Shifting To Long-term Contracts And Cybersecurity Focus Promises Enhanced Revenue Stability And Growth

Key Takeaways

• Transitioning to annual and multiyear contracts aims to create a more predictable revenue stream, improving future growth and retention rates.
  
• Emphasis on cybersecurity and IT management platform modernization indicates a commitment to innovation and meeting SMB demands, likely increasing market share and revenue growth.
  
• Transition to long-term contracts, pricing changes, and geopolitical pressures could negatively impact near-term financials, despite efforts to adapt and grow in a tight market.

Catalysts

Provides cloud-based software solutions for managed service providers in the United States, the United Kingdom, and internationally.

• N-able's strategic initiative to transition from consumption and month-to-month contracts to annual and multiyear agreements underscores a focus on building a more predictable revenue stream, directly influencing the company's future growth and stability by potentially improving revenue predictability and gross retention rates.
  
• The company's investments in direct sales and marketing, especially in high GDP regions like Germany, indicate a strategic approach to capturing larger market segments and driving higher sales, which, in turn, could significantly boost revenue growth.
  
• N-able's emphasis on cybersecurity, demonstrated by the expansion of its security product suite and the introduction of managed detection and response services, taps into the growing demand for cyber protection among SMBs. This focus is likely to increase the company’s market share in the cybersecurity domain, thereby enhancing future revenue streams.
  
• The ongoing modernization of N-able's IT management platform and the strategic deepening of its presence in security highlight a commitment to innovation and market relevance. These initiatives are poised to meet evolving customer demands, particularly in the SMB sector, driving both customer retention and acquisition, which could lead to higher revenue growth.
  
• The introduction and enhancement of data protection solutions and improved product capabilities, such as automated provisioning and PSA integration features, address the increasing demand for comprehensive IT management and data protection among MSPs. By offering value-added services that resonate with the current needs of MSPs, N-able is poised to enhance its net retention rates and realize additional revenue opportunities.

Assumptions

• Analysts are assuming N-able's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $59.5 million (and earnings per share of $0.3) by about September 2027, up from $32.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.0x on those 2027 earnings, down from 71.3x today. This future PE is greater than the current PE for the US Software industry at 35.7x.
• Analysts expect the number of shares outstanding to grow by 1.52% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Risks

• Transitioning customers from consumption and/or month-to-month contracts to annual and multiyear agreements could result in near-term negative financial impact as customers optimize their estates before signing long-term deals, impacting revenue and net margins.
  
• The endpoint security space is maturing, and with MSPs being cost diligent and facing tight customer budgets, this could weigh on growth, potentially affecting revenue.
  
• The pricing and packaging changes, alongside the rationalization related to the company's long-term contract initiative, began materially impacting net revenue retention, which could influence net margins and earnings negatively.
  
• The uncertain macroeconomic environment could lead to moderate near-term pressures on net retention, affecting long-term benefits and possibly impacting earnings and revenue growth.
  
• The necessity to continuously invest in product development and go-to-market strategies in new geographic markets like Germany, and to meet growing security needs, could impact operating expenses, thus affecting net margins and potentially earnings if the expected returns on these investments do not materialize as planned.

Valuation

• The analysts have a consensus price target of $15.38 for N-able based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $17.0, and the most bearish reporting a price target of just $14.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $593.7 million, earnings will come to $59.5 million, and it would be trading on a PE ratio of 61.0x, assuming you use a discount rate of 7.0%.
  
• Given the current share price of $12.42, the analyst's price target of $15.38 is 19.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.