SolarWinds Corp [SWI] Filings

10-Q 1 swi-20230630.htm 10-Q swi-20230630

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 June 30, 2023


☐			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 Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.001 par value	SWI	New 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 filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller 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 August 4, 2023, 164,738,253 shares of common stock, par value $0.001 per share, were outstanding.

SOLARWINDS CORPORATION

Table of Contents


PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	5
	Condensed Consolidated Balance Sheets as of June 30 , 2023 and December 31, 2022	5
	Condensed Consolidated Statements of Operations for the three and six month periods ended June 30 , 2023 and 2022	6
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six month periods ended June 30 , 2023 and 2022	7
	Condensed Consolidated Statements of Stockholders' Equity for the three and six month periods ended June 30 , 2023 and 2022	8
	Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2023 and 2022	10
	Notes to the Condensed Consolidated Financial Statements	11
	1. Organization and Nature of Operations
	2. Summary of Significant Accounting Policies
	3. Investments
	4. Goodwill
	5. Fair Value Measurements
	6. Debt
	7. Income (Loss) Per Share
	8. Income Taxes
	9. Commitment and Contingencies

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	35
Item 4.	Controls and Procedures	37
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 6.	Exhibits	39
	Signatures	40

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 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 the impact of macroeconomic conditions, including the war in Ukraine, geopolitical tensions involving China, inflation, instability in the banking sector and financial services industry, foreign currency exchange rates 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; 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) 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 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, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations and the incurrence of other liabilities, (2) litigation and investigation risks related to the Cyber Incident, including as a result of U.S. regulatory investigations and enforcement actions, including any proceeding that may be commenced against us or our current and former executive officers and employees by the Securities and Exchange Commission, in each case relating to the previously disclosed Wells Notices, and exposure to judgements, fines, settlements and other costs and liabilities related thereto, (3) risks that our insurance coverage may not be available or sufficient to compensate for all liabilities we incur related to these matters and (4) 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 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;

•risks related to any shifts in our revenue mix and the timing of how we recognize revenue as we transition to a subscription-first model;

•risks related to using artificial intelligence in our business and our solutions, 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 global macroeconomic conditions, including the war in Ukraine, geopolitical tensions involving China, inflation, instability in the banking sector and financial services industry, foreign currency exchange rates and the effects of the 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 or to convert our existing customers to subscription products;

◦any decline in our renewal or net retention rates or any delay or loss of U.S. government sales;

◦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;

◦risks associated with our international operations and any international expansion efforts; and

◦ongoing sanctions and export controls;

•the possibility that our operating income could fluctuate and may decline as percentage of revenue as we make further expenditures to expand our product offerings and sales motion in order to support additional growth in our business;

•our ability to compete effectively in the markets we serve and the risks of increased competition as we enter new markets;

•our ability to attract, retain and motivate employees;

•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 or potential indemnification liabilities incurred in connection with the separation could materially affect our business and financial results;

•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, 2022, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and this Quarterly Report on Form 10-Q.

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.

In this report “SolarWinds,” “Company,” “we,” “us” and “our” refer to SolarWinds Corporation and its consolidated subsidiaries.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SolarWinds Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share information)

(Unaudited)


	June 30,		December 31,
	2023		2022
Assets
Current assets:
Cash and cash equivalents	$	177,194	$	121,738
Short-term investments	995		27,114
Accounts receivable, net of allowances of $2,425 and $1,173 as of June 30, 2023 and December 31, 2022, respectively	83,446		100,204
Income tax receivable	1,998		987


Prepaid and other current assets	67,046		57,350
Total current assets	330,679		307,393
Property and equipment, net	21,114		26,634
Operating lease assets	43,837		61,418
Deferred taxes	136,509		134,922
Goodwill	2,386,896		2,380,059
Intangible assets, net	212,592		243,980
Other assets, net	48,807		45,600
Total assets	$	3,180,434	$	3,200,006
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	10,928	$	14,045
Accrued liabilities and other	39,982		68,284
Current operating lease liabilities	14,847		15,005

Accrued interest payable	307		579
Income taxes payable	25,656		11,841
Current portion of deferred revenue	332,309		337,541
Current debt obligation	12,450		9,338
Total current liabilities	436,479		456,633
Long-term liabilities:
Deferred revenue, net of current portion	42,018		38,945
Non-current deferred taxes	4,995		8,582
Non-current operating lease liabilities	52,276		59,235
Other long-term liabilities	54,194		74,193
Long-term debt, net of current portion	1,191,816		1,192,765
Total liabilities	1,781,778		1,830,353
Commitments and contingencies (Note 9)

Stockholders’ equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 164,710,793 and 161,928,532 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	165		162
Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively	—		—
Additional paid-in capital	2,654,178		2,627,370
Accumulated other comprehensive loss	(40,561)		(48,114)
Accumulated deficit	(1,215,126)		(1,209,765)
Total stockholders’ equity	1,398,656		1,369,653
Total liabilities and stockholders’ equity	$	3,180,434	$	3,200,006

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

SolarWinds Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share information)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Revenue:
Subscription	$	53,389	$	36,980	$	107,746	$	75,727
Maintenance	116,056		113,972		230,534		229,467
Total recurring revenue	169,445		150,952		338,280		305,194
License	15,589		25,082		32,730		47,708
Total revenue	185,034		176,034		371,010		352,902
Cost of revenue:
Cost of recurring revenue	18,533		15,460		36,927		33,291
Amortization of acquired technologies	3,425		3,648		6,861		20,875
Total cost of revenue	21,958		19,108		43,788		54,166
Gross profit	163,076		156,926		327,222		298,736
Operating expenses:
Sales and marketing	59,838		64,615		125,754		125,659
Research and development	24,081		22,108		47,872		45,530
General and administrative	34,418		41,283		60,019		73,947
Amortization of acquired intangibles	12,094		13,103		25,099		26,342
Goodwill impairment	—		612,395		—		612,395
Total operating expenses	130,431		753,504		258,744		883,873
Operating income (loss)	32,645		(596,578)		68,478		(585,137)
Other income (expense):
Interest expense, net	(29,443)		(18,401)		(58,024)		(34,488)
Other income (expense), net	13		726		(76)		557
Total other expense	(29,430)		(17,675)		(58,100)		(33,931)
Income (loss) before income taxes	3,215		(614,253)		10,378		(619,068)
Income tax expense	2,955		7,871		15,739		7,715
Net income (loss)	$	260	$	(622,124)	$	(5,361)	$	(626,783)
Net income (loss) available to common stockholders	$	260	$	(622,124)	$	(5,361)	$	(626,783)
Net income (loss) available to common stockholders per share:
Basic income (loss) per share	$	—	$	(3.87)	$	(0.03)	$	(3.91)
Diluted income (loss) per share	$	—	$	(3.87)	$	(0.03)	$	(3.91)
Weighted-average shares used to compute net income (loss) available to common stockholders per share:
Shares used in computation of basic income (loss) per share	164,193		160,663		163,487		160,257
Shares used in computation of diluted income (loss) per share	165,386		160,663		163,487		160,257

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

SolarWinds Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net income (loss)	$	260	$	(622,124)	$	(5,361)	$	(626,783)
Other comprehensive income (loss):
Foreign currency translation adjustment	(2,950)		(53,670)		7,433		(70,565)
Unrealized gains (losses) on investments, net of income tax expense (benefit) of $10 and $(34) for the three months ended June 30, 2023 and 2022, respectively, and $31 and $(34) for the six months ended June 30, 2023 and 2022, respectively	37		(152)		120		(152)
Other comprehensive income (loss)	(2,913)		(53,822)		7,553		(70,717)
Comprehensive income (loss)	$	(2,653)	$	(675,946)	$	2,192	$	(697,500)

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

SolarWinds Corporation

Condensed Consolidated Statements of Stockholders' Equity

(In thousands)

(Unaudited)


	Three Months Ended June 30, 2023
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount









Balance at March 31, 2023	163,667	$	164	$	2,638,670	$	(37,648)	$	(1,215,386)	$	1,385,800
Foreign currency translation adjustment	—	—		—		(2,950)		—		(2,950)
Unrealized gain on investments, net of taxes	—	—		—		37		—		37
Net income	—	—		—		—		260		260
Comprehensive loss										(2,653)
Exercise of stock options	115	—		104		—		—		104
Restricted stock units issued, net of shares withheld for taxes	929	1		(3,177)		—		—		(3,176)



Stock-based compensation	—	—		18,581		—		—		18,581
Balance at June 30, 2023	164,711	$	165	$	2,654,178	$	(40,561)	$	(1,215,126)	$	1,398,656


	Six Months Ended June 30, 2023
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2022	161,929	$	162	$	2,627,370	$	(48,114)	$	(1,209,765)	$	1,369,653
Foreign currency translation adjustment	—	—		—		7,433		—		7,433
Unrealized gain on investments, net of taxes	—	—		—		120		—		120
Net loss	—	—		—		—		(5,361)		(5,361)
Comprehensive income										2,192
Exercise of stock options	121	—		112		—		—		112
Restricted stock units issued, net of shares withheld for taxes	2,460	3		(10,170)		—		—		(10,167)
Issuance of stock	3	—		18		—		—		18
Issuance of stock under employee stock purchase plan	198	—		1,711		—		—		1,711
Stock-based compensation	—	—		35,137		—		—		35,137
Balance at June 30, 2023	164,711	$	165	$	2,654,178	$	(40,561)	$	(1,215,126)	$	1,398,656


	Three Months Ended June 30, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at March 31, 2022	160,456	$	160	$	2,577,818	$	(15,589)	$	(285,011)	$	2,277,378
Foreign currency translation adjustment	—	—		—		(53,670)		—		(53,670)
Unrealized loss on investments, net of taxes	—	—		—		(152)		—		(152)
Net loss	—	—		—		—		(622,124)		(622,124)
Comprehensive loss										(675,946)
Exercise of stock options	18	—		25		—		—		25
Restricted stock units issued, net of shares withheld for taxes	391	1		(1,476)		—		—		(1,475)
Issuance of stock	6	—		11		—		—		11


Stock-based compensation	—	—		17,814		—		—		17,814
Balance at June 30, 2022	160,871	$	161	$	2,594,192	$	(69,411)	$	(907,135)	$	1,617,807


	Six Months Ended June 30, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	159,176	$	159	$	2,566,783	$	1,306	$	(280,352)	$	2,287,896
Foreign currency translation adjustment	—	—		—		(70,565)		—		(70,565)
Unrealized loss on investments, net of taxes	—	—		—		(152)		—		(152)
Net loss	—	—		—		—		(626,783)		(626,783)
Comprehensive loss										(697,500)
Exercise of stock options	34	—		37		—		—		37
Restricted stock units issued, net of shares withheld for taxes	1,454	2		(7,884)		—		—		(7,882)
Issuance of stock	57	—		227		—		—		227
Issuance of stock under employee stock purchase plan	150	—		1,753		—		—		1,753
Stock-based compensation	—	—		33,276		—		—		33,276
Balance at June 30, 2022	160,871	$	161	$	2,594,192	$	(69,411)	$	(907,135)	$	1,617,807

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

SolarWinds Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Six Months Ended June 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(5,361)	$	(626,783)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	43,132		54,059
Goodwill and indefinite-lived intangible asset impairment	—		621,760
Provision for losses on accounts receivable	1,293		366
Stock-based compensation expense	34,494		32,684

Amortization of debt issuance costs	5,361		4,536


Deferred taxes	(3,593)		(9,027)


(Gain) loss on foreign currency exchange rates	116		(440)
Lease impairment charges	11,689		—
Other non-cash expenses	245		142
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable	15,873		8,912
Income taxes receivable	(999)		(110)
Prepaid and other assets	(9,522)		6,566
Accounts payable	(3,048)		252
Accrued liabilities and other	(29,736)		(3,976)
Accrued interest payable	(272)		81
Income taxes payable	(6,171)		(4,700)
Deferred revenue	(3,734)		(2,998)
Other long-term liabilities	—		116
Net cash provided by operating activities	49,767		81,440
Cash flows from investing activities
Purchases of investments	(988)		(55,885)
Maturities of investments	26,535		—
Purchases of property and equipment	(1,387)		(3,533)
Purchases of intangible assets	(6,867)		(7,508)
Acquisitions, net of cash acquired	—		(6,500)

Other investing activities	564		—
Net cash provided by (used in) investing activities	17,857		(73,426)
Cash flows from financing activities


Proceeds from issuance of common stock under employee stock purchase plan	1,711		1,753
Repurchase of common stock and incentive restricted stock	(10,167)		(7,921)
Exercise of stock options	112		37




Repayments of borrowings from credit agreement	(3,113)		(9,950)



Net cash used in financing activities	(11,457)		(16,081)
Effect of exchange rate changes on cash and cash equivalents	(711)		(1,609)






Net increase (decrease) in cash and cash equivalents	55,456		(9,676)
Cash and cash equivalents
Beginning of period	121,738		732,116
End of period	$	177,194	$	722,440

Supplemental disclosure of cash flow information
Cash paid for interest	$	54,935	$	30,933
Cash paid for income taxes	$	24,140	$	19,422

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

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 observability and information technology, or IT, management software. Our solutions are designed to give organizations worldwide, regardless of type, size or complexity, the power to optimize performance of their IT environments, no matter where they are in their digital transformation journeys. Our business is focused on building products designed to enable technology professionals and leaders to securely monitor and manage the performance of their IT environments, whether they be on-premises, in the cloud or in hybrid deployments. Our approach has enabled us to serve the entire IT market and our customers include network and systems engineers, database administrators, storage administrators, DevOps, SecOps and service desk professionals. We sell our products for use in organizations across industries ranging in size from very small businesses to large enterprises.

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, 2022.

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.

Recently Issued Accounting Pronouncements

During the six months ended June 30, 2023, there have been no recently issued accounting pronouncements that are expected to have a material impact to our financial position, results of operations or cash flows.

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 during the fourth quarter 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.

During the year ended December 31, 2022, we experienced declines 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 interim quantitative assessments of our reporting unit as of June 30, 2022 and September 30, 2022. As a result of the interim goodwill impairment analyses, our reporting unit was determined to have a carrying value that exceeded its fair value and therefore, we recorded non-cash goodwill impairment charges of $612.4 million and $278.7 million for the three months ended June 30, 2022 and September 30, 2022, respectively.

Throughout the period since the quantitative assessment on September 30, 2022, there have been no unanticipated changes or negative indicators in the qualitative factors or valuation assumptions that would negatively impact the fair value of our

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

reporting unit. As such, we determined there were no indicators of impairment and that it was more likely than not that the fair value of our reporting unit was greater than its carrying value at June 30, 2023.

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.

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 5. 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, 2022	$	(47,996)	$	(118)	$	(48,114)
Other comprehensive gain before reclassification	7,433		120		7,553
Amount reclassified from accumulated other comprehensive income (loss)	—		—		—
Net current period other comprehensive income	7,433		120		7,553
Balance at June 30, 2023	$	(40,563)	$	2	$	(40,561)

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, 2022	$	376,486

Deferred revenue recognized	(263,271)
Additional amounts deferred	261,112

Balance at June 30, 2023	$	374,327

We expect to recognize revenue related to these remaining performance obligations as of June 30, 2023 as follows:


	Revenue Recognition Expected by Period
	Total		Less than 1 year		1-3 years		More than 3 years

	(in thousands)
Expected recognition of deferred revenue	$	374,327	$	332,309	$	40,932	$	1,086

Deferred Commissions

Details of our deferred commissions balance are as follows:


			Deferred Commissions
			(in thousands)
Balance at December 31, 2022			$	22,540

Commissions capitalized			4,832
Amortization recognized			(4,065)
Balance at June 30, 2023			$	23,307

	June 30,		December 31,
	2023		2022

	(in thousands)
Classified as:
Current	$	7,557	$	6,936
Non-current	15,750		15,604
Total deferred commissions	$	23,307	$	22,540

Leases

During the six months ended June 30, 2023, as part of our ongoing efforts to align our office lease arrangements with our anticipated operating needs, we exited certain leased facilities and recognized impairment charges for the related operating lease assets of $11.7 million, which are included in general and administrative expense.

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands)
Amortization of acquired license technologies	$	924	$	921	$	1,846	$	15,404
Amortization of acquired subscription technologies	2,501		2,727		5,015		5,471
Total amortization of acquired technologies	$	3,425	$	3,648	$	6,861	$	20,875

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The decrease in amortization of acquired license technologies for the six months ended June 30, 2023 in comparison to the same period in 2022 was primarily due to certain intangible assets acquired in connection with the Take Private being fully amortized.

3. Investments

Our short-term investments as of June 30, 2023 and December 31, 2022 consist of available-for-sale securities, such as U.S. Treasury securities and other federal agency bonds, corporate bonds, commercial paper and asset-backed securities.

The following table summarizes our short-term investments:


	June 30, 2023
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

	(in thousands)



Short-term investments:
Available-for-sale securities:

U.S. government agency bonds	$	993	$	2	$	—	$	995



Total short-term investments	$	993	$	2	$	—	$	995

	December 31, 2022
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

	(in thousands)
Short-term investments:
Available-for-sale securities:
U.S. Treasury securities	$	6,013	$	—	$	(43)	$	5,970
Corporate bonds	19,887		—		(105)		19,782
Commercial paper	798		—		—		798
Asset-backed securities	565		—		(1)		564
Total short-term investments	$	27,263	$	—	$	(149)	$	27,114

The following table summarizes the fair value of our available-for-sale securities with unrealized losses aggregated by type of investment instrument and length of time those securities have been in a continuous unrealized loss position:
















	December 31, 2022
	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses

	(in thousands)
As of December 31, 2022


U.S. Treasury securities	$	5,970	$	(43)	$	—	$	—	$	5,970	$	(43)
Corporate bonds	19,782		(105)		—		—		19,782		(105)
Asset-backed securities	564		(1)		—		—		564		(1)
	$	26,316	$	(149)	$	—	$	—	$	26,316	$	(149)

The following table summarizes the contractual underlying maturities of our available-for-sale securities:


	June 30, 2023
	Cost		Fair Value

	(in thousands)
Due in one year or less	$	993	$	995

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

4. Goodwill

The following table reflects the changes in goodwill for the six months ended June 30, 2023:


	(in thousands)
Balance at December 31, 2022	$	2,380,059


Foreign currency translation	6,837
Balance at June 30, 2023	$	2,386,896

As of June 30, 2023, the accumulated goodwill impairment on our condensed consolidated balance sheet was $894.6 million.

5. Fair Value Measurements

The following table summarizes the fair value of our financial assets that were measured on a recurring basis as of June 30, 2023 and December 31, 2022. There have been no transfers between fair value measurement levels during the six months ended June 30, 2023.


	Fair Value Measurements at June 30, 2023 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

	(in thousands)
Cash equivalents:
Money market funds	$	115,930	$	—	$	—	$	115,930
U.S. Treasury securities	—		4,714		—		4,714
U.S. government agency bonds	—		1,994		—		1,994

Commercial paper	—		13,739		—		13,739
Total cash equivalents	115,930		20,447		—		136,377
Short-term investments:
U.S. government agency bonds	—		995		—		995



Total short-term investments	—		995		—		995







Total assets	$	115,930	$	21,442	$	—	$	137,372


	Fair Value Measurements at December 31, 2022 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total

	(in thousands)
Cash equivalents:
Money market funds	$	48,833	$	—	$	—	$	48,833

Total cash equivalents	48,833		—		—		48,833

Short-term investments:
U.S. Treasury bonds	—		5,970		—		5,970
Corporate bonds	—		19,782		—		19,782
Commercial paper	—		798		—		798
Asset-backed securities	—		564		—		564
Total short-term investments	—		27,114		—		27,114




Total assets	$	48,833	$	27,114	$	—	$	75,947

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

As of June 30, 2023 and December 31, 2022, the carrying value of our long-term debt approximates its estimated fair value as the interest rate on the debt agreements is adjusted for changes in the market rates. See Note 6. Debt for additional information regarding our debt.

The fair value of our non-financial assets and liabilities, which include goodwill, intangible assets and property, plant and equipment, are measured on a non-recurring basis. Fair value adjustments are made in the period an impairment charge is recognized. The fair value of our reporting unit and indefinite-lived intangible asset are classified as Level 3 within the fair value hierarchy due to the significant unobservable inputs developed using company-specific information.

6. Debt

The following table summarizes information relating to our debt:


	June 30,				December 31,
	2023				2022
	Amount		Effective Rate		Amount		Effective Rate

	(in thousands, except interest rates)
Revolving credit facility	$	—	—	%	$	—	—	%
First Lien Term Loan (as amended) due Feb 2027	1,241,888		8.85	%	1,245,000		8.32	%


Total principal amount	1,241,888				1,245,000
Unamortized discount and debt issuance costs	(37,622)				(42,897)
Total debt	1,204,266				1,202,103
Less: Current portion of long-term debt	(12,450)				(9,338)
Total long-term debt	$	1,191,816			$	1,192,765

Senior Secured First Lien Credit Facilities

Our first lien credit agreement, as amended, or First Lien Credit Agreement, provides for senior secured first lien credit facilities, consisting of the following:

•a $1.245 billion U.S. dollar term loan, or First Lien Term Loan, with a final maturity date of February 5, 2027; and

•a $130.0 million revolving credit facility (with a letter of credit sub-facility in the amount of $35.0 million), or the Revolving Credit Facility, consisting of (i) a $112.5 million multicurrency tranche and (ii) a $17.5 million tranche available only in U.S. dollars, with a final maturity of the earlier of: November 23, 2027 or, in the event that there are more than $150.0 million of the First Lien Term Loan outstanding on the 91st day prior to maturity date of the first lien term loans, the 91st day prior to the maturity date of the First Lien Term Loan.

Borrowings under our Revolving Credit Facility bear interest at a floating rate which is, at our option, either (1) a secured overnight financing rate (“SOFR”) rate for a specified interest period plus an applicable margin of 2.25% or (2) a base rate plus an applicable margin of 1.25%, respectively. The SOFR rate applicable to the Revolving Credit Facility is subject to a “floor” of 0.0%.

Borrowings under our First Lien Term Loan bear interest at a floating rate which is, at our option, either (1) a SOFR rate for a specified interest period plus an applicable margin of 3.75% or (2) a base rate plus an applicable margin of 2.75%. The SOFR rate applicable to the First Lien Term Loan is subject to a “floor” of 0.0%.

The base rate for any day is a fluctuating rate per annum equal to the highest of (a) the rate of interest in effect for such day as publicly announced by Credit Suisse as its “prime rate” and (b) the federal funds effective rate in effect on such day plus 0.50% and (c) the one-month SOFR rate plus 1.0% per annum.

The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the principal amount.

In addition to paying interest on loans outstanding under the Revolving Credit Facility and the First Lien Term Loan, we are required to pay a commitment fee of 0.375% per annum of unused commitments under the Revolving Credit Facility.

The First Lien Credit Agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to: incur additional indebtedness; incur liens; engage in mergers, consolidations, liquidations or dissolutions; pay dividends and distributions on, or redeem, repurchase or retire our capital stock; and make certain investments, acquisitions, loans, or advances. In addition, the terms of the First Lien Credit Agreement include a financial covenant which requires that, at the end of each fiscal quarter, if the aggregate amount of borrowings under the Revolving Credit Facility exceeds 35% of the aggregate commitments under the Revolving Credit Facility, our first lien net leverage ratio

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

cannot exceed 7.40 to 1.00. The First Lien Credit Agreement also contains certain customary representations and warranties, affirmative covenants and events of default. As of June 30, 2023, we were in compliance with all covenants of the First Lien Credit Agreement.

7. Income (Loss) Per Share

A reconciliation of the number of shares in the calculation of basic and diluted income (loss) per share follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands)
Basic income (loss) per share
Numerator:
Net income (loss)	$	260	$	(622,124)	$	(5,361)	$	(626,783)


Earnings allocated to unvested restricted stock	—		—		—		—
Net income (loss) available to common stockholders	$	260	$	(622,124)	$	(5,361)	$	(626,783)

Denominator:
Weighted-average shares used in computing basic net income (loss) per share	164,193		160,663		163,487		160,257

Diluted net income (loss) per share
Numerator:
Net income (loss) available to common stockholders	$	260	$	(622,124)	$	(5,361)	$	(626,783)

Denominator:
Weighted-average shares used in computing basic income (loss) per share	164,193		160,663		163,487		160,257
Add dilutive impact of employee equity plans	1,193		—		—		—
Weighted-average shares used in computing diluted net income (loss) per share	165,386		160,663		163,487		160,257

The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of the diluted net income (loss) per share attributable to common stockholders for the periods presented because their effect would have been anti-dilutive or for which the performance condition had not been met at the end of the period:


	Three Months Ended June 30,		Six Months Ended June 30,
	2023	2022	2023	2022

	(in thousands)






Total anti-dilutive shares	7,429	12,954	14,089	11,074

The calculation of diluted income (loss) per share requires us to make certain assumptions related to the use of proceeds that would be received upon the assumed exercise of stock options or proceeds from the employee stock purchase plan.

8. Income Taxes

For the three months ended June 30, 2023 and 2022, we recorded income tax expense of $3.0 million and $7.9 million, respectively, resulting in an effective tax rate of 91.9% and (1.3)%, respectively. For the six months ended June 30, 2023 and 2022, we recorded income tax expense of $15.7 million and $7.7 million, respectively, resulting in an effective tax rate of 151.7% and (1.2)%, respectively. The increase in the effective tax rates for the three and six months ended June 30, 2023 compared to the same period in 2022 was primarily due to the effect of the goodwill impairment recognized in 2022, which is primarily non-deductible for income tax purpose, as well as an increase in the valuation allowance resulting from deduction limitations associated with the U.S. Tax Cuts and Jobs Act of 2017, or U.S. Tax Act.

Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At June 30, 2023, we had accrued interest and penalties related to unrecognized tax benefits of approximately $4.2 million.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2013 through February 2016 and 2019 through 2022 tax years generally remain open and subject to examination by federal tax authorities. The 2015 through 2022 tax years generally remain open and subject to examination by the state tax authorities and foreign tax

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

authorities. We are currently under examination by the IRS for the tax years 2013 through the period ending February 2016. We are under audit by the Indian Tax Authority for the 2017 tax year. We are currently under audit by the Texas Comptroller for the 2015 through 2020 tax years. We are not currently under audit in any other taxing jurisdictions.

9. Commitments and Contingencies

Cyber Incident

As previously disclosed, we were the victim of a cyberattack on our Orion Software Platform and internal systems, or the Cyber Incident. We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident.

Expenses Incurred

We recorded pre-tax expenses (proceeds) related to the Cyber Incident as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022

	(in thousands)
Cost of recurring revenue	$	—	$	7	$	—	$	163
Sales and marketing	—		62		—		130
Research and development	—		—		—		2
General and administrative	5,580		3,679		7,608		9,169
Total gross expenses related to the Cyber Incident	5,580		3,748		7,608		9,464
Less: proceeds received or expected to be received under our insurance coverage	(5,000)		—		(14,798)		—
Total net expenses (proceeds) related to the Cyber Incident	$	580	$	3,748	$	(7,190)	$	9,464

General and administrative expense is presented net of insurance proceeds received and expected insurance proceeds for costs we believe are reimbursable and probable of recovery in our condensed consolidated statements of operations. Expenses include costs to investigate and remediate the Cyber Incident, costs of lawsuits and investigations related thereto, including settlement costs and legal and other professional services, and consulting services provided to customers at no charge, all of which were expensed as incurred.

Litigation, Claims and Government Investigations

As a result of the Cyber Incident, we are subject to multiple lawsuits and investigations. A consolidated putative class action lawsuit alleging violations of the federal securities laws was filed against us and certain of our current and former officers. The complainants sought certification of a class of all persons who purchased or otherwise acquired our securities between October 18, 2018 and December 17, 2020 and sought unspecified monetary damages, costs and attorneys’ fees. On October 28, 2022, the parties entered into a binding settlement term sheet with respect to the securities class action lawsuit and lead plaintiff filed the parties’ Stipulation and Agreement of Settlement with the court on December 8, 2022. On February 8, 2023, the court granted preliminary approval of the settlement, and on March 2, 2023, we paid $26 million to fund claims submitted by class members, the legal fees of plaintiffs’ counsel and the costs of administering the settlement. The settlement resolves all claims asserted against us and the other named defendants in connection with the class action litigation and contains provisions that the settlement does not constitute an admission, concession, or finding of any fault, liability, or wrongdoing of any kind by us or any defendant. On July 28, 2023, the court held a final settlement hearing after which the court entered an order and final judgment approving the settlement. The settlement sum was authorized and approved by our insurers, and we expect that the settlement payment will be reimbursed entirely by applicable directors’ and officers’ liability insurance. In addition, two shareholder derivative actions were filed, purportedly on behalf of the Company, one in the Western District of Texas and one in the Delaware Court of Chancery, in each case asserting breach of duty and other claims against certain of our current and former officers and directors in connection with the Cyber Incident. On October 13, 2022, the Delaware Court of Chancery entered an order dismissing the case in that court with prejudice, and on May 17, 2023, the Supreme Court of the State of Delaware entered an order affirming the Delaware Court of Chancery’s judgment. On July 12, 2023, the United States District Court for the Western District of Texas entered a final judgment dismissing the case in that court without prejudice.

In addition, there are several pending investigations and inquiries by U.S. regulatory authorities related to the Cyber Incident, including from the Department of Justice and the SEC. We are cooperating and providing information in connection with these investigations and inquiries and are incurring, and in future periods expect to incur, costs and other expenses in connection with these investigations and inquiries. On October 28, 2022, the enforcement staff of the SEC provided us with a

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

“Wells Notice” relating to its investigation, or the Investigation, into the Cyber Incident. Subsequently, certain of our current and former executive officers and employees, including our Chief Financial Officer and Chief Information Security Officer, also received “Wells Notices” from the SEC staff, each in connection with the Investigation. The Wells Notices state that the SEC staff has made a preliminary determination to recommend that the SEC file an enforcement action against us and each such individual, respectively, alleging violations of certain provisions of the U.S. federal securities laws with respect to our cybersecurity disclosures and public statements, as well as our internal controls and disclosure controls and procedures. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. We maintain that our disclosures, public statements, controls and procedures were appropriate, and we currently intend to continue to vigorously defend ourselves, including against any enforcement action or other charges. If the SEC were to authorize an action against us or such individuals, it could seek an order enjoining us or the individuals from engaging in future violations of provisions of the federal securities laws subject to the action and, in the case of the individuals, imposing a bar from serving as an officer or director of a public company, imposing civil monetary penalties and/or providing for other equitable relief within the SEC’s authority. The results of the Wells Notice process and any corresponding enforcement action and the costs, timing and other potential consequences of responding and complying therewith are unknown at this time.

While we believe it is reasonably possible that we could incur losses associated with these proceedings and investigations, other than with respect to the securities class action settlement and the two shareholder derivative actions, it is not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the fact that alleged damages have not been specified and the lack of resolution on significant factual and legal issues. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. Losses associated with any adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations could be material to our business, results of operations, financial condition or cash flows in future periods.

Additional lawsuits and claims related to the Cyber Incident may be asserted by or on behalf of customers, stockholders or others seeking damages or other related relief and additional inquiries from governmental agencies may be received or investigations by governmental agencies commenced.

Insurance Coverage

We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident, which renews annually. In addition, we maintain $50 million of directors and officers liability insurance coverage to reduce our exposure to our indemnification obligations for certain expenses incurred by our directors and officers, including as a result of the legal proceedings related to the Cyber Incident such as the securities class action settlement, which renews annually. As of June 30, 2023, we have a loss recovery asset of $45 million recorded for insurance proceeds deemed probable of recovery which is included in prepaid and other current assets in our condensed consolidated balance sheet.

Indemnification

In connection with the separation and distribution of our managed service provider (“N-able”) business into a newly created and separately traded public company, N-able, Inc. (“Separation”), we entered into a separation and distribution agreement and related agreements with N‑able to govern the Separation and related transactions and the relationship between the respective companies going forward. The separation and distribution agreement provides for certain indemnity and liability obligations, including that we will indemnify N-able for all liabilities based upon, arising out of or related to the Cyber Incident other than certain specified expenses for which N-able will be responsible. The amount of the indemnification liability, if any, cannot be determined and has not been recorded in our condensed consolidated financial statements as of June 30, 2023.

Other Matters

In addition to the Cyber Incident described above, from time to time we are involved in litigation arising from the normal course of business. In management's opinion, this litigation is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 2. 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 the condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical condensed 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 section entitled “Safe Harbor Cautionary Statement” above and the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and this Quarterly Report on Form 10-Q 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.”

Overview

SolarWinds is a leading provider of simple, powerful, and secure information technology, or IT, management and observability software. Our solutions are designed to give organizations worldwide, regardless of type, size, or complexity, the power to optimize performance of their hybrid IT environments, no matter where they are in their digital transformation journeys.

We offer a broad portfolio of solutions designed to help technology professionals and leaders to monitor, manage, and optimize networks, systems, databases and applications across on-premises, multi-cloud and hybrid IT infrastructures. Most of our offerings are built on a platform-based approach, that we call the SolarWinds Platform, to enable our customers to easily purchase and deploy our products individually or as an integrated offering as their needs evolve. We utilize a cost-efficient, integrated global product development model and have expanded our offerings over time through both organic development and strategic acquisitions. We intend to continue to innovate and invest in areas of product development to bring new products to market and enhance the functionality, ease of use, and integration of our current products. Over time, we intend to grow our subscription revenue by focusing more on selling subscriptions over perpetual licenses, which we call our subscription-first approach.

On February 5, 2016, we were acquired by affiliates of Silver Lake Group, L.L.C. and Thoma Bravo, LLC in a take private transaction, or the Take Private. In October 2018, we completed our initial public offering, or IPO, and once again become a publicly traded company.

Cyber Incident

As previously disclosed, we were the victim of a cyberattack on our Orion Software Platform and internal systems, or the “Cyber Incident.” We, together with our partners, have undertaken extensive measures to investigate, contain, eradicate, and remediate the Cyber Incident. In addition, as part of our “Secure by Design” initiative, we continue to work with industry experts to implement enhanced security practices designed to further strengthen and protect our products and environment against these and other types of attacks in the future.

Expenses

Expenses incurred related to the Cyber Incident include costs to investigate and remediate the Cyber Incident, costs of lawsuits and investigations related thereto, including settlement costs and legal and other professional services, and consulting services provided to customers at no charge, all of which were expensed as incurred. See Note 9. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding expenses incurred related to the Cyber Incident.

Our “Secure by Design” initiatives, which include costs to enhance our security measures across our systems and our software development and build environments, continue to be included in our ongoing research and development expense, as well as general and administrative expense.

Litigation, Claims and Government Investigations

As a result of the Cyber Incident, we are subject to several lawsuits and investigations or inquiries as described in Note 9. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

Future Costs

We expect to continue to incur additional legal and other professional services costs and expenses associated with the Cyber Incident in future periods. We expect to recognize these expenses as services are received. Costs related to the Cyber

Incident that will be incurred in future periods may include increased expenses associated with ongoing claims, investigations and inquiries, and any new claims, investigations and inquiries. See Note 9. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for information related to the legal proceedings and governmental investigations related to the Cyber Incident. While we will incur costs and other expenses associated with these proceedings and investigations, other than with respect to the settlement of the consolidated putative class action lawsuit and dismissal of the two derivative cases, it is currently not possible to estimate the amount of any loss or range of possible loss that might result from adverse judgments, settlements, penalties or other resolutions of such proceedings and investigations based on the fact that alleged damages have not been specified and the lack of resolution on significant factual and legal issues. We also expect to incur increased expenses for insurance, finance, compliance activities, and to meet increased legal and regulatory requirements.

Insurance Coverage

Impacts of Macroeconomic Conditions

As a global company, we are subject to negative impacts and risks related to prevailing macroeconomic conditions and significant events with macroeconomic impacts, including, but not limited to, the ongoing conflict between Russia and Ukraine and resulting sanctions and other actions against Russia and Belarus, geopolitical tensions involving China, market conditions related to inflation and action taken by central banks to counter inflation, fluctuating foreign currency exchange rates, changes in interest rates, instability in the banking sector and financial services industry, supply chain disruption issues and the effects of the COVID-19 pandemic. We have suspended all of our business activities in Russia and Belarus, but such suspension has not had, and we do not expect it to have, a material impact on our financial results. Foreign currency exchange rate fluctuations during the past year negatively impacted our revenues and may continue to impact our revenues in 2023. In addition, rising interest rates have increased our borrowing expense under our credit agreement, and if rates continue to rise, our borrowing costs may continue to increase. We continuously monitor the direct and indirect impacts of these events on our business and financial results, as well as the overall global economy, and we anticipate that these macroeconomic events may continue to negatively impact our results of operation. See Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and Part II, Item 1A “Risk Factors” in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023 for further discussion of the possible impacts of these macroeconomic conditions on our business and financial results.

Second Quarter Highlights

Below are our key financial highlights for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Customers

Our approach allows us to both sell to a broad group of potential customers and close large transactions with significant customers. As of June 30, 2023, we had over 300,000 customers. While some customers may spend as little as $100 with us over a twelve-month period, we had 933 customers who spent more than $100,000 with us for the trailing twelve-month period ended June 30, 2023 as compared to 879 for the trailing twelve-month period ended June 30, 2022.

We define customers as individuals or entities that have purchased one or more of our products under a unique customer identification number since our inception for our perpetual license products and individuals or entities that have an active subscription for at least one of our subscription products. Each unique customer identification number constitutes a separate customer regardless of the amount purchased. We may have multiple purchasers of our products within a single organization, each of which may be assigned a unique customer identification number and deemed a separate customer.

Annual Recurring Revenue (ARR)

We use Subscription Annual Recurring Revenue, or Subscription ARR, and Total Annual Recurring Revenue, or Total ARR, to better understand and assess the performance of our business, as our mix of revenue generated from recurring revenue has increased in recent years. Subscription ARR and Total ARR each provides a normalized view of customer retention, renewal and expansion, as well as growth from new customers. Subscription ARR and Total ARR should each be viewed independently of revenue and deferred revenue and are not intended to be combined with or to replace either of those items.

Beginning in the quarter ended December 31, 2022, we revised the methodology used to calculate Total ARR. In calculating Total ARR, we now only recognize the impact of any price increases upon renewal of the expiring maintenance contracts rather than upon enactment of such price increases. We believe this change in methodology better represents the current value of our maintenance contracts and better aligns our definition with comparable companies.

Total ARR for the prior period ended June 30, 2022 presented below has been recalculated to conform to the current calculation method. The change in calculation method reduced our previously reported Total ARR as of June 30, 2022 by $4.0 million. There have been no changes in the calculation method for Subscription ARR.


	As of June 30,				Year-over-Year Growth
	2023		2022

	(in thousands, except percentages)
Subscription ARR(1)	$	197,725	$	148,277	33.3	%
Total ARR(2)	657,104		621,449		5.7

_______

(1)Subscription ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period.

(2)Total ARR represents the sum of Subscription ARR and the annualized value of all maintenance contracts related to perpetual licenses active at the end of a reporting period.

The year-over-year growth in Subscription ARR was primarily driven by sales of our time-based subscription offerings as a result of customers transitioning to our subscription products and pricing models including our SolarWinds Hybrid Cloud Observability. Total ARR increased primarily due to the growth in Subscription ARR, partially offset by the decline in the annualized value of maintenance contracts as a result of lower new perpetual license sales and the impact of customers transitioning to our subscription offerings.

Components of Our Results of Operations

Revenue

Our revenue consists of recurring revenue and perpetual license revenue.

•Recurring Revenue. The significant majority of our revenue is recurring and consists of subscription and maintenance revenue.

•Subscription Revenue. We primarily derive subscription revenue from fees received for subscriptions to our SaaS offerings and our time-based subscription offerings. We recognize revenue for SaaS offerings, including our SolarWinds Observability solution, ratably over the subscription term once the service is made available to the customer or when we have the right to invoice services performed. We also offer time-based subscription offerings for our SolarWinds Hybrid Cloud Observability solution along with many of our products historically sold as perpetual licenses, such as our network, systems and database management products, to give customers additional flexibility when purchasing our products. Revenue for our time-based subscription offerings, including multi-year arrangements, is recognized upfront upon delivery of the on-premise software license and ratably over the contract period for the related support. We generally invoice our time-based subscription agreements in advance at the beginning of the subscription period and invoice our SaaS offerings over the subscription period on either a monthly or annual basis and to a lesser extent, monthly based on usage. Our subscription revenue grows as customers transition to our subscription model, add new subscription products, upgrade the capacity level of their existing subscription products or increase the usage of their subscription products. In addition, while the majority of our contracts include annual subscription periods, subscription revenue is impacted by the timing, duration and volume of multi-year time-based subscription arrangements sold during a period, which impacts the amount of revenue recognized upfront and may cause subscription revenue to fluctuate.

•Maintenance Revenue. We derive maintenance revenue from the sale of maintenance services associated with our perpetual license products. Perpetual license customers pay for maintenance services based on the products they have purchased. We recognize maintenance revenue ratably on a daily basis over the contract period. Our maintenance revenue grows when we renew existing maintenance contracts and add new perpetual license customers, and as existing customers add new products. In addition, we typically implement annual price increases for our maintenance services. We also include professional services and other revenue in maintenance revenue, which is generally recognized ratably or as delivered.

•License Revenue. We derive license revenue from sales of perpetual licenses of our on-premise network, systems, storage and database management products to new and existing customers. We include one year of maintenance services as part of our customers’ initial license purchase. License revenue is recognized upfront upon delivery of the electronic license key. We allocate revenue to the license component based upon our estimated standalone selling prices, which is derived by evaluating our historical pricing and discounting practices in observable bundled transactions.

Our continued efforts to increase sales of our subscription offerings as part of our subscription-first approach has impacted the mix of license and recurring revenue. As we introduce new subscription offerings and incentivize our sales teams to focus on more subscription sales, we expect a continued shift in our revenue mix each quarter as existing customers transition to, and new customers purchase, our subscription offerings. However, due to uncertainty regarding the level of customer adoption of our subscription offerings, the timing and impact of this transition are difficult to predict at this time. While we encourage customers to transition to our subscription offerings, we do not require them to transition and we plan to continue to sell perpetual licenses and renew maintenance services for our network, systems and database management products. Our license sales and maintenance renewals may decline or fluctuate in future periods as customers transition to our subscription offerings.

Cost of Revenue

•Cost of Recurring Revenue. Cost of recurring revenue primarily consists of technical support personnel costs, public cloud infrastructure and hosting fees, amortization of capitalized development costs related to our hosted solutions and an allocation of overhead costs for our subscription revenue and maintenance services. Allocated costs consist of certain facilities, depreciation, benefits and IT costs allocated based on headcount. We expect our public cloud infrastructure and hosting fees and amortization of capitalized development costs to increase as we expand our subscription-based offerings.

•Amortization of Acquired Technologies. Amortization of acquired technologies consists of amortization related to capitalized costs of technologies acquired, including those acquired in connection with the Take Private.

Operating Expenses

Operating expenses consists 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 consist of salaries, benefits, bonuses, sales commissions, stock-based compensation and an allocation of overhead costs based on headcount. The total number of employees as of June 30, 2023 was 2,129, as compared to 2,215 as of June 30, 2022. During 2023, as part of our ongoing efforts to improve our operating margins, we completed certain restructuring activities, resulting in lease impairment charges, other costs incurred in connection with the exiting of certain leased facilities and other contracts as well as costs related to headcount reductions.

While we are focused on disciplined expense management, we expect our operating expenses to continue to increase in absolute dollars as we make long-term investments in our business, including continued product development and increasing our selling efforts toward enterprise customers. Our operating expenses in future periods also may increase in absolute dollars and fluctuate as a percentage of revenue as a result of any future acquisitions and any further decisions to increase our investment in our business. Our stock-based compensation expense has increased due to equity awards granted to our employees and directors, and we intend to continue to grant equity awards which will result in additional stock-based compensation expense in future periods.

•Sales and Marketing. Sales and marketing expenses primarily consist of related personnel costs, including our sales, marketing and maintenance renewal and subscription retention teams. Sales and marketing expenses also includes the cost of digital marketing programs such as paid search, search engine optimization and management, website maintenance and design. As part of our ongoing efforts to improve our operating margins, we have and expect to continue to invest selectively in our marketing programs as we look to optimize our sales and marketing productivity and expand our routes to market.

•Research and Development. Research and development expenses primarily consist of related personnel costs for our product development employees and executives and, to a lesser extent, contractor fees. We capitalize certain research and development costs related to developing new functionality for our solutions that are hosted and accessed by our customers on a subscription basis, which may cause our research and development expense to fluctuate from period to period.

•General and Administrative. General and administrative expenses primarily consist of personnel costs for our executive, finance, legal, human resources and other administrative personnel, general restructuring costs, acquisition costs, certain Cyber Incident costs, professional fees, certain non-cash impairment charges and other general corporate expenses. The Cyber Incident has resulted in increased general and administrative expenses which we expect to

continue in 2023 and beyond, although expenses may fluctuate from period to period depending on the timing of related activities.

•Amortization of Acquired Intangibles. We amortize to operating expenses the capitalized costs of intangible assets acquired in connection with the Take Private and our other acquisitions.

Other Income (Expense)

Other income (expense) primarily consists of interest expense, interest income and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts. The interest expense on our debt has increased due to increases in interest rates and as a result of the increase in applicable margins resulting from the refinancing of our debt in November 2022. We expect our interest expense may continue to increase as a result of anticipated interest rate increases since the borrowings outstanding under our credit agreement currently bear interest at variable rates.

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 3. Quantitative and Qualitative Disclosures About Market Risk” for additional information on how foreign currency impacts our financial results.

Income Tax Expense (Benefit)

Income tax expense (benefit) consists of domestic and foreign corporate income taxes related to the sale of products. The tax rate on income earned by our North American entities is generally higher than the tax rate on income earned by our international entities. We expect the income earned by our international entities to grow over time as a percentage of total income, which could result in a decline in our effective income tax rate. However, our effective tax rate will be affected by many other factors including changes in tax laws, regulations or rates, new interpretations of existing laws or regulations, shifts in the allocation of income earned throughout the world and changes in overall levels of income before tax.

Comparison of the Three Months Ended June 30, 2023 and 2022

Revenue


	Three Months Ended June 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Subscription	$	53,389	28.9	%	$	36,980	21.0	%	$	16,409
Maintenance	116,056		62.7		113,972		64.7		2,084
Total recurring revenue	169,445		91.6		150,952		85.8		18,493
License	15,589		8.4		25,082		14.2		(9,493)
Total revenue	$	185,034	100.0	%	$	176,034	100.0	%	$	9,000

Total revenue increased $9.0 million, or 5.1%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due to an increase in recurring revenue partially offset by a decrease in license revenue as we continue to transition to a subscription model. Revenue from North America was approximately 69% of total revenue for both the three months ended June 30, 2023 and 2022. Other than the United States, no single country accounted for 10% or more of our total revenue during these periods. We expect our international total revenue to increase slightly as a percentage of total revenue as we expand our international sales and marketing efforts across our product lines.

As a result of macroeconomic conditions, certain of our customers have, and others may, defer renewals or cancel subscriptions which has had, and could in the future have, a negative impact on our revenue. However, despite the impact of macroeconomic conditions, our maintenance renewal rate for the trailing twelve month period was 94%.

Recurring Revenue

Subscription Revenue. Subscription revenue increased $16.4 million, or 44.4%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due to increased sales of our time-based subscription offerings resulting from customers transitioning to our subscription pricing model, including our SolarWinds Hybrid Cloud Observability solution, and includes a $3.0 million increase resulting from sales of multi-year time-based arrangements during the period. Our

subscription revenue increased as a percentage of our total revenue for the three months ended June 30, 2023 as compared to the three months ended June 30, 2022.

Our net retention rate for our subscription products was as follows:


	Trailing Twelve Months Ended June 30,
	2023		2022

Net retention rate(1)	93	%	97	%

_______

(1)Net retention rate for subscription products represents the implied monthly subscription revenue at the end of a period for the base set of customers from which we generated subscription revenue in the year prior to the calculation, divided by the implied monthly subscription revenue one year prior to the date of the calculation for that same customer base.

The decrease in net retention rate for the period is primarily attributable to the impacts of customer attrition in certain of our established subscription products, partially offset by stronger net retention rates of our Observability solutions.

Maintenance Revenue. Maintenance revenue increased $2.1 million, or 1.8%, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, primarily due to increased sales of professional services and other revenue as well as the impact of price increases on our maintenance services, partially offset by the impact on maintenance revenue from conversions of customers to subscription-based products.

Our maintenance renewal rate for our perpetual license products was as follows:


	Trailing Twelve Months Ended June 30,
	2023		2022

Maintenance renewal rate(1)	94	%	91	%

_______

(1)Maintenance renewal rate represents the sales of maintenance services for all existing maintenance contracts expiring in a period, divided by the sum of previous sales of maintenance services corresponding to those services expiring in the current period. The calculation of maintenance renewal rate only includes customers renewing maintenance contracts and excludes all customers that transition from maintenance contracts to subscription offerings. Sales of maintenance services includes sales of maintenance renewals for a previously purchased product and the amount allocated to maintenance revenue from a license purchase.

License Revenue

License revenue decreased $9.5 million, or 37.8%, primarily due to the impact of customers transitioning to our subscription offerings including an increase in the subscription sales of our SolarWinds Hybrid Cloud Observability solution and other products that have historically been sold only as perpetual licenses. We expect license revenue to continue to decline as customers transition to our subscription offerings.

Cost of Revenue


	Three Months Ended June 30,
	2023				2022
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Cost of recurring revenue	$	18,533	10.0	%	$	15,460	8.8	%	$	3,073
Amortization of acquired technologies	3,425		1.9		3,648		2.1		(223)
Total cost of revenue	$	21,958	11.9	%	$	19,108	10.9	%	$	2,850

Total cost of revenue incre

SolarWinds Corp [SWI] Filings
10-Q	[2023-08-09]
10-Q	[2023-05-04]
10-K	[2023-02-22]
10-Q	[2022-11-08]
10-Q	[2022-08-05]
10-Q	[2022-05-06]
10-K	[2022-02-25]
10-Q	[2021-11-09]
10-Q	[2021-08-06]
10-Q	[2021-05-10]
10-K	[2021-03-01]
10-Q	[2020-11-05]
10-Q	[2020-08-10]
10-Q	[2020-05-08]
10-K	[2020-02-24]
10-Q	[2019-11-07]
10-Q	[2019-08-12]
S-1	[2019-05-20]
10-Q	[2019-05-10]
10-K	[2019-02-25]
10-Q	[2018-11-27]
S-1	[2018-09-21]