular tailwinds will continue to support rising demand for MSP, which drives growth to NABL solutions. I also expect increase adoption from the new products launched in 2022, which will help NABL's growth as the company progresses through 2023.
Latest earnings highlights
Sales of $95.8 million in 4Q22 were 2.3% higher than was expected by consensus. $26.6 million operating profit greatly surpassed the expected $17.9M. With regards to growth continual secular tailwinds across the company's MSP customer base, as well as better penetration within existing customers, contributed to it. Meanwhile, the improved profitability resulted from a combination of factors, including cost rationalization and a 5% RIF implemented during the quarter. It's also important to note that the quarter saw an increase in attach rates within the installed base, which led to better traction with higher-value MSP customers. The percentage of ARR contributed by partners with >$50k in ARR increased to 51% from 47% in the previous year.
What to pay attention to
About 90% of NABL's business comes from existing customers, so keeping and growing that base is crucial to the company's success. In light of this, my concerns about the strength of underlying demand were reinforced when I observed a further decline in LTM dollar retention to 103% from 104% in the previous quarter and 110% in the previous year. That said, projections for FY23 assume retention rates will be relatively unchanged from FY22 levels. I believe this metric should improve moving forward and investors should definitely keep an eye on this development. The introduction of NABL's six new products in 2022 has fueled my belief that dollar retention rates will improve. I expect NABL to use this new products to further installed base.
Capital allocation
Even though it reduced its workforce in the fourth quarter, management said it plans to add workers in 2023. There will be a greater number of employees in 2023 than there were in 2022, with the increase coming primarily from quota-carrying sales representatives and research and development workers. While this might increase the cost base, I believe it is alright as the hired personnel will drive growth accordingly. Something else I noticed is that taxes and interest continue to be a drain on cash flow, and they are both expected to rise this year. Consequently, we might see a drop in FCF margin this year.
Guidance
Midpoint revenue guidance of $410 million for FY23 is above streets estimate of $397 million. Additionally, the midpoint of the range of adjusted EBITDA margin guidance at 30.2% is also higher than the consensus estimates of 29.6%.
Summary
Overall, this was a great quarter for NABL in my opinion, and it has reinforced my positive (buy) outlook for the stock. With high demand for MSPs and expected increasing adoption of NABL's new products, I expect growth to continue in 2023. The thing to note is that NABL's LTM dollar retention declined, and investors should keep an eye on this metric moving forward.
For further details see:
N-able: To Continue Enabling MSP To Strive