N-Able Inc.
02/26/2026 | Press release | Distributed by Public on 02/26/2026 15:40
Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes thereto included elsewhere in this report. 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 sections entitled "Safe Harbor Cautionary Statement" and "Risk Factors" above 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" below.
Overview
N-able, Inc., a Delaware corporation, together with its subsidiaries, protects businesses from evolving cyberthreats. Our AI powered cybersecurity platform delivers business resilience to more than 500,000 organizations worldwide, leveraging advanced end-to-end capabilities, simplified workflows, market-leading integrations, and flexible deployment options to improve efficiency and drive critical security outcomes. Our partner-first approach pairs our technology with experts, training, and peer-led events that empower customers to be secure, resilient, and successful.
On August 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"). On July 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 on July 12, 2021. As a result of the Distribution, we became an independent public company and our common stock is listed under the symbol "NABL" on the New York Stock Exchange.
Fourth Quarter Financial Highlights
Revenue
Our total revenue was $130.3 million and $116.5 million for the three months ended December 31, 2025 and 2024, respectively.
During the year ended December 31, 2024, we began increasing the proportion of our subscriptions that are long-term committed contracts, as compared to month-to-month contracts (the "Long-Term Contract Initiative"). Under Accounting Standards Update No. 2014-09,"Revenue from Contracts with Customers ("Topic 606")," we recognize revenue for long-term subscriptions when the distinct license is made available to the customer, and support revenue is recognized ratably over the contract term. 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. The Long-Term Contract Initiative results in an increase in point in time subscription revenue, primarily due to the impact of revenue recognition for long-term committed contracts under Topic 606, net of any volume and pricing rationalization when committing to long-term subscriptions and any fluctuations in month-to-month contracts. See Note 2. Summary of Significant Accounting Policiesin the Notes to Consolidated Financial Statements for further details regarding revenue recognized from subscription and other services at a point in time and over time.
Annual Recurring Revenue
Total annual recurring revenue ("ARR") as of December 31, 2025 was $539.7 million, compared to $482.5 million as of December 31, 2024, representing an increase of 11.9%. This increase was primarily due to steady demand for our solutions, including the impact of the November 20, 2024 acquisition of Adlumin.
As of December 31, 2025, we had 2,671 customers with ARR over $50,000 on our platform, up from 2,349 as of December 31, 2024, representing an increase of approximately 14%. Over the same period, customers with over $50,000 of ARR on our platform grew from approximately 57% of our total ARR as of December 31, 2024 to approximately 61% of our total ARR as of December 31, 2025.
We calculate ARR by annualizing the recurring revenue and related usage revenue inclusive of discounts, excluding the impacts of credits and reserves, recognized during the last day of the reporting period from both long-term and month-to-month subscriptions. We use ARR, and in particular ARR attributable to customers with over $50,000 of ARR, to enhance the understanding of our business performance and the growth of our relationships with our customers.
Profitability
Our net (loss) income for the three months ended December 31, 2025 and 2024 was $(7.2) million and $3.3 million, respectively. The decrease in net income for the three months ended December 31, 2025 was due to increases in cost of revenue, sales and marketing expense, interest expense, net, amortization of acquired technologies, research and development expense, other expense, net, general and administrative expense, income tax expense, and amortization of acquired intangibles, partially offset by an increase in revenue. Our Adjusted EBITDA, calculated as net (loss) income of $(7.2) million and $3.3 million for the three months ended December 31, 2025 and 2024, respectively, excluding amortization of acquired intangible assets and developed technology of $6.9 million and $3.9 million, respectively, depreciation expense of $4.8 million and $4.0 million, respectively, income tax expense of $4.5 million and $3.7 million, respectively, interest expense, net of $12.2 million and $7.3 million, respectively, unrealized foreign currency losses of $4.2 million and $2.0 million, respectively, transaction related costs of $0.9 million and $2.4 million, respectively, stock-based compensation expense and related employer-paid payroll taxes of $10.4 million and $10.8 million, respectively, and restructuring costs and other of $2.0 million and $0.7 million, respectively, was $38.6 million and $38.1 million for the three months ended December 31, 2025 and 2024, respectively.
Cash Flow
We have built our business to generate strong cash flow over the long term. For the three months ended December 31, 2025 and 2024, cash flows from operations were $25.3 million and $26.0 million, respectively. Our cash flows from operations were reduced by cash payments for interest of $6.0 million and $6.9 million for the three months ended December 31, 2025 and 2024, respectively, and cash payments for income taxes of $6.5 million and $4.6 million for the three months ended December 31, 2025 and 2024, 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 customer 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 customers. 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 and revenue from professional services. MSP customers 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.
Cost of Revenue
•Cost of Revenue.Cost of revenue consists of public cloud infrastructure and hosting fees, an allocation of overhead costs for our subscription revenue and maintenance services, royalty fees, and personnel costs for technical support and our security operations center. We allocate facilities, depreciation, IT and benefits costs based on headcount.
•Amortization of Acquired Technologies.We amortize to cost of revenue capitalized costs of technologies acquired in connection with business combinations, including the July 1, 2022 acquisition of Spinpanel B.V. ("Spinpanel") and November 20, 2024 acquisition of Adlumin.
Operating Expenses
Operating expenses consist of sales and marketing, research and development and general and administrative expenses as well as amortization of acquired intangibles. Generally, personnel costs are the most significant component of operating expenses and include salaries, bonuses and stock-based compensation and related employer-paid payroll taxes, as well as an allocation of our facilities, depreciation, IT and benefits costs. We had total employees of 1,852 and 1,773 as of December 31,
2025 and 2024, respectively. Our stock-based compensation expense increased during the year ended December 31, 2025 as compared to the prior fiscal year primarily due to the impact of new equity awards that were granted to employees through December 31, 2025, and we expect stock-based compensation expense to continue to increase during the year ended December 31, 2026.
•Sales and Marketing.Sales and marketing expenses primarily consist of related personnel costs, including our sales, marketing, partner success and product management teams, net of capitalized commissions related to long-term committed contracts, as well as an allocation of our facilities, depreciation, IT and benefits costs. 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, marketing development funds, as well as the cost of events for existing and prospective customers. We expect to continue to grow our sales and marketing organization over time to drive new customer adds, retain and expand with existing customers and pursue initiatives designed to help our customers succeed and grow.
•Research and Development.Research and development expenses primarily consist of related personnel costs, including our engineering, development operations, user experience and security operations teams, as well as an allocation of our facilities, depreciation, IT and benefits costs. We expect to continue to grow our research and development organization over time 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 transaction related costs, professional fees and other general corporate expenses, as well as an allocation of our facilities, depreciation, IT and benefits costs. We expect to continue to grow our general and administrative organization over time to support continued growth of our business.
•Amortization of Acquired Intangibles.We amortize to operating expenses capitalized costs of intangible assets primarily acquired in connection with the take private transaction of SolarWinds in early 2016 and subsequent business combinations, including the July 1, 2022 acquisition of Spinpanel and the November 20, 2024 acquisition of Adlumin. Amortization related to the take private transaction of SolarWinds concluded during the three months ended March 31, 2023.
Other Expense, Net
Other expense, net primarily consists of interest expense related to the Credit Agreement and losses resulting from changes in exchange rates on foreign currency denominated accounts, partially offset by gains resulting from changes in exchange rates on foreign currency denominated accounts and dividend income from our money market fund financial assets. See Item 7A. Quantitative and Qualitative Disclosures About Market Riskfor 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 into U.S. dollars. See Item 1A. Risk Factorsand Item 7A. 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 Years Ended December 31, 2025 and 2024
Revenue
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2025
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2024
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Subscription revenue | $ | 506,249 | 99.0 | % | $ | 458,961 | 98.5 | % | $ | 47,288 | |||||||||||||||||||
| Other revenue | 5,181 | 1.0 | 7,186 | 1.5 | (2,005) | ||||||||||||||||||||||||
| Total subscription and other revenue | $ | 511,430 | 100.0 | % | $ | 466,147 | 100.0 | % | $ | 45,283 | |||||||||||||||||||
Total revenue increased $45.3 million, or 9.7%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. We base revenue by geography on the billing address of each customer. Based on customer location, revenue from the United States was approximately 49.6% and 48.2% of total revenue for the years ended December 31, 2025 and 2024, respectively. Revenue from the United Kingdom was approximately 10.2% and 10.5% of total revenue for the years ended December 31, 2025 and 2024, 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 $47.3 million, or 10.3%, for the year ended December 31, 2025 compared to the year ended December 31, 2024. The increase in subscription revenue was primarily driven by growth in sales of our data protection, security and UEM solutions, inclusive of the impact from long-term committed contracts. See Fourth Quarter Financial Highlights for further details regarding the impact of long-term committed contracts during the year ended December 31, 2025. Subscription revenue increased slightly as a percentage of total revenue for the year ended December 31, 2025 compared to the year ended December 31, 2024.
Our annual dollar-based net revenue retention rate for our subscription products was approximately 103% for the years ended December 31, 2025 and 2024, respectively. The 103% dollar-based net revenue retention rate reflects the impact from our pricing and packaging changes, coupled with rationalization related to our Long-Term Contract Initiative, which began materially impacting net revenue retention during the three months ended June 30, 2024. Our calculation includes any expansion revenue and is net of any contraction or cancellation, but excludes credits and revenue attributable to any customer who was not a customer with a paid subscription in the prior period. To calculate our annual dollar-based net revenue retention rate, we first identify the customers with active paid subscriptions in the last month of the prior-year period, or the base customers. We then divide the subscription revenue in the last month of the current-year period attributable to the base customers by the revenue attributable to those base customers 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.
Other Revenue. Other revenue decreased $2.0 million, or 27.9%, for the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily due to a decrease in maintenance revenue of $2.6 million, partially offset by an increase in professional services revenue of $0.6 million. Other revenue decreased slightly as a percentage of total revenue for the year ended December 31, 2025 compared to the year ended December 31, 2024.
Cost of Revenue
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2025
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2024
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Cost of revenue | $ | 100,180 | 19.6 | % | $ | 77,159 | 16.6 | % | $ | 23,021 | |||||||||||||||||||
| Amortization of acquired technologies | 16,874 | 3.3 | 3,520 | 0.8 | 13,354 | ||||||||||||||||||||||||
| Total cost of revenue | $ | 117,054 | 22.9 | % | $ | 80,679 | 17.4 | % | $ | 36,375 | |||||||||||||||||||
Total cost of revenue increased $36.4 million, or 45.1%, in the year ended December 31, 2025 compared to the year ended December 31, 2024 primarily due to an increase in public cloud infrastructure and hosting fees and royalties related to our subscription products of $14.4 million, an increase in amortization of acquired technologies of $13.4 million, related to the November 20, 2024 acquisition of Adlumin, an increase in personnel costs driven by headcount and salary increases of $3.7 million, which includes an increase in stock-based compensation expense of $0.1 million, an increase in depreciation of servers
and amortization of capitalized internal-use software costs of $3.5 million, and an increase in contract services costs of $1.0 million.
Operating Expenses
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2025
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2024
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Sales and marketing | $ | 163,163 | 31.9 | % | $ | 135,592 | 29.1 | % | $ | 27,571 | |||||||||||||||||||
| Research and development | 100,713 | 19.7 | 90,714 | 19.5 | 9,999 | ||||||||||||||||||||||||
| General and administrative | 91,715 | 17.9 | 76,514 | 16.4 | 15,201 | ||||||||||||||||||||||||
| Amortization of acquired intangibles | 1,996 | 0.4 | 278 | 0.1 | 1,718 | ||||||||||||||||||||||||
| Total operating expenses | $ | 357,587 | 69.9 | % | $ | 303,098 | 65.1 | % | $ | 54,489 | |||||||||||||||||||
Sales and Marketing.Sales and marketing expenses increased $27.6 million, or 20.3%, primarily due to an increase in personnel costs driven by headcount and salary increases of $19.7 million, which includes an increase in the amortization of capitalized commissions of $1.5 million and an increase in stock-based compensation expense of $1.4 million, an increase in transaction related costs of $3.3 million, an increase in travel and event-related costs of $3.2 million, and an increase in subscription costs of $1.9 million, partially offset by a decrease in contract services costs of $1.0 million.
Research and Development.Research and development expenses increased $10.0 million, or 11.0%, primarily due to an increase in personnel costs driven by headcount and salary increases of $12.1 million, which includes an increase in stock-based compensation expense of $1.0 million, an increase in contract services costs of $1.9 million, and an increase in subscription costs of $1.4 million, partially offset by an increase in capitalized internal-use software costs of $5.2 million.
General and Administrative. General and administrative expenses increased $15.2 million, or 19.9%, primarily due to a net increase in transaction related costs of $10.2 million, an increase in bad debt expense of $3.0 million, an increase in contract services costs of $1.6 million, an increase in professional fees of $1.1 million, an increase in personnel costs driven by headcount and salary increases of $0.9 million, which is net of a decrease in stock-based compensation expense of $1.2 million, and an increase in property, penalty, and franchise taxes of $0.8 million, partially offset by a decrease in restructuring and other costs of $2.2 million. See Note 3. Acquisitions, Note 7. Fair Value Measurements, and Note 15. Commitments and Contingenciesin the Notes to Consolidated Financial Statementsfor additional information regarding the acquisitions of Spinpanel and Adlumin.
Amortization of Acquired Intangibles. Amortization of acquired intangibles increased $1.7 million, or 618.0%, related to the November 20, 2024 acquisition of Adlumin.
Interest Expense, Net
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2025
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2024
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Interest expense, net | $ | (35,997) | (7.0) | % | $ | (30,031) | (6.4) | % | $ | (5,966) | |||||||||||||||||||
Interest expense, net increased by $6.0 million, or 19.9%, in the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily due to an increase in expense of $5.4 million related to the Adlumin deferred consideration liability and an increase in expense of $3.3 million related to one-time fees incurred in connection with entering into Amendment No. 2 to the Credit Agreement on November 26, 2025, partially offset by a decrease in interest expense of $2.5 million due to the impact of decreased interest rates and lower average outstanding borrowings under the Credit Agreement. Outstanding borrowings under the Credit Agreement bear interest at variable rates, and therefore changes in interest rates will have an impact on our financial results and cash flows. See Note 9. Debtin the Notes to Consolidated Financial Statements for additional information regarding the Credit Agreement.
Other Income, Net
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2025
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2024
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Other income, net | $ | 1,599 | 0.3 | % | $ | 1,931 | 0.4 | % | $ | (332) | |||||||||||||||||||
Other income, net decreased by $0.3 million, or 17.2%, in the year ended December 31, 2025 compared to the year ended December 31, 2024, primarily due to a decrease in dividend income from our money market fund financial assets of $3.3 million, partially offset by an increase in the impact of changes in foreign currency exchange rates of $2.5 million related to various accounts for the period.
Income Tax Expense
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2025
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2024
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Income before income taxes | $ | 2,391 | 0.5 | % | $ | 54,270 | 11.6 | % | $ | (51,879) | |||||||||||||||||||
| Income tax expense | 19,423 | 3.8 | 23,312 | 5.0 | (3,889) | ||||||||||||||||||||||||
| Effective tax rate | 812.3 | % | 43.0 | % | 769.3 | % | |||||||||||||||||||||||
Our income tax expense for the year ended December 31, 2025 decreased by $3.9 million as compared to the year ended December 31, 2024. The effective tax rate increased to 812.3% for the year ended December 31, 2025 primarily due to an increase in the amount of the unbenefited loss in the United States, partially offset by a decrease in income taxes on income outside of the United States. For additional discussion about our income taxes, see Note 14. Income Taxes in the Notes to Consolidated Financial Statements.
Comparison of the Years Ended December 31, 2024 and 2023
Revenue
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2024
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2023
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Subscription Revenue | $ | 458,961 | 98.5 | % | $ | 412,072 | 97.7 | % | $ | 46,889 | |||||||||||||||||||
| Other revenue | 7,186 | 1.5 | 9,808 | 2.3 | (2,622) | ||||||||||||||||||||||||
| Total subscription and other revenue | $ | 466,147 | 100.0 | % | $ | 421,880 | 100.0 | % | $ | 44,267 | |||||||||||||||||||
Total revenue increased $44.3 million, or 10.5%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. We base revenue by geography on the billing address of each customer. Based on customer location, revenue from the United States was approximately 48.2% and 48.8% of total revenue for the years ended December 31, 2024 and 2023, respectively. Revenue from the United Kingdom was approximately 10.5% and 10.2% of total revenue for the years ended December 31, 2024 and 2023, 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 $46.9 million, or 11.4%, for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in subscription revenue was primarily driven by growth in sales of our data protection, security and unified endpoint management solutions, inclusive of the net positive impact from long-term committed contracts. Subscription revenue increased slightly as a percentage of total revenue for the year ended December 31, 2024 compared to the year ended December 31, 2023.
Our annual dollar-based net revenue retention rate for our subscription products was approximately 103% and 110% for the years ended December 31, 2024 and 2023, respectively. The reduction in the dollar-based net revenue retention rate reflects the pressure from our pricing and packaging changes, coupled with rationalization related to our Long-Term Contract Initiative, which began materially impacting net revenue retention during the three months ended June 30, 2024.
Other Revenue. Other revenue decreased $2.6 million, or 26.7%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to a decrease in maintenance and professional services revenue. Other revenue decreased slightly as a percentage of total revenue for the year ended December 31, 2024 compared to the year ended December 31, 2023.
Cost of Revenue
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2024
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2023
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Cost of revenue | $ | 77,159 | 16.6 | % | $ | 66,369 | 15.7 | % | $ | 10,790 | |||||||||||||||||||
| Amortization of acquired technologies | 3,520 | 0.8 | 1,839 | 0.4 | 1,681 | ||||||||||||||||||||||||
| Total cost of revenue | $ | 80,679 | 17.4 | % | $ | 68,208 | 16.1 | % | $ | 12,471 | |||||||||||||||||||
Total cost of revenue increased $12.5 million, or 18.3%, in the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to an increase in public cloud infrastructure and hosting fees and royalties related to our subscription products of $7.0 million, an increase in depreciation of servers and amortization of capitalized internal-use software costs of $3.0 million, an increase in amortization of intangible assets acquired in connection with business combinations of $1.7 million, an increase in personnel costs driven by headcount and salary increases of $0.4 million, which includes an increase in stock-based compensation expense of $0.2 million, an increase in contract services costs of $0.3 million, and an increase in allocated facilities and IT costs of $0.1 million.
Operating Expenses
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2024
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2023
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Sales and marketing | $ | 135,592 | 29.1 | % | $ | 134,691 | 31.9 | % | $ | 901 | |||||||||||||||||||
| Research and development | 90,714 | 19.5 | 78,180 | 18.5 | 12,534 | ||||||||||||||||||||||||
| General and administrative | 76,514 | 16.4 | 69,885 | 16.6 | 6,629 | ||||||||||||||||||||||||
| Amortization of acquired intangibles | 278 | 0.1 | 597 | 0.1 | (319) | ||||||||||||||||||||||||
| Total operating expenses | $ | 303,098 | 65.1 | % | $ | 283,353 | 67.1 | % | $ | 19,745 | |||||||||||||||||||
Sales and Marketing.Sales and marketing expenses increased $0.9 million, or 0.7%, primarily due to an increase in personnel costs driven by headcount and salary increases of $7.4 million, which includes an increase in stock-based compensation expense of $0.3 million, an increase in travel and event-related costs of $1.7 million, an increase in allocated facilities and IT costs of $0.3 million, an increase in restructuring and other costs of $0.3 million, and an increase in transaction related costs of $0.2 million, partially offset by an increase in commissions related to long-term committed contracts of $7.4 million, which is net of the recognition of $0.4 million of amortization expense for capitalized commissions, and a decrease in advertising expense of $1.6 million.
Research and Development.Research and development expenses increased $12.5 million, or 16.0%, primarily due to an increase in personnel costs driven by headcount and salary increases of $6.5 million, which includes an increase in stock-based compensation expense of $1.6 million, an increase in subscription costs of $2.1 million, an increase in allocated facilities and IT
costs of $1.9 million, a decrease in capitalized internal-use software costs of $1.4 million, an increase in contract services costs of $0.2 million, and an increase in amortization expense of $0.2 million.
General and Administrative. General and administrative expenses increased $6.6 million, or 9.5%, primarily due to an increase in transaction related costs of $4.7 million, which is net of gains on contingent consideration related to the July 1, 2022 acquisition of Spinpanel of $3.7 million and the November 20, 2024 acquisition of Adlumin of $2.6 million, and an increase in expense of $1.8 million related to the Adlumin deferred consideration liability, an increase in rent expense of $2.4 million, an increase in restructuring and other costs of $2.0 million, and an increase in professional fees of $1.2 million, partially offset by a decrease in allocated facilities and IT costs of $2.2 million, a decrease in costs associated with our separation from SolarWinds of $0.7 million, and a decrease in director and officer liability insurance costs of $0.6 million. See Note 3. Acquisitions, Note 7. Fair Value Measurements, and Note 15. Commitments and Contingenciesin the Notes to Consolidated Financial Statementsfor additional information regarding the acquisitions of Spinpanel and Adlumin.
Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $0.3 million, or 53.4%, primarily due to a decrease in expense of $0.6 million related to the conclusion of amortization of intangible assets acquired in connection with the take private transaction of SolarWinds in early 2016 during the three months ended March 31, 2023, partially offset by an increase in expense of $0.2 million related to the November 20, 2024 acquisition of Adlumin.
Interest Expense, Net
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2024
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2023
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Interest expense, net | $ | (30,031) | (6.4) | % | $ | (30,252) | (7.2) | % | $ | 221 | |||||||||||||||||||
Interest expense, net decreased by $0.2 million, or 0.7%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to the impact of decreased interest rates and lower outstanding borrowings under the Credit Agreement. Outstanding borrowings under the Credit Agreement bear interest at variable rates, and therefore changes in interest rates will have an impact on our financial results and cash flows. See Note 9. Debtin the Notes to Consolidated Financial Statements for additional information regarding the Credit Agreement.
Other Income, Net
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2024
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2023
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||||||||||||||
| Other income, net | $ | 1,931 | 0.4 | % | $ | 4,259 | 1.0 | % | $ | (2,328) | |||||||||||||||||||
Other income, net decreased by $2.3 million, or 54.7%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to a decrease in the impact of changes in foreign currency exchange rates of $3.8 million related to various accounts for the period, partially offset by an increase in dividend income from our money market fund financial assets of $1.9 million.
Income Tax Expense
| Year Ended December 31, | |||||||||||||||||||||||||||||
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2024
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2023
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| Amount | Percentage of Revenue | Amount | Percentage of Revenue | Change | |||||||||||||||||||||||||
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| Income before income taxes | $ | 54,270 | 11.6 | % | $ | 44,326 | 10.5 | % | $ | 9,944 | |||||||||||||||||||
| Income tax expense | 23,312 | 5.0 | 20,914 | 5.0 | 2,398 | ||||||||||||||||||||||||
| Effective tax rate | 43.0 | % | 47.2 | % | (4.2) | % | |||||||||||||||||||||||
Our income tax expense for the year ended December 31, 2024 increased by $2.4 million as compared to the year ended December 31, 2023. The effective tax rate decreased to 43.0% for the year ended December 31, 2024, primarily due to a decrease in income taxes on income outside of the United States, partially offset by an increase in the amount of the unbenefited
loss in the United States. For additional discussion about our income taxes, see Note 14. Income Taxes in 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, transaction related adjustments, spin-off costs related to 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, transaction related costs, spin-off costs and restructuring costs and other. We define non-GAAP operating margin as non-GAAP operating income divided by total revenue. 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 Technologies and Intangible Assets. We provide non-GAAP information that excludes expenses related to purchased technologies and 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 technologies and 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.
•Transaction Related Costs. We exclude certain expense items resulting from proposed and completed acquisitions, dispositions and similar transactions, 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, such proposed and completed transactions 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 transaction 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 peer companies with different transaction related activities, 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.
| Year Ended December 31, | |||||||||||||||||
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2025
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2024
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2023
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| (in thousands, except margin data) | |||||||||||||||||
| GAAP operating income | $ | 36,789 | $ | 82,370 | $ | 70,319 | |||||||||||
| Stock-based compensation expense and related employer-paid payroll taxes | 48,355 | 47,741 | 45,093 | ||||||||||||||
| Amortization of acquired technologies | 16,874 | 3,520 | 1,839 | ||||||||||||||
| Amortization of acquired intangibles | 1,996 | 278 | 597 | ||||||||||||||
| Transaction related costs | 18,207 | 4,146 | (1,096) | ||||||||||||||
| Spin-off costs | - | 51 | 735 | ||||||||||||||
| Restructuring costs and other | 2,668 | 4,761 | 2,113 | ||||||||||||||
| Non-GAAP operating income | $ | 124,889 | $ | 142,867 | $ | 119,600 | |||||||||||
| GAAP operating margin | 7.2 | % | 17.7 | % | 16.7 | % | |||||||||||
| Non-GAAP operating margin | 24.4 | % | 30.6 | % | 28.3 | % | |||||||||||
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), transaction 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 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 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 implication 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.
| Year Ended December 31, | |||||||||||||||||
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2025
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2024
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2023
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| (in thousands, except margin data) | |||||||||||||||||
| Net (loss) income | $ | (17,032) | $ | 30,958 | $ | 23,412 | |||||||||||
| Amortization | 25,699 | 9,769 | 6,396 | ||||||||||||||
| Depreciation | 18,358 | 15,956 | 15,227 | ||||||||||||||
| Income tax expense | 19,423 | 23,312 | 20,914 | ||||||||||||||
| Interest expense, net | 35,997 | 30,031 | 30,252 | ||||||||||||||
| Unrealized foreign currency losses | 1,565 | 2,702 | 358 | ||||||||||||||
| Transaction related costs | 18,207 | 4,146 | (1,096) | ||||||||||||||
| Spin-off costs | - | 51 | 735 | ||||||||||||||
| Stock-based compensation expense and related employer-paid payroll taxes | 48,355 | 47,741 | 45,093 | ||||||||||||||
| Restructuring costs and other | 2,668 | 4,761 | 2,113 | ||||||||||||||
| Adjusted EBITDA | $ | 153,240 | $ | 169,427 | $ | 143,404 | |||||||||||
| Adjusted EBITDA margin | 30.0 | % | 36.3 | % | 34.0 | % | |||||||||||
Liquidity and Capital Resources
Cash and cash equivalents were $111.8 million as of December 31, 2025. As our sales and operating cash flows are primarily generated by international entities in the United Kingdom and Canada, our international subsidiaries held approximately $101.0 million of cash and cash equivalents, of which 74.0%, 15.8% and 4.6% were held in United 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 our United States entities in a tax-efficient manner. The U.S. Tax Cuts and Jobs Act of 2017 imposed a mandatory transition tax on accumulated foreign earnings and eliminates United States federal income taxes on foreign subsidiary distributions. As a result, our earnings in foreign jurisdictions are generally available for distribution to the United States without significant U.S. tax consequences.
Our primary source of cash for funding operations and growth has been through cash provided by operating activities. Given the uncertainty of rapidly changing market and economic conditions, we continue to evaluate the nature and extent of the impact to our business and financial position. However, despite this uncertainty, we 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, on July 19, 2021, certain subsidiaries of the Company entered into a credit agreement (the "Credit Agreement") with JPMorgan Chase, Bank, N.A. as administrative agent and collateral agent and the lenders from time to time party thereto. We subsequently entered into Amendment No. 1 to the Credit Agreement on June 26, 2023, and Amendment No. 2 to the Credit Agreement on November 26, 2025. The Credit Agreement provides for $460.0 million of first lien secured credit facilities (the "Credit Facilities"), consisting of a $60.0 million revolving credit facility (the "Revolving Facility"), and a $400.0 million term loan facility (the "Term Loan"). We had total borrowings of $393.9 million and $333.1 million as of December 31, 2025 and 2024, respectively, net of debt issuance costs of $6.1 million and $5.5 million, respectively. In addition to our total borrowings, we are also committed to cash interest payments of approximately $178.4 million over the term of the Credit Agreement, based upon an interest rate as of December 31, 2025 of 6.59%. See Note 9. Debtin the Notes to Consolidated Financial Statementsfor further details regarding the Credit Agreement.
In addition to committed payments related to the Credit Agreement, we are also committed to purchase obligations of $243.2 million through the fiscal year ended December 31, 2029, and remaining operating lease liabilities of $36.5 million through the fiscal year ended December 31, 2032. Purchase obligations represent outstanding purchase orders for items including public cloud infrastructure and hosting fees, royalty fees, marketing activities, software license and support fees, and accounting and legal fees. On October 4, 2023, we entered into a non-cancellable royalty agreement for third-party cloud-based platform and hosting services, with an effective date of September 1, 2023. Our total commitment under this agreement is $39.0 million, with royalty fees of $10.0 million payable over the next 0.7 years as of December 31, 2025. See Note 6. Leasesin the Notes to Consolidated Financial Statementsfor further details regarding our operating leases.
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 year ended December 31, 2025, 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.
Summary of Cash Flows
Summarized cash flow information is as follows:
| Year Ended December 31, | |||||||||||
| 2025 | 2024 | ||||||||||
| (in thousands) | |||||||||||
| Net cash provided by operating activities | $ | 93,202 | $ | 79,437 | |||||||
| Net cash used in investing activities | (28,958) | (122,421) | |||||||||
| Net cash used in financing activities | (40,625) | (22,595) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 3,022 | (2,273) | |||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 26,641 | $ | (67,852) | |||||||
Operating Activities
Our primary source of cash from operating activities is cash collections from our customers. We expect cash inflows from operating activities to be affected by the timing of our sales and the consumption of our solutions by our customers. Our primary uses of cash from operating activities are for personnel-related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities.
For the year ended December 31, 2025 as compared to the year ended December 31, 2024, the increase in cash provided by operating activities was primarily due to a decrease in recoverable taxes, a decrease in other long-term assets, a decrease in current contract assets, an increase in accrued liabilities and other, and an increase in accounts payable, partially offset by an increase in prepaid and other current assets, an increase in accounts receivable, a decrease in income taxes payable, an increase in income taxes receivable, a decrease in deferred revenue, an increase in operating lease right-of-use assets, net, and a decrease in other long-term liabilities. The net cash outflows of $2.2 million and $21.0 million resulting from the changes in our operating assets and liabilities for the years ended December 31, 2025 and 2024, respectively, excluding the changes noted above, were primarily due to the timing of sales, cash payments and receipts.
Investing Activities
Investing cash flows consist of cash used for acquisitions, net of cash acquired, capital expenditures, intangible assets and cash provided by the return of deposits in escrow. Our capital expenditures principally relate to purchases of servers for cloud infrastructure primarily to support our data protection solutions, as well as leasehold improvements, computers and equipment to support our domestic and international office locations. Purchases of intangible assets consist of capitalized research and development costs.
Net cash used in investing activities decreased for the year ended December 31, 2025 as compared to the year ended December 31, 2024, primarily due to a decrease in acquisitions, net of cash acquired and an increase in the return of deposits in escrow related to the November 20, 2024 acquisition of Adlumin, partially offset by an increase in capitalized research and development costs related to internal-use software and an increase in capital expenditures to support our domestic and international office locations.
Financing Activities
Financing cash flows consist of payments of tax withholding obligations related to restricted stock, repurchases of our common stock, the exercise of stock options, proceeds from the issuance of common stock under the Employee Stock Purchase Plan, deferred acquisition payments, repayments of borrowings from the Credit Agreement, net proceeds from the Credit Agreement, and payments of debt issuance costs.
Net cash used in financing activities increased for the year ended December 31, 2025 as compared to the year ended December 31, 2024, primarily due to an increase in deferred acquisition payments related to the November 20, 2024 acquisition of Adlumin, an increase in repurchases of our common stock, a decrease in proceeds from the issuance of common stock under the Employee Stock Purchase Plan, and a decrease in proceeds from exercises of stock options, partially offset by an increase in
net proceeds from the Credit Agreement, a decrease in payments of tax withholding obligations related to restricted stock, and a decrease in repayments of borrowings from the Credit Agreement.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in conformity with GAAP and require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected, perhaps materially.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application, while in other cases, management's judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that these accounting policies requiring significant management judgment and estimates are critical to understanding our historical and future performance, as these policies relate to the more significant areas of our financial results. These critical accounting policies are:
•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;
•revenue recognition; and
•income taxes.
Goodwill
Our goodwill was derived from the take private transaction of SolarWinds in February 2016 and subsequent business combinations, where the purchase price exceeded the fair value of the net identifiable assets acquired. The N-able legal entities were managed as a single reporting unit of the Parent prior to the Separation and Distribution and N-able continues to be managed as a single reporting unit following the Separation and Distribution. Goodwill is tested for impairment at least annually during the fourth quarter or sooner when circumstances indicate an impairment may exist. An impairment of goodwill is recognized when the carrying amount of a reporting unit exceeds its fair value. For purposes of the annual impairment test, we assess qualitative factors to determine if it is more likely than not that goodwill might be impaired and whether it is necessary to perform the quantitative impairment test which considers the fair value of the reporting unit compared with the carrying value on the date of the test. Qualitative factors include industry and market considerations, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers and other relevant events and circumstances affecting the reporting unit. We may also elect to bypass the qualitative assessment and perform a quantitative assessment.
In October 2025, we performed a quantitative assessment for our single reporting unit. For the quantitative assessment, we compared the fair value of the reporting unit to its carrying value. As of October 1, 2025, the fair value of the reporting unit exceeded its carrying value.
Fair value determination of our reporting unit requires considerable judgment and is sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the qualitative goodwill impairment test will prove to be an accurate prediction of future results. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our goodwill, the revision could result in a non-cash impairment charge that could have a material impact on our financial results.
Identifiable Intangible Assets
We evaluate long-lived assets, including finite-lived intangible assets and other assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. Events or changes in circumstances that could result in an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, and significant negative industry or economic trends. If an event occurs that would cause us to revise our estimates and assumptions used in analyzing the value of our property and equipment or our finite-lived intangibles and other assets, that revision could result in a non-cash impairment charge that could have a material impact on our financial results.
Revenue Recognition
We primarily generate revenue from the sale of subscriptions to our SaaS solutions and subscription-based term licenses and, to a lesser extent, from the sale of maintenance services associated with our perpetual licenses. We recognize revenue when we transfer promised goods or services in amounts that reflect the consideration to which the entity expects to be entitled
in exchange for those goods or services. This is determined by following a five-step process which includes (1) identifying the agreement with a customer, (2) identifying the performance obligations in the agreement, (3) determining the transaction price, (4) allocating the transaction price, and (5) recognizing revenue when or as we satisfy a performance obligation, as described below.
We identify performance obligations in an agreement based on the goods and services that will be transferred to the customer that are separately identifiable from other promises in the agreement, or distinct. If not considered distinct, the promised goods or services are combined with other goods or services and accounted for as a combined performance obligation. Determining the distinct performance obligations in an agreement requires judgment. Our performance obligations primarily relate to our SaaS solutions, subscription-based term licenses and maintenance support including unspecified upgrades or enhancements to new versions of our solutions.
We allocate the transaction price of the agreement to each distinct performance obligation based on a relative stand-alone selling price basis. Determining stand-alone selling prices for our performance obligations requires judgment and are based on multiple factors primarily including historical selling prices and discounting practices for our solutions and services. We review the stand-alone selling price for our performance obligations periodically and update, if needed, to ensure that the methodology utilized reflects our current pricing practices.
Income Taxes
We use the liability method of accounting for income taxes as set forth in the authoritative guidance for accounting for income taxes. Under this method, we recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the respective carrying amounts and tax basis of our assets and liabilities. For the period beginning July 20, 2021, the income tax provision was computed on a post-Separation and Distribution basis following the authoritative guidance reflected in ASC 740.
In calculating our effective tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions.
The guidance on accounting for uncertainty in income taxes requires us to identify, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of these positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities. Although we believe that our estimates and judgments are reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities. To the extent that the actual results of these matters is different than the amounts recorded, such differences will affect our effective tax rate. We recognize interest expense and penalties on uncertain tax positions as a component of our income tax expense. ASC 740 defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the tax authority based solely on its technical merits as of the reporting date. If a tax position is not considered more-likely-than-not to be sustained solely on its technical merits, no benefits of the position are to be recognized in the financial statements. If a tax position meets the more-likely-than-not threshold, it should be measured based on the largest benefit that is more than 50 percent likely to be realized.
We establish valuation allowances when necessary to reduce deferred tax assets to the amounts expected to be realized. On a quarterly basis, we evaluate the need for, and the adequacy of, valuation allowances based on the expected realization of our deferred tax assets. The factors used to assess the likelihood of realization include our latest forecast of future taxable income, available tax planning strategies that could be implemented, reversal of taxable temporary differences and carryback potential to realize the net deferred tax assets. During the year ended December 31, 2025, we recorded a valuation allowance of $5.8 million in the U.S. and $0.5 million outside the U.S. During the year ended December 31, 2024, we recorded a valuation allowance of $2.4 million in the U.S. and $0.5 million outside the U.S. If, based upon the weight of all available evidence, it is more likely than not (a likelihood of greater than 50%) that some portion or all of the deferred tax assets will not be realized, a valuation allowance must be recorded to reduce the deferred tax assets.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policiesin the Notes to Consolidated Financial Statementsin Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, which is incorporated herein by reference.
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