10-Q 1 swi-20220930.htm 10-Q swi-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission File Number: 001-38711
SolarWinds Corporation
(Exact name of registrant as specified in its charter)
Delaware 81-0753267
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification No.)
7171 Southwest Parkway
Building 400
Austin, Texas 78735
(512) 682.9300
(Address and telephone number of principal executive offices) 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, $0.001 par valueSWINew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     þ Yes   ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  þ  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes   þ  No
On November 3, 2022, 161,672,213 shares of common stock, par value $0.001 per share, were outstanding.



SOLARWINDS CORPORATION

Table of Contents
PART I - FINANCIAL INFORMATION
Page
Item 1.
Item 2.
Item 3.
Item 4.
PART II - OTHER INFORMATION
Item 1.
Item 1A.
Item 2.
Item 6.
Certifications

2


Safe Harbor Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements may be signified by terms such as “aim,” “anticipate,” “believe,” “continue,” “expect,” “feel,” “intend,” “estimate,” “seek,” “plan,” “may,” “can,” “could,” “should,” “will,” “would” or similar expressions and the negatives of those terms. In this report, forward-looking statements include statements regarding our financial projections, future financial performance and plans and objectives for future operations including, without limitation, the following:
expectations regarding our financial condition and results of operations, including revenue, revenue growth, revenue mix, cost of revenue, operating expenses, operating income, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA and adjusted EBITDA margin, cash flows and effective income tax rate;
expectations regarding the impact of the cyberattack on our Orion Software Platform and internal systems (the "Cyber Incident") on our business and reputation, the success of our related mitigation and remediation efforts and the additional costs, liabilities and other adverse consequences that we may incur as a result of the Cyber Incident;
expectations regarding the impact the government investigations and litigation resulting from the Cyber Incident may have on our business;
expectations regarding investment in product development and our expectations about the results of those efforts and our ability to convert our customers to subscription products;
expectations regarding our evolution from monitoring to observability;
expectations regarding hiring additional personnel globally in the areas of sales and marketing and research and development;
expectations regarding our ability to refinance our long-term indebtedness;
expectations regarding the impact of macroeconomic conditions, including the war in Ukraine, inflation and the global COVID-19 pandemic on our business and financial results;
intentions regarding our international earnings and investment of those earnings in international operations;
expectations regarding our capital expenditures;
expectations concerning acquisitions and opportunities resulting from our acquisitions;
expectations regarding the impact and benefits of the spin-off of the N-able business; and
our beliefs regarding the sufficiency of our cash and cash equivalents, cash flows from operating activities and borrowing capacity.
Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially and adversely different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following:
numerous risks related to the Cyber Incident, including with respect to (1) the discovery of new or different information regarding the Cyber Incident, (2) the possibility that our mitigation and remediation efforts with respect to the Cyber Incident may not be successful, (3) the possibility that additional confidential, proprietary, or personal information, including information of SolarWinds’ current or former employees and customers, was accessed and exfiltrated as a result of the Cyber Incident, (4) numerous financial, legal, reputational and other risks to us related to the Cyber Incident, including risks that the incident or SolarWinds’ response thereto, may result in the loss, compromise or corruption of data and proprietary information, loss of business as a result of termination or non-renewal of agreements or reduced purchases or upgrades of our products, reputational damage adversely affecting customer, partner and vendor relationships and investor confidence, increased attrition of personnel and distraction of key and other personnel, U.S. or foreign regulatory investigations and enforcement actions, including as a result of the “Wells Notice” provided to the Company by the U.S. Securities and Exchange Commission on October 28, 2022, exposure to litigation and other proceedings, including as a result of the proposed settlement of the previously disclosed consolidated putative class action lawsuit against the Company, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations, significant costs for remediation and the incurrence of other liabilities, (5) risks that our insurance coverage may not be available or sufficient to compensate for all liabilities we incur related to these matters and (6) the possibility that our steps to secure our internal environment, improve our product development environment and ensure the security and integrity of the software that we deliver to our customers may not be successful or sufficient to protect against future threat actors or attacks or be perceived by existing and prospective customers as sufficient to address the harm caused by Cyber Incident;
other risks related to cyber security, including that we may experience other security incidents or have vulnerabilities in our systems and services exploited, whether through the actions or inactions of our employees or otherwise, which may
3


result in compromises or breaches of our and our customers’ systems or, theft or misappropriation of our and our customers’ confidential, proprietary or personal information, as well as exposure to legal and other liabilities, including the related risk of higher customer, employee and partner attrition and the loss of key personnel, as well as negative impacts to our sales, renewals and upgrades;
risks related to the evolving breadth of our sales motion and challenges, investments and additional costs associated with increased selling efforts toward enterprise customers and adopting a subscription first approach;
risks relating to increased investments in, and the timing of, our transformation from monitoring to observability;
regulatory risks, including risks related to evolving regulation of artificial intelligence, machine learning and the receipt, collection, storage, processing and transfer of data;
potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity;
any of the following factors either generally or as a result of the impacts of the Cyber Incident, the war in Ukraine, inflation or the global COVID-19 pandemic on the global economy or on our business operations and financial condition or on the business operations and financial conditions of our customers, their end-customers and our prospective customers;
reductions in information technology spending or delays in purchasing decisions by our customers, their end-customers and our prospective customers;
the inability to sell products to new customers or to sell additional products or upgrades to our existing customers;
any decline in our renewal or net retention rates;
the inability to generate significant volumes of high-quality sales leads from our digital marketing initiatives and convert such leads into new business at acceptable conversion rates;
the timing and adoption of new products, product upgrades or pricing model changes by us or our competitors;
changes in interest rates and foreign exchange rates;
risks associated with our international operations; and
ongoing sanctions and disruptions resulting from the war in Ukraine;
the possibility that our operating income could fluctuate and may decline as percentage of revenue as we make further expenditures to expand our operations in order to support additional growth in our business;
risks associated with the estimates and assumptions used in our impairment testing;
our ability to compete effectively in the markets we serve and the risks of increased competition as we enter new markets;
risks related to the spin-off of the N-able business into a newly created and separately traded public company, including that we could incur significant liability if the separation is determined to be a taxable transaction, potential indemnification liabilities incurred in connection with the separation could materially affect our business and financial results and N-able may fail to perform under various transaction agreements that were executed as part of the separation;
our ability to attract, retain and motivate employees;
our inability to successfully identify, complete and integrate acquisitions and manage our growth effectively;
risks associated with our status as a controlled company; and
such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially and adversely from those anticipated in these forward-looking statements, even if new information becomes available in the future.
Investors and others should note that we announce material information to our investors using our investor relations website (https://investors.solarwinds.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about our company, our business and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website.
4


In this report “SolarWinds,” “Company,” “we,” “us” and “our” refer to SolarWinds Corporation and its consolidated subsidiaries. On July 19, 2021, we completed the previously announced separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. Unless otherwise indicated, all references to the Company exclude the N-able business for all periods presented.
5


PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SolarWinds Corporation
Condensed Consolidated Balance Sheets
(In thousands, except share and per share information)
(Unaudited)
September 30,December 31,
20222021
Assets
Current assets:
Cash and cash equivalents$441,661 $732,116 
Short-term investments50,878  
Accounts receivable, net of allowances of $900 and $476 as of September 30, 2022 and December 31, 2021, respectively
92,621 95,095 
Income tax receivable1,013 1,114 
Prepaid and other current assets49,113 30,515 
Total current assets635,286 858,840 
Property and equipment, net26,987 29,722 
Operating lease assets63,977 74,318 
Deferred taxes124,818 144,162 
Goodwill2,328,085 3,308,405 
Intangible assets, net255,880 342,563 
Other assets, net43,479 34,117 
Total assets$3,478,512 $4,792,127 
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable$9,589 $7,327 
Accrued liabilities and other60,334 41,328 
Current operating lease liabilities14,898 14,382 
Accrued interest payable261 153 
Income taxes payable15,016 3,086 
Current portion of deferred revenue313,363 327,701 
Current debt obligation19,900 19,900 
Total current liabilities433,361 413,877 
Long-term liabilities:
Deferred revenue, net of current portion36,557 34,968 
Non-current deferred taxes6,785 16,918 
Non-current operating lease liabilities62,060 74,543 
Other long-term liabilities74,843 93,156 
Long-term debt, net of current portion1,564,441 1,870,769 
Total liabilities2,178,047 2,504,231 
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 161,338,727 and 159,176,042 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
161 159 
Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
  
Additional paid-in capital2,612,665 2,566,783 
Accumulated other comprehensive income (loss)(113,007)1,306 
Accumulated deficit(1,199,354)(280,352)
Total stockholders’ equity1,300,465 2,287,896 
Total liabilities and stockholders’ equity$3,478,512 $4,792,127 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6


SolarWinds Corporation
Condensed Consolidated Statements of Operations
(In thousands, except per share information)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Revenue:
Subscription$42,248 $32,293 $117,975 $90,218 
Maintenance114,381 119,742 343,848 360,909 
Total recurring revenue156,629 152,035 461,823 451,127 
License22,767 29,236 70,475 80,788 
Total revenue179,396 181,271 532,298 531,915 
Cost of revenue:
Cost of recurring revenue16,563 17,949 49,854 49,331 
Amortization of acquired technologies3,628 39,882 24,503 120,397 
Total cost of revenue20,191 57,831 74,357 169,728 
Gross profit159,205 123,440 457,941 362,187 
Operating expenses:
Sales and marketing64,813 58,642 190,472 174,384 
Research and development22,562 26,285 68,092 78,474 
General and administrative 42,558 28,551 116,505 90,135 
Amortization of acquired intangibles13,045 13,784 39,387 41,704 
Goodwill impairment278,706  891,101  
Total operating expenses421,684 127,262 1,305,557 384,697 
Operating loss(262,479)(3,822)(847,616)(22,510)
Other income (expense):
Interest expense, net(23,181)(15,897)(57,669)(48,262)
Other income (expense), net(2,418)1,478 (1,861)1,865 
Total other expense(25,599)(14,419)(59,530)(46,397)
Loss before income taxes(288,078)(18,241)(907,146)(68,907)
Income tax expense (benefit)4,141 (19,321)11,856 (26,322)
Net income (loss) from continuing operations(292,219)1,080 (919,002)(42,585)
 Net income (loss) from discontinued operations, net of tax  (10,059) 14,822 
Net loss$(292,219)$(8,979)$(919,002)$(27,763)
 Net income (loss) from continuing operations available to common stockholders $(292,219)$920 $(919,002)$(42,745)
 Net income (loss) from discontinued operations available to common stockholders $ $(10,059)$ $14,822 
Net income (loss) available to common stockholders per share:
 Basic earnings (loss) from continuing operations per share $(1.81)$0.01 $(5.72)$(0.27)
 Basic earnings (loss) from discontinued operations per share  (0.06) 0.09 
 Basic loss per share$(1.81)$(0.06)$(5.72)$(0.18)
 Diluted earnings (loss) from continuing operations per share $(1.81)$0.01 $(5.72)$(0.27)
 Diluted earnings (loss) from discontinued operations per share  (0.06) 0.09 
Diluted loss per share $(1.81)$(0.06)$(5.72)$(0.18)
Weighted-average shares used to compute net income (loss) available to common stockholders per share:
Shares used in computation of basic earnings (loss) per share161,111 158,202 160,545 157,730 
Shares used in computation of diluted earnings (loss) per share161,111 160,328 160,545 157,730 

The accompanying notes are an integral part of these condensed consolidated financial statements.
7


SolarWinds Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Net loss$(292,219)$(8,979)$(919,002)$(27,763)
Other comprehensive loss:
Foreign currency translation adjustment(43,534)(55,849)(114,099)(103,954)
Unrealized losses on investments, net of income tax expense (benefit) of $(23) and $(57) for the three and nine months ended September 30, 2022, respectively
(62) (214) 
Other comprehensive loss(43,596)(55,849)(114,313)(103,954)
Comprehensive loss$(335,815)$(64,828)$(1,033,315)$(131,717)
The accompanying notes are an integral part of these condensed consolidated financial statements.

8


SolarWinds Corporation
Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
(Unaudited)
Three Months Ended September 30, 2022

Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at June 30, 2022160,871$161 $2,594,192 $(69,411)$(907,135)$1,617,807 
Foreign currency translation adjustment— — — (43,534)— (43,534)
Unrealized loss on investments, net of taxes— — — (62)— (62)
Net loss— — — — (292,219)(292,219)
Comprehensive loss(335,815)
Exercise of stock options 18 — 21 — — 21 
Restricted stock units issued, net of shares withheld for taxes284 — (1,201)— — (1,201)
Issuance of stock4 — 9 — — 9 
Issuance of stock under employee stock purchase plan162 — 1,398 — — 1,398 
Stock-based compensation — — 18,246 — — 18,246 
Balance at September 30, 2022161,339 $161 $2,612,665 $(113,007)$(1,199,354)$1,300,465 
Nine Months Ended September 30, 2022

Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 2021159,176 $159 $2,566,783 $1,306 $(280,352)$2,287,896 
Foreign currency translation adjustment— — — (114,099)— (114,099)
Unrealized loss on investments, net of taxes— — — (214)— (214)
Net loss— — — — (919,002)(919,002)
Comprehensive loss (1,033,315)
Exercise of stock options 52 — 58 — — 58 
Restricted stock units issued, net of shares withheld for taxes1,738 2 (9,085)— — (9,083)
Issuance of stock61 — 236 — — 236 
Issuance of stock under employee stock purchase plan312 — 3,151 — — 3,151 
Stock-based compensation — — 51,522 — — 51,522 
Balance at September 30, 2022161,339 $161 $2,612,665 $(113,007)$(1,199,354)$1,300,465 









9


SolarWinds Corporation
Condensed Consolidated Statements of Stockholders' Equity (Continued)
(In thousands)
(Unaudited)
Three Months Ended September 30, 2021

Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at June 30, 2021158,015$158 $3,140,176 $79,107 $(247,728)$2,971,713 
Foreign currency translation adjustment— — — (55,849)— (55,849)
Net loss— — — — (8,979)(8,979)
Comprehensive loss(64,828)
Exercise of stock options 69 — 126 — — 126 
Restricted stock units issued, net of shares withheld for taxes138 — (658)— — (658)
Issuance of stock8 — 8 — — 8 
Issuance of stock under employee stock purchase plan173 — 2,529 — — 2,529 
Distribution of N-able business— — (365,443)— — (365,443)
Special dividends paid ($1.50 per share)
— — (237,214)— — (237,214)
Stock-based compensation — — 16,266 — — 16,266 
Balance at September 30, 2021158,403 $158 $2,555,790 $23,258 $(256,707)$2,322,499 
Nine Months Ended September 30, 2021

Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Accumulated
Deficit
Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 2020156,520 $157 $3,112,262 $127,212 $(228,944)$3,010,687 
Foreign currency translation adjustment— — — (103,954)— (103,954)
Net loss— — — — (27,763)(27,763)
Comprehensive loss (131,717)
Exercise of stock options 161 — 527 — — 527 
Restricted stock units issued, net of shares withheld for taxes986 1 (10,527)— — (10,526)
Issuance of stock455 — 500 — — 500 
Issuance of stock under employee stock purchase plan281 — 5,658 — — 5,658 
Distribution of N-able business— — (365,443)— — (365,443)
Special dividends paid ($1.50 per share)
— — (237,214)— — (237,214)
Stock-based compensation — — 50,027 — — 50,027 
Balance at September 30, 2021158,403 $158 $2,555,790 $23,258 $(256,707)$2,322,499 


The accompanying notes are an integral part of these condensed consolidated financial statements.

10


SolarWinds Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20222021
Cash flows from operating activities
Net loss from continuing operations$(919,002)$(42,585)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization74,107 173,362 
Goodwill and indefinite-lived intangible asset impairment906,350  
Provision for losses on accounts receivable612 230 
Stock-based compensation expense50,599 43,472 
Amortization of debt issuance costs6,794 6,794 
Loss on extinguishment of debt1,930  
Deferred taxes(10,019)(26,277)
Gain on foreign currency exchange rates(898)(1,504)
Other non-cash expenses (benefit)(220)758 
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable(2,326)3,428 
Income taxes receivable4 (2,348)
Prepaid and other assets(20,319)(9,556)
Accounts payable2,385 1,335 
Accrued liabilities and other18,964 (16,906)
Accrued interest payable108 (5)
Income taxes payable(6,398)(32,478)
Deferred revenue4,017 (15,499)
Other long-term liabilities38 (276)
Net cash provided by operating activities from continuing operations106,726 81,945 
Cash flows from investing activities
Purchases of investments(67,133) 
Maturities of investments16,000  
Purchases of property and equipment(5,570)(6,968)
Purchases of intangible assets(11,099)(3,066)
Acquisitions, net of cash acquired(6,500)447 
Other investing activities176  
Net cash used in investing activities from continuing operations(74,126)(9,587)
Cash flows from financing activities
Proceeds from issuance of common stock under employee stock purchase plan3,151 5,658 
Repurchase of common stock and incentive restricted stock(9,123)(10,717)
Exercise of stock options58 527 
Distribution from spin-off of discontinued operations, net 505,580 
Dividends paid (237,214)
Repayments of borrowings from credit agreement(314,925)(15,975)
Payment of debt issuance costs (234)
Net cash provided by (used in) financing activities from continuing operations(320,839)247,625 
Effect of exchange rate changes on cash and cash equivalents from continuing operations(2,216)(3,803)
Cash flows of discontinued operations
Operating activities of discontinued operations 39,040 
Investing activities of discontinued operations (15,003)
Financing activities of discontinued operations (903)
Effect of exchange rate changes on cash and cash equivalents from discontinued operations (922)
Net cash provided by discontinued activities 22,212 
Net increase (decrease) in cash and cash equivalents(290,455)338,392 
Cash and cash equivalents
Beginning of period732,116 370,498 
End of period$441,661 $708,890 
11


SolarWinds Corporation
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20222021
Supplemental disclosure of cash flow information
Cash paid for interest$54,629 $42,060 
Cash paid for income taxes$25,177 $38,120 

The accompanying notes are an integral part of these condensed consolidated financial statements.
12

SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)


1. Organization and Nature of Operations
SolarWinds Corporation, a Delaware corporation, and its subsidiaries (“Company”, “we,” “us” and “our”) is a leading provider of simple, powerful and secure information technology, or IT, management and observability software. Our solutions give organizations worldwide, regardless of type, size or complexity, the power to accelerate business transformation in today's hybrid IT environments. We combine customer-driven products with an "inside-first" selling motion. We’ve built our business to enable the technology professionals who use our products to manage “all things IT.” Our range of customers has expanded over time to include network and systems engineers, database administrators, storage administrators, DevOps, SecOps and service desk professionals. We sell our products for use in organizations ranging in size from very small businesses to large enterprises.
Spin-Off of N-able Business
On July 19, 2021, we completed the separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. We refer to this transaction as the “Separation.”
After the Separation, we do not beneficially own any shares of common stock in N-able and no longer consolidate N‑able into our financial results for periods ending after July 19, 2021. As a result, N‑able's historical financial results through the Separation are reflected in our consolidated financial statements as discontinued operations. See Note 3. Discontinued Operations for additional information.
2. Summary of Significant Accounting Policies
We prepared our interim condensed consolidated financial statements in conformity with United States of America generally accepted accounting principles ("GAAP"), and the reporting regulations of the Securities and Exchange Commission (the "SEC"). They do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying condensed consolidated financial statements include the accounts of SolarWinds Corporation and the accounts of its wholly owned subsidiaries. We have eliminated all intercompany balances and transactions.
The interim financial information is unaudited, but reflects all normal adjustments that are, in our opinion, necessary to provide a fair statement of results for the interim periods presented. This interim information should be read in conjunction with the audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
Reverse Stock Split
Effective July 30, 2021, we effected a 2:1 reverse stock split of our common stock. As a result of the reverse stock split, all share and per share figures contained in the condensed consolidated financial statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.
Special Dividend
On July 30, 2021, our board of directors declared a special one-time cash dividend (the "Special Dividend"), to be paid following the effectiveness of, and after giving effect to, the reverse stock split, equal to $1.50 per share of common stock issued and outstanding as of August 9, 2021. The Special Dividend in the aggregate amount of $237.2 million was paid on August 24, 2021.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts and the disclosure of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The actual results that we experience may differ materially from our estimates. The accounting estimates that require our most significant, difficult and subjective judgments include:
the valuation of goodwill, intangibles, long-lived assets and contingent consideration;
revenue recognition;
stock-based compensation;
income taxes; and
loss contingencies.
13

SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2021-08 "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers", which requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification ("ASC") 606, "Revenue from Contracts with Customers", instead of at fair value on the acquisition date as previously required by ASC 805. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for acquired revenue contracts and revenue contracts not acquired in a business combination. The updated guidance is effective for public companies for fiscal years beginning after December 15, 2022 and early adoption is permitted. We elected to early adopt the updated guidance prospectively as of January 1, 2022. The adoption of the standard did not have a material impact on our condensed consolidated financial statements for the three or nine months ended September 30, 2022.
Impairment of Goodwill, Intangible Assets and Long-lived Assets
Goodwill
Our goodwill was derived from the take private transaction in early 2016 ("Take Private") and acquisitions where the purchase price exceeded the fair value of the net identifiable assets acquired. Goodwill is tested for impairment at least annually on October 1st or more frequently if events or circumstances indicate it is more likely than not that the fair value of our reporting unit is less than its carrying value.
Subsequent to our annual 2021 goodwill impairment analysis on October 1, 2021, we experienced a decline in our stock price resulting in the total market value of our shares of stock outstanding (our "market capitalization"), being less than the carrying value of our reporting unit. Therefore, as of December 31, 2021, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our one reporting unit, including the significance of the amount of excess fair value over carrying value, consistency of operating margins and cash flows, budgeted-to-actual performance from prior year, overall change in economic climate, changes in the industry and competitive environment, and earnings quality and sustainability. We considered the decline in the market capitalization being less than the carrying value of our reporting unit in our evaluation of goodwill impairment indicators and determined it appropriate to perform a quantitative assessment of our reporting unit as of December 31, 2021. As a result of the impairment analysis, our reporting unit was determined to have a fair value that exceeded its carrying value by approximately 7.2%, and therefore no impairment was recognized.
As of March 31, 2022, while we experienced a further decline in our market capitalization, there were no unanticipated changes or negative indicators in the goodwill impairment qualitative factors or significant changes to assumptions used in the discounted cash flow models that would impact the fair value of our reporting unit. After considering all available evidence, we determined there were no indicators of impairment or changes to circumstances that more likely than not reduced the fair value of our reporting unit to less than its carrying value as of March 31, 2022.
As of June 30, 2022, we experienced a further decline in our market capitalization and considered the impact of current macroeconomic conditions on our projected operating results and assumptions used in the income approach - discounted cash flow method and market approach models that impact the fair value of our reporting unit. The macroeconomic conditions considered include deterioration in the equity markets evidenced by sustained declines in our stock price, those of our peers, and major market indices since December 31, 2021, which reduced the market multiples, along with an increase in the weighted-average cost of capital primarily driven by an increase in interest rates. In addition, as of June 30, 2022, we lowered our projected operating results primarily due to the recent impact of foreign currency exchange rate fluctuations on our projected sales and market concerns related to inflation, supply chain disruption issues and other macroeconomic factors. After considering all available evidence in our evaluation of goodwill impairment indicators, we determined it appropriate to perform an interim quantitative assessment of our reporting unit as of June 30, 2022. We engaged a third-party valuation specialist to assist in the performance of the impairment analysis of our reporting unit.
For the interim quantitative goodwill impairment analysis performed as of June 30, 2022, we utilized a combination of both an income and market approach to determine the fair value of our reporting unit. The income approach utilizes a discounted cash flow method which is based on the present value of projected cash flows. The discounted cash flow models reflect our assumptions regarding revenue growth rates, risk-adjusted discount rate, terminal period growth rate, economic and market trends and other expectations about the anticipated operating results of our reporting unit. Under the market approach, we estimate the fair value based on market multiples of revenues derived from comparable publicly traded companies with operating characteristics similar to the reporting unit. As a result of the interim goodwill impairment analysis, our reporting unit was determined to have a carrying value that exceeded its fair value and therefore, a $612.4 million non-cash goodwill impairment charge was recognized in our condensed consolidated statements of operations for the three months ended June 30, 2022.
14

SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

As of September 30, 2022, we experienced a further decline in our market capitalization, and after considering the impact of current macroeconomic conditions on the assumptions used in determining the fair value of our reporting unit, determined it appropriate to perform an interim quantitative assessment of our reporting unit. The macroeconomic conditions considered include the continued deterioration in the equity markets, which reduced the market multiples used in our analysis, along with an increase in the weighted-average cost of capital primarily driven by an increase in interest rates and ongoing effects from foreign currency exchange rate fluctuations. We engaged a third-party valuation specialist to assist in the performance of the impairment analysis of our reporting unit.
For the interim quantitative goodwill impairment analysis performed as of September 30, 2022, we utilized a combination of both an income and market approach to determine the fair value of our reporting unit consistent with the analysis performed at June 30, 2022 discussed above. As a result of the interim goodwill impairment analysis, our reporting unit was determined to have a carrying value that exceeded its fair value and therefore, a $278.7 million non-cash goodwill impairment charge was recognized in our condensed consolidated statements of operations for the three months ended September 30, 2022.
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 quantitative goodwill impairment tests will prove to be an accurate prediction of future results. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impact the estimated fair value of our reporting unit may include such items as: (i) volatility in the equity and debt markets or other macroeconomic factors, (ii) an increase in the weighted-average cost of capital due to further increases in interest rates, (iii) timing and success of new products introduced in our evolution from monitoring to observability, (iv) the ongoing impact of the Cyber Incident including a decrease in future cash flows due to lower than expected license sales or maintenance renewals, higher than expected customer attrition, higher than estimated costs to respond and adverse loss exposure from claims, fines or penalties resulting from government investigations and litigation; and (v) fluctuations in foreign currency exchange rates that may negatively impact our reported results of operations. Accordingly, if our current cash flow assumptions are not realized, we experience further sustained declines in our stock price or market capitalization, or there are further declines in the market multiplies used in our analysis, it is possible that an additional impairment charge may be recorded in the future, which could be material.
Indefinite-lived Intangible Assets
We review our indefinite-lived intangible assets for impairment annually, in the fourth quarter, or more frequently if a triggering event occurs. We first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative test. If necessary, the quantitative test is performed by comparing the fair value of indefinite-lived intangible assets to the carrying value. In the event the carrying value exceeds the fair value of the assets, the assets are written down to their fair value. As of June 30, 2022 and September 30, 2022, due to the factors discussed in the goodwill analysis above, we performed quantitative assessments of our indefinite-lived intangible assets utilizing a relief from royalty method and determined the estimated fair value of the SolarWinds trade name, recorded in connection with the Take Private, was less than its carrying value. As a result, we recorded non-cash impairment charges of $9.4 million and $5.9 million for the three months ended June 30, 2022 and September 30, 2022, respectively, which are included in general and administrative expense in our condensed consolidated statements of operations.
Long-lived Assets
We evaluate the recoverability of our 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 assets may not be recoverable. As of June 30, 2022 and September 30, 2022, prior to performing the goodwill impairment analyses discussed above, we performed recoverability tests of our long-lived assets, including finite-lived intangible assets, by comparing the net book value of our long-lived assets or asset groups, to the future undiscounted net cash flows attributable to such assets, and determined no impairment was required.
Investments
Our investments, classified as available-for-sale securities, consist of marketable securities such as U.S. Treasury securities, corporate bonds, commercial paper and asset-backed securities. We determine the appropriate classification of our investments at the time of purchase and reevaluate such determination at each balance sheet date. We may classify our available-for-sale securities as either short-term or long-term investments. We classify an investment as short-term if we have both the intent and ability to convert the security into cash to fund current operations.
Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in accumulated other comprehensive income (loss), which is a component of shareholders' equity except for any unrealized losses
15

SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

determined to be related to credit losses, which we record within other income (expense), net in our condensed consolidated statements of operations. Any premiums or discounts are amortized or accreted, respectively, to maturity as a component of interest expense, net in our condensed consolidated statements of operations. Cash flows from the amount of purchases, sales and maturities of available-for-sale securities are classified as cash flows from investing activities. Amortization and accretion of purchased premiums and discounts on securities are included as a non-cash adjustment to net income (loss) within cash flows from operating activities in our condensed consolidated statements of cash flows.
The cost of securities sold is based on the specific-identification method. In determining if and when a decline in fair value is judged to be other-than-temporary, we evaluate, among other factors: the duration and extent to which the fair value has been less than the carrying value and the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair market value. Declines in fair value deemed other-than-temporary are included as a component of other income (expense), net in our condensed consolidated statements of operations. We have not recorded any other-than-temporary impairments related to marketable securities. See Note 4. Investments for a summary of our investments.
Fair Value Measurements
We apply the authoritative guidance on fair value measurements for financial assets and liabilities that are measured at fair value on a recurring basis and non-financial assets and liabilities, such as goodwill, intangible assets and property, plant and equipment that are measured at fair value on a non-recurring basis.
The guidance establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets accessible by us.
Level 2: Inputs that are observable in the marketplace other than those inputs classified as Level 1.
Level 3: Inputs that are unobservable in the marketplace and significant to the valuation.
We determine the fair value of our available-for-sale securities based on inputs obtained from multiple pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our available-for-sale securities as being valued using Level 2 inputs. The valuation techniques used to determine the fair value of our financial instruments having Level 2 inputs are derived from unadjusted, non-binding market consensus prices that are corroborated by observable market data, quoted market prices for similar instruments, or pricing models. Our procedures include controls to ensure that appropriate fair values are recorded by a review of the valuation methods and assumptions.
See Note 6. Fair Value Measurements for a summary of our financial instruments accounted for at fair value on a recurring basis. The carrying amounts reported in our consolidated balance sheets for cash, accounts receivable, accounts payable and other accrued expenses approximate fair value due to relatively short periods to maturity.
Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (loss) by component are summarized below:
Foreign Currency
Translation Adjustments
Unrealized Gain (Loss) on Investments,
 Net of Tax
Accumulated Other Comprehensive
 Income (Loss)
(in thousands)
Balance at December 31, 2021$1,306 $ $1,306 
Other comprehensive gain (loss) before reclassification(114,099)(214)(114,313)
Amount reclassified from accumulated other comprehensive income (loss)    
Net current period other comprehensive income (loss)(114,099)(214)(114,313)
Balance at September 30, 2022$(112,793)$(214)$(113,007)
16

SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

Deferred Revenue
Details of our total deferred revenue balance are as follows:
Total Deferred Revenue
(in thousands)
Balance at December 31, 2021$362,669 
Deferred revenue recognized(375,992)
Additional amounts deferred362,980 
Deferred revenue acquired in business combinations263 
Balance at September 30, 2022$349,920 
We expect to recognize revenue related to these remaining performance obligations as of September 30, 2022 as follows:
Revenue Recognition Expected by Period
TotalLess than 
1 year
1-3 yearsMore than
3 years
(in thousands)
Expected recognition of deferred revenue$349,920 $313,363 $35,679 $878 
Deferred Commissions
Details of our deferred commissions balance are as follows:
Deferred Commissions
(in thousands)
Balance at December 31, 2021$18,897 
Commissions capitalized6,856 
Amortization recognized(4,831)
Balance at September 30, 2022$20,922 
September 30,December 31,
20222021
(in thousands)
Classified as:
Current$6,284 $5,378 
Non-current14,638 13,519 
Total deferred commissions$20,922 $18,897 
Cost of Revenue
Amortization of Acquired Technologies. Amortization of acquired technologies included in cost of revenue relate to our licensed products and subscription offerings as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
(in thousands)
Amortization of acquired license technologies$917 $37,119 $16,321 $111,783 
Amortization of acquired subscription technologies2,711 2,763 8,182 8,614 
Total amortization of acquired technologies$3,628 $39,882 $24,503 $120,397 
The decreases in amortization of acquired license technologies for the three and nine months ended September 30, 2022 in comparison to the same periods in 2021 were primarily due to certain intangible assets acquired in connection with the Take Private being fully amortized during the three months ended March 31, 2022.
17

SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)

3. Discontinued Operations
As discussed in Note 1. Organization and Nature of Operations, we completed the Separation of the N‑able business into a newly created and separately traded public company, N-able, Inc., on July 19, 2021. The Separation was achieved through the transfer of all the net assets and legal entities associated with the N-able business to N-able, Inc. The distribution of the net assets to N-able, Inc., was recorded as a reduction to additional paid-in-capital for the three months ended September 30, 2021. As part of the Separation, we received a cash distribution from N-able which includes $324.7 million in cash to repay intercompany indebtedness and $238.2 million as a one-time dividend payment, net of $57.3 million of cash distributed to N‑able at the Separation.
In accordance with applicable accounting guidance, the results of the N-able business are presented as discontinued operations for the period up to and including the date of the Separation, and, as such, have been excluded from continuing operations for all periods presented.
The following table summarizes the results of operations of N-able presented as discontinued operations:
Three Months EndedNine Months Ended
September 30, 2021
(in thousands)
Revenue:
Subscription$20,102 $183,594 
Maintenance313 5,053 
Total recurring revenue20,415 188,647 
License  
Total revenue20,415 188,647 
Cost of revenue:
Cost of recurring revenue2,126 25,218 
Amortization of acquired technologies209 3,950 
Total cost of revenue2,335 29,168 
Gross profit18,080 159,479 
Operating expenses:
Sales and marketing5,323 55,249 
Research and development2,455 27,133 
General and administrative 6,471 42,994 
Amortization of acquired intangibles331 10,626 
Total operating expenses14,580 136,002 
Operating income from discontinued operations3,500 23,477