SolarWinds Corp [SWI] Filings

10-Q 1 swi-20220331.htm 10-Q swi-20220331

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 March 31, 2022


☐			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 May 2, 2022, 160,513,119 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	6
	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	6
	Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2022 and 2021	7
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three month periods ended March 31, 2022 and 2021	8
	Condensed Consolidated Statements of Stockholders' Equity for the three month periods ended March 31, 2022 and 2021	9
	Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2022 and 2021	10
	Notes to the Condensed Consolidated Financial Statements	11
	1. Organization and Nature of Operations
	2. Summary of Significant Accounting Policies
	3. Discontinued Operations
	4. Goodwill
	5. Fair Value Measurements
	6. Debt
	7. Earnings (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	33
Item 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	37
	Signatures	38
	Certifications

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;

•findings from our investigations into the cyberattack on our Orion Software Platform and internal systems (the "Cyber Incident"), including our understanding of the nature, source and duration of the attack and our plans to ensure our products and internal systems are secure and provide additional information regarding our findings, as well as our expectations regarding the impact of 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 the impact and benefits of the spin-off of the N-able business into a newly created and separately traded public company;

•expectations regarding investment in product development and our expectations about the results of those efforts;

•expectations regarding hiring additional personnel globally in the areas of sales and marketing and research and development;

•expectations regarding our evolution from monitoring to observability;

•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 of the COVID-19 pandemic on our business, results of operations and financial condition; 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, including with respect to its scope, the threat actor’s access to SolarWinds’ environments and its related activities during such period, and the related impact on SolarWinds’ systems, products, current or former employees and customers, (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, including with respect to providing notices to any impacted individuals, 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, litigation, 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, including coverage relating to certain security and privacy damages and claim expenses, may not be available or sufficient to compensate for all liabilities we incur related to these matters, (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 and (7) the risk that the impact of the Cyber Incident may be proportionally greater in future periods as a result of the spin-off of the N-able business;

•other risks related to cyber security, including that we may experience other security incidents or have vulnerabilities in our systems and services exploited, 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 spin-off of the N-able business into a newly created and separately traded public company, including that we may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the separation, or such benefits may be delayed by a variety of circumstances, which may not be under our control, we may experience increased difficulties in attracting, retaining and motivating employees or maintaining or initiating relationships with partners, customers and other parties with which we currently do business, or may do business in the future, 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;

•the possibility that the global COVID-19 pandemic may adversely affect our business, results of operations and financial condition or the impact of the COVID-19 pandemic on the global economy or on the business operations and financial conditions of 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 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;

•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;

•our ability to develop new products and product upgrades, and the timing and success of any such new product introductions and product upgrades;

•our ability to compete effectively in the markets we serve;

•our ability to attract, retain and motivate employees;

•the possibility that general economic conditions or uncertainty cause information technology spending to be reduced or purchasing decisions to be delayed, including as a result of the war in Ukraine, the COVID-19 pandemic, inflation or other geopolitical events globally;

•our inability to successfully identify, complete and integrate acquisitions and manage our growth effectively;

•risks associated with our international operations;

•our status as a controlled company;

•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;

•potential foreign exchange gains and losses related to expenses and sales denominated in currencies other than the functional currency of an associated entity; 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.

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.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SolarWinds Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share information)

(Unaudited)


	March 31,		December 31,
	2022		2021
Assets
Current assets:
Cash and cash equivalents	$	751,218	$	732,116

Accounts receivable, net of allowances of $693 and $476 as of March 31, 2022 and December 31, 2021, respectively	98,231		95,095
Income tax receivable	1,343		1,114

Prepaid and other current assets	22,559		30,515
Total current assets	873,351		858,840
Property and equipment, net	27,974		29,722
Operating lease assets	71,373		74,318
Deferred taxes	141,512		144,162
Goodwill	3,299,468		3,308,405
Intangible assets, net	311,874		342,563
Other assets, net	36,197		34,117
Total assets	$	4,761,749	$	4,792,127
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	7,188	$	7,327
Accrued liabilities and other	32,994		41,328
Current operating lease liabilities	14,938		14,382

Accrued interest payable	171		153
Income taxes payable	6,483		3,086
Current portion of deferred revenue	329,017		327,701
Current debt obligation	19,900		19,900
Total current liabilities	410,691		413,877
Long-term liabilities:
Deferred revenue, net of current portion	35,458		34,968
Non-current deferred taxes	10,713		16,918
Non-current operating lease liabilities	70,713		74,543
Other long-term liabilities	88,786		93,156
Long-term debt, net of current portion	1,868,010		1,870,769
Total liabilities	2,484,371		2,504,231


Stockholders’ equity:
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 160,456,486 and 159,176,042 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	160		159
Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively	—		—
Additional paid-in capital	2,577,818		2,566,783
Accumulated other comprehensive income (loss)	(15,589)		1,306
Accumulated deficit	(285,011)		(280,352)
Total stockholders’ equity	2,277,378		2,287,896
Total liabilities and stockholders’ equity	$	4,761,749	$	4,792,127

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 March 31,
	2022		2021
Revenue:
Subscription	$	38,747	$	28,317
Maintenance	115,495		120,665
Total recurring revenue	154,242		148,982
License	22,626		24,874
Total revenue	176,868		173,856
Cost of revenue:
Cost of recurring revenue	17,831		15,654
Amortization of acquired technologies	17,227		40,417
Total cost of revenue	35,058		56,071
Gross profit	141,810		117,785
Operating expenses:
Sales and marketing	61,044		57,666
Research and development	23,422		26,358
General and administrative	32,664		30,865
Amortization of acquired intangibles	13,239		14,038
Total operating expenses	130,369		128,927
Operating income (loss)	11,441		(11,142)
Other income (expense):
Interest expense, net	(16,087)		(16,174)
Other income (expense), net	(169)		656
Total other expense	(16,256)		(15,518)
Loss before income taxes	(4,815)		(26,660)
Income tax benefit	(156)		(4,880)
Net loss from continuing operations	(4,659)		(21,780)
Net income from discontinued operations, net of tax	—		14,620
Net loss	$	(4,659)	$	(7,160)
Net loss from continuing operations available to common stockholders	$	(4,659)	$	(21,780)
Net income from discontinued operations available to common stockholders	$	—	$	14,620
Net income (loss) available to common stockholders per share:
Basic loss from continuing operations per share	$	(0.03)	$	(0.14)
Basic earnings from discontinued operations per share	—		0.09
Basic loss per share	$	(0.03)	$	(0.05)
Diluted loss from continuing operations per share	$	(0.03)	$	(0.14)
Diluted earnings from discontinued operations per share	—		0.09
Diluted loss per share	$	(0.03)	$	(0.05)
Weighted-average shares used to compute net income (loss) available to common stockholders per share:
Shares used in computation of basic earnings (loss) per share	159,847		157,123
Shares used in computation of diluted earnings (loss) per share	159,847		157,123

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 March 31,
	2022		2021
Net loss	$	(4,659)	$	(7,160)
Other comprehensive income (loss):
Foreign currency translation adjustment	(16,895)		(65,750)

Other comprehensive income (loss)	(16,895)		(65,750)
Comprehensive income (loss)	$	(21,554)	$	(72,910)

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 March 31, 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	—	—		—		(16,895)		—		(16,895)
Net loss	—	—		—		—		(4,659)		(4,659)
Comprehensive loss										(21,554)
Exercise of stock options	16	—		12		—		—		12
Restricted stock units issued, net of shares withheld for taxes	1,063	1		(6,408)		—		—		(6,407)
Issuance of stock	51	—		216		—		—		216
Issuance of stock under employee stock purchase plan	150	—		1,753		—		—		1,753
Stock-based compensation	—	—		15,462		—		—		15,462
Balance at March 31, 2022	160,456	$	160	$	2,577,818	$	(15,589)	$	(285,011)	$	2,277,378


	Three Months Ended March 31, 2021
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2020	156,520	$	157	$	3,112,262	$	127,212	$	(228,944)	$	3,010,687
Foreign currency translation adjustment	—	—		—		(65,750)		—		(65,750)
Net loss	—	—		—		—		(7,160)		(7,160)
Comprehensive loss										(72,910)
Exercise of stock options	4	—		11		—		—		11
Restricted stock units issued, net of shares withheld for taxes	659	1		(8,398)		—		—		(8,397)
Issuance of stock	411	—		463		—		—		463
Issuance of stock under employee stock purchase plan	108	—		3,129		—		—		3,129
Stock-based compensation	—	—		17,183		—		—		17,183

Balance at March 31, 2021	157,702	$	158	$	3,124,650	$	61,462	$	(236,104)	$	2,950,166

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

SolarWinds Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net loss from continuing operations	$	(4,659)	$	(21,780)
Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities:
Depreciation and amortization	33,928		58,355
Provision for losses on accounts receivable	297		413
Stock-based compensation expense	15,269		13,794

Amortization of debt issuance costs	2,258		2,239


Deferred taxes	(6,392)		26


Loss (gain) on foreign currency exchange rates	280		(1,462)
Other non-cash expenses	211		2,266
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations:
Accounts receivable	(3,332)		(4,515)
Income taxes receivable	(243)		487
Prepaid and other assets	8,073		(9,580)
Accounts payable	(138)		4,834
Accrued liabilities and other	(8,482)		(14,848)
Accrued interest payable	18		(3)
Income taxes payable	(822)		(14,864)
Deferred revenue	3,876		603
Other long-term liabilities	116		—
Net cash provided by operating activities from continuing operations	40,258		15,965
Cash flows from investing activities


Purchases of property and equipment	(1,180)		(3,389)
Purchases of intangible assets	(3,120)		(926)
Acquisitions, net of cash acquired	(6,500)		447


Net cash used in investing activities from continuing operations	(10,800)		(3,868)
Cash flows from financing activities


Proceeds from issuance of common stock under employee stock purchase plan	1,753		3,129
Repurchase of common stock and incentive restricted stock	(6,419)		(8,588)
Exercise of stock options	12		11




Repayments of borrowings from credit agreement	(4,975)		(4,975)



Net cash used in financing activities from continuing operations	(9,629)		(10,423)
Effect of exchange rate changes on cash and cash equivalents from continuing operations	(727)		(4,390)
Cash flows of discontinued operations
Operating activities of discontinued operations	—		10,966
Investing activities of discontinued operations	—		(3,661)
Financing activities of discontinued operations	—		—
Effect of exchange rate changes on cash and cash equivalents from discontinued operations	—		(735)
Net cash provided by discontinued activities	—		6,570
Net increase in cash and cash equivalents	19,102		3,854
Cash and cash equivalents
Beginning of period	732,116		370,498
End of period	$	751,218	$	374,352

Supplemental disclosure of cash flow information
Cash paid for interest	$	13,907	$	13,993
Cash paid for income taxes	$	6,259	$	14,408

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 information technology, or IT, management software. Our solutions give organizations worldwide, regardless of type, size or complexity, the power to accelerate business transformation in today's hybrid IT environments. Our approach, which we refer to as the SolarWinds Model, combines 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. Our SolarWinds Model enables us to sell our products for use in organizations ranging in size from very small businesses to large enterprises.

Spin-Off of N-able Business

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.

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 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

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 months ended March 31, 2022.

Goodwill

Our goodwill was derived from the Take Private transaction 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 when circumstances indicate an impairment may exist.

For the goodwill impairment analysis performed at December 31, 2021, we assessed several events and circumstances that could affect the significant inputs used to determine the fair value of our reporting units, 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, key management turnover, 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 above qualitative factors that would impact the fair value of our reporting unit. In addition, there were no changes to factors used in the determination of our assumptions used in the discounted cash flow models regarding revenue growth rates, discount rate, estimated implications of the Cyber Incident to our cost structure, economic and market trends and other expectations about the anticipated operating results 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. We will continue to evaluate whether circumstances indicate an impairment may exist throughout the year prior to our annual impairment analysis during the fourth quarter of 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) a decrease in future cash flows due to lower than expected license sales or maintenance renewals and higher than estimated costs to respond to the Cyber Incident, (ii) higher than expected customer attrition resulting from customer concerns related to the Cyber Incident, (iii) adverse loss exposure from claims, fines or penalties from the Cyber Incident; and (iv) volatility in the equity and debt markets or other macroeconomic factors which could result in a higher weighted-average cost of capital. Accordingly, if our current cash flow assumptions are not realized or we experience sustained declines in our stock price or market capitalization, it is possible that an 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.

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.

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component are summarized below:


	Foreign Currency Translation Adjustments		Accumulated Other Comprehensive Income (Loss)

	(in thousands)




Balance at December 31, 2021	$	1,306	$	1,306
Other comprehensive gain (loss) before reclassification	(16,895)		(16,895)
Amount reclassified from accumulated other comprehensive income (loss)	—		—
Net current period other comprehensive income (loss)	(16,895)		(16,895)
Balance at March 31, 2022	$	(15,589)	$	(15,589)

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	(125,297)
Additional amounts deferred	126,840
Deferred revenue acquired in business combinations	263
Balance at March 31, 2022	$	364,475

We expect to recognize revenue related to these remaining performance obligations as of March 31, 2022 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	$	364,475	$	329,017	$	34,549	$	909

Deferred Commissions

Details of our deferred commissions balance are as follows:


			Deferred Commissions
			(in thousands)
Balance at December 31, 2021			$	18,897

Commissions capitalized			1,979
Amortization recognized			(1,528)
Balance at March 31, 2022			$	19,348

	March 31,		December 31,
	2022		2021

	(in thousands)
Classified as:
Current	$	5,600	$	5,378
Non-current	13,748		13,519
Total deferred commissions	$	19,348	$	18,897

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Cost of Revenue

Amortization of Acquired Technologies. Amortization of acquired technologies included in cost of revenue relate to our licensed products and subscription products as follows:


	Three Months Ended March 31,
	2022		2021

	(in thousands)
Amortization of acquired license technologies	$	14,483	$	37,336
Amortization of acquired subscription technologies	2,744		3,081
Total amortization of acquired technologies	$	17,227	$	40,417

The decrease in amortization of acquired license technologies was primarily due to certain intangible assets acquired in connection with our take private transaction in early 2016 being fully amortized during the three months ended March 31, 2022.

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.

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.

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table summarizes the results of operations of N-able presented as discontinued operations:


	Three Months Ended March 31, 2021

	(in thousands)
Revenue:
Subscription	$	80,671
Maintenance	2,375
Total recurring revenue	83,046
License	—
Total revenue	83,046
Cost of revenue:
Cost of recurring revenue	11,304
Amortization of acquired technologies	2,704
Total cost of revenue	14,008
Gross profit	69,038
Operating expenses:
Sales and marketing	25,631
Research and development	11,403
General and administrative	16,845
Amortization of acquired intangibles	6,019
Total operating expenses	59,898
Operating income from discontinued operations	9,140
Other expense:
Interest (expense) income, net	—
Other expense, net	(529)
Total other expense	(529)
Income from discontinued operations before income taxes	8,611
Income tax benefit	(6,009)
Net income from discontinued operations, net of tax	$	14,620

We incurred $0.2 million and $9.9 million of costs in connection with the Separation during the three months ended March 31, 2022 and 2021, respectively. Spin-off costs incurred in the three months ended March 31, 2021 are primarily reflected in our condensed consolidated statements of operations as discontinued operations. These costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions and information technology systems, employee and contract costs and other incremental separation costs related to the Separation.

4. Goodwill

The following table reflects the changes in goodwill for the three months ended March 31, 2022:


	(in thousands)
Balance at December 31, 2021	$	3,308,405
Acquisitions	5,422
Foreign currency translation and other adjustments	(14,359)
Balance at March 31, 2022	$	3,299,468

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

5. Fair Value Measurements

The following table summarizes the fair value of our financial assets that were measured on a recurring basis as of March 31, 2022 and December 31, 2021. There have been no transfers between fair value measurement levels during the three months ended March 31, 2022.


	Fair Value Measurements at March 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)
Money market funds	$	475,000	$	—	$	—	$	475,000


Total assets	$	475,000	$	—	$	—	$	475,000


	Fair Value Measurements at December 31, 2021 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)
Money market funds	$	645,000	$	—	$	—	$	645,000


Total assets	$	645,000	$	—	$	—	$	645,000

As of March 31, 2022 and December 31, 2021, 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.

6. Debt

The following table summarizes information relating to our debt:


	March 31,				December 31,
	2022				2021
	Amount		Effective Rate		Amount		Effective Rate

	(in thousands, except interest rates)
Revolving credit facility	$	—	—	%	$	—	—	%
First Lien Term Loan (as amended) due Feb 2024	1,904,375		3.21	%	1,909,350		2.85	%


Total principal amount	1,904,375				1,909,350
Unamortized discount and debt issuance costs	(16,465)				(18,681)
Total debt	1,887,910				1,890,669
Less: Current portion of long-term debt	(19,900)				(19,900)
Total long-term debt	$	1,868,010			$	1,870,769

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 as of March 31, 2022:

•a $1.99 billion U.S. dollar term loan, or First Lien Term Loan, with a final maturity date of February 5, 2024; and

•a $117.5 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 $100.0 million multicurrency tranche and (ii) a $17.5 million tranche available only in U.S. dollars, with a final maturity date of August 5, 2023.

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

Borrowings under our Revolving Credit Facility bear interest at a floating rate which is, at our option, either (1) a Eurodollar rate for a specified interest period plus an applicable margin of 2.50% or (2) a base rate plus an applicable margin of 1.50%, respectively. The Eurodollar 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 Eurodollar rate for a specified interest period plus an applicable margin of 2.75% or (2) a base rate plus an applicable margin of 1.75%, respectively. The Eurodollar rate applicable to the First Lien Term Loan is subject to a “floor” of 0.0%.

The Eurodollar rate is equal to an adjusted London Interbank Offered Rate, or LIBOR, for a one-, two-, three- or six-month interest period with a LIBOR floor of 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 adjusted LIBOR plus 1.0% per annum.

The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the original 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 0.50% per annum of unused commitments under the Revolving Credit Facility. The commitment fee is subject to a reduction to 0.375% per annum based on our first lien net leverage ratio.

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 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 March 31, 2022, we were in compliance with all covenants of the First Lien Credit Agreement.

7. Earnings (Loss) Per Share

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


	Three Months Ended March 31,
	2022		2021

	(in thousands)
Basic earnings (loss) per share
Numerator:
Net loss from continuing operations	$	(4,659)	$	(21,780)
Net income from discontinued operations	—		14,620
Net loss	(4,659)		(7,160)


Earnings allocated to unvested restricted stock	—		—
Net loss from continuing operations available to common stockholders	$	(4,659)	$	(21,780)
Net income from discontinued operations available to common stockholders	$	—	$	14,620
Denominator:
Weighted-average common shares outstanding used in computing basic net earnings (loss) per share	159,847		157,123

Diluted net earnings (loss) per share
Numerator:
Net loss from continuing operations available to common stockholders	$	(4,659)	$	(21,780)
Net income from discontinued operations available to common stockholders	$	—	$	14,620
Denominator:
Weighted-average shares used in computing basic net earnings (loss) per share	159,847		157,123
Add dilutive impact of employee equity plans	—		—
Weighted-average shares used in computing diluted net earnings (loss) per share	159,847		157,123

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

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 March 31,
	2022	2021

	(in thousands)






Total anti-dilutive shares	9,618	6,626

The calculation of diluted earnings (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 March 31, 2022 and 2021, we recorded income tax benefit from continuing operations of $0.2 million and $4.9 million, respectively, resulting in an effective tax rate of 3.2% and 18.3%, respectively. The decrease in the effective tax rate for the three months ended March 31, 2022 compared to the same period in 2021 was primarily due to the excess tax deficiency from stock-based compensation, partially offset by an increase in permanent differences.

Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At March 31, 2022, we had accrued interest and penalties related to unrecognized tax benefits of approximately $2.9 million.

We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 2013 through February 2016 and 2018 through 2021 tax years generally remain open and subject to examination by federal tax authorities. The 2012 through 2021 tax years generally remain open and subject to examination by the state tax authorities and foreign tax 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 and 2019 tax years. We are currently under audit by the California Franchise Tax Board for the 2012 through 2014 tax years and the Texas Comptroller for the 2015 through 2018 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

For the three months ended March 31, 2022, we recorded pretax gross expenses related to the Cyber Incident of $5.7 million and included $0.2 million of these gross expenses in cost of recurring revenue, $0.1 million in sales and marketing expense and $5.5 million in general and administrative expense in the condensed consolidated statements of operations.

For the three months ended March 31, 2021, we recorded pretax gross expenses related to the Cyber Incident of $20.4 million, partially offset by $10.2 million of expected insurance proceeds for costs we believe were reimbursable and probable of recovery under our insurance coverage, for pretax net expenses of $10.2 million. We have included $0.8 million of these gross expenses in cost of recurring revenue, $0.8 million in sales and marketing expense and $18.8 million in general and administrative expense in the condensed consolidated statements of operations.

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 is pending against us and certain of our current and former officers. The complainants seek certification of a class of all persons who purchased or otherwise acquired our securities between October 18, 2018 and December 17, 2020 and seek unspecified monetary damages, costs and attorneys’ fees. In August 2021, the Company and all other named defendants in the securities class action filed motions to dismiss the

SolarWinds Corporation

Notes to Condensed Consolidated Financial Statements (Unaudited)

consolidated class action complaint. On March 30, 2022, the District Court for the Western District of Texas entered an order denying the Company's motion to dismiss. Discovery has commenced in the action. In addition, two shareholder derivative actions, purportedly on behalf of the Company, are pending, 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. In January 2022, the Company and all other named defendants filed motions to dismiss the Delaware derivative complaint which is pending before the court. We dispute the allegations in these complaints and intend to defend against the claims.

In addition, there are underway numerous investigations and inquiries by domestic and foreign law enforcement and other governmental authorities related to the Cyber Incident, including from the Department of Justice, the Securities and Exchange Commission, and various state Attorneys General. 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.

While we believe it is reasonably possible that we could incur losses associated with these proceedings and investigations, 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 early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, 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 we renewed in June 2021. As of March 31, 2022, we had received insurance proceeds payments of $15 million for costs incurred related to the Cyber Incident. 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.

Indemnification

In connection with the 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 March 31, 2022.

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, 2021 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 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" sales model to grow our business while also generating significant cash flow.

We offer a broad portfolio of solutions designed to help technology professionals to monitor, manage and optimize networks, systems, desktops, applications, storage, databases, website infrastructures and IT service desks. We intend to continue to innovate and invest in areas of product development that bring new products to market and enhance the functionality, ease of use and integration of our current products. We believe this will strengthen the overall value proposition of our products in any IT environment.

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. We applied purchase accounting on the date of the Take Private. In October 2018, we completed our initial public offering, or IPO, and once again become a publicly traded company.

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 distribution, 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.

We incurred significant costs in connection with the Separation which we refer to as “spin-off costs.” We incurred $0.2 million and $9.9 million of costs in connection with the Separation during the three months ended March 31, 2022 and 2021, respectively. Spin-off costs incurred in the three months ended March 31, 2021 are primarily reflected in our condensed consolidated statements of operations as discontinued operations. Of these amounts, the spin-off costs included in continuing operations were $0.2 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively. We do not expect to incur significant spin-off costs in 2022.

See Note 3. Discontinued Operations 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 discussion of the Separation.

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

these gross expenses in cost of recurring revenue, $0.8 million in sales and marketing expense and $18.8 million in general and administrative expense in the condensed consolidated statements of operations.

General and administrative expense is presented net of insurance proceeds in the condensed consolidated statements of operations. Expenses include one-time costs to investigate and remediate the Cyber Incident, and legal and other professional services related thereto, and consulting services being provided to customers at no charge, all of which were expensed as incurred. Our "Secure By Design" initiatives which include costs to enhance our security measures across our systems and our software development and build environments, have increased our ongoing expenses by approximately $20 million on an annual basis. These costs are primarily included in 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 numerous 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. While we will incur costs and other expenses associated with these proceedings and investigations, 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 early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues. We 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.

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, as well as increased customer support activities and other related matters. 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, 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 early stage thereof, the fact that alleged damages have not been specified, the uncertainty as to the certification of a class or classes and the size of any certified class, as applicable, and the lack of resolution on significant factual and legal issues.

In addition, we expect to incur increased expenses for insurance, finance, compliance activities, and to meet increased legal and regulatory requirements. In addition, in connection with the 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. Although the ultimate magnitude and timing of expenses or other impacts to our business or reputation related to the Cyber Incident are uncertain, they could be significant.

Insurance Coverage

Impacts of COVID-19

We continue to monitor the impact from the changing market and economic conditions due to the COVID-19 pandemic on our business. While the impact of the COVID-19 pandemic contributed to a decline in our license revenue, based on current conditions, we do not expect to experience a significant ongoing impact related to the COVID-19 pandemic on our financial results in future periods. However, we are unable to predict with a level of precision the longer term impact, if any, that the COVID-19 pandemic may have on our business, results of operations and financial condition due to numerous uncertainties, including the duration of the pandemic, virus mutations and variants, the availability and efficacy of vaccines and boosters, the willingness of individuals to obtain vaccines and boosters, the pandemic's impact to the business of our customers and their end-customers and other factors identified in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. We will continue to evaluate the nature and extent of the impact of the COVID-19 pandemic to our business, consolidated results of operations and financial condition.

First Quarter Highlights

Below are our key financial highlights from continuing operations for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

Customers

Our approach, which we call the "The SolarWinds Model," allows us to both sell to a broad group of potential customers and close large transactions with significant customers. As of March 31, 2022, we had over 300,000 customers after giving effect to the Separation. While some customers may spend as little as $100 with us over a twelve-month period, we had 852 customers who spent more than $100,000 with us for the trailing twelve-month period ended March 31, 2022 as compared to 771 for the twelve-month period ended March 31, 2021, as adjusted to exclude customers of the N-able business.

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.


	Three Months Ended March 31,				Year-over-Year Growth
	2022		2021

	(in thousands, except percentages)
Subscription ARR(1)	$	141,840	$	108,911	30.2	%
Total ARR(2)	622,860		622,470		0.1

_______

(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 primarily resulting from customers transitioning to our subscription pricing model, as well as sales of our database monitoring and service desk solutions. Total ARR increased slightly due to growth in Subscription ARR which was partially offset by a decline in the annualized value of maintenance contracts as a result of lower new perpetual license sales and lower maintenance renewal rates related to the Cyber Incident.

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 to a lesser extent, our time-based license arrangements. We recognize revenue for SaaS offerings 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 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. The time-based subscription offerings are recognized at a point in time upon delivery of the on-premise software and support is recognized ratably over the contract period. We generally invoice subscription agreements in advance 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 add new subscription products, upgrade the capacity level of their existing subscription products or increase the usage of their subscription products.

•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. Customers typically renew their maintenance contracts at our standard list maintenance renewal pricing for their applicable products. We generally invoice maintenance contracts annually in advance.

•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 at a point in time 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.

We plan to continue to sell perpetual licenses for our network, systems and database management products and not require customers to transition to a subscription pricing model discussed above. The subscription pricing option, and our continued efforts to increase subscription revenue, may impact the mix of license and recurring revenue, but this impact is difficult to predict at this time due to uncertainty regarding the level of customer adoption of the new subscription pricing options. We expect a continued shift in the mix between license and recurring revenue in each quarter as new customers purchase these subscription offerings. Our license sales and maintenance renewal rates may decline or fluctuate in future periods as customers transition to our subscription offerings and as a result of the Cyber Incident.

Cost of Revenue

•Cost of Recurring Revenue. Cost of recurring revenue consists of technical support personnel costs, public cloud infrastructure and hosting fees 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 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 in connection with the Take Private and other acquisitions.

Operating Expenses

Operating expenses consists of sales and marketing, research and development and general and administrative expenses as well as amortization of acquired intangibles. 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 March 31, 2022 was 2,199, as compared to 2,074 as of March 31, 2021, which was adjusted to exclude employees of the N-able business.

We expect our operating expenses to continue to increase in absolute dollars as we make long-term investments in our business, including 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. In addition, the Separation of the N-able business resulted in dis-synergies associated with increased overhead costs and duplicate hiring which increased certain expenses for 2021. Our stock-based compensation expense has increased due to equity awards granted to our employees and directors. We intend to continue to grant equity awards which will result in additional stock-based compensation expense in future periods. We also expect our travel costs may increase throughout the year as our employees begin to resume business travel activities.

•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. We expect to continue to hire personnel globally to drive new sales and maintenance renewals.

•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 expect to continue to grow our research and development organization, particularly internationally. We capitalize certain research and development costs related to developing new functionality for our suite of products 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 and other general corporate expenses. The Cyber Incident has resulted in increased general and administrative expenses which we expect to continue in 2022, 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 and gains (losses) resulting from changes in exchange rates on foreign currency denominated accounts. We expect interest expense may increase as a result of anticipated interest rate increases since our 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 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 March 31, 2022 and 2021

Revenue


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Subscription	$	38,747	21.9	%	$	28,317	16.3	%	$	10,430
Maintenance	115,495		65.3		120,665		69.4		(5,170)
Total recurring revenue	154,242		87.2		148,982		85.7		5,260
License	22,626		12.8		24,874		14.3		(2,248)
Total revenue	$	176,868	100.0	%	$	173,856	100.0	%	$	3,012

Total revenue increased $3.0 million, or 1.7%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. Revenue from North America was approximately 69% of total revenue for both the three months ended March 31, 2022 and 2021. 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.

The Cyber Incident has negatively impacted revenue, profitability and cash flows and may continue to do so throughout 2022 and beyond. 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 the Cyber Incident, our maintenance renewal rate for the trailing twelve month period was 89%.

Recurring Revenue

Subscription Revenue. Subscription revenue increased $10.4 million, or 36.8%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to increased sales of our time-based subscription offerings resulting from customers, including our largest maintenance customer, transitioning to our subscription pricing model as well as sales of our database monitoring solutions. Our subscription revenue increased as a percentage of our total revenue for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.

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


	Trailing Twelve-Months Ended March 31,
	2022		2021

Net retention rate(1)	96	%	96	%

_______

(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.

Maintenance Revenue. Maintenance revenue decreased $5.2 million, or 4.3%, for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, primarily due to the impact on maintenance revenue from decreased sales of our licensed products, customers transitioning to our time-based subscription offerings and a decline in our maintenance renewal rate primarily due to the Cyber Incident.

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


	Trailing Twelve-Months Ended March 31,
	2022		2021

Maintenance renewal rate(1)	89	%	92	%

_______

(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 $2.2 million, or 9.0%, primarily due to an increase in the subscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses.

Cost of Revenue


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Cost of recurring revenue	$	17,831	10.1	%	$	15,654	9.0	%	$	2,177
Amortization of acquired technologies	17,227		9.7		40,417		23.2		(23,190)
Total cost of revenue	$	35,058	19.8	%	$	56,071	32.3	%	$	(21,013)

Total cost of revenue decreased in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to a decrease in amortization of acquired technologies due to certain intangible assets acquired in connection with the Take Private being fully amortized during the period. Cost of recurring revenue increased primarily due to increases in public cloud infrastructure and hosting fees related to our subscription offerings of $2.5 million and personnel costs to support our customers and additional product offerings of $0.3 million, partially offset by a decrease in costs related to the Cyber Incident of $0.7 million.

Operating Expenses


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Sales and marketing	$	61,044	34.5	%	$	57,666	33.2	%	$	3,378
Research and development	23,422		13.2		26,358		15.2		(2,936)
General and administrative	32,664		18.5		30,865		17.8		1,799
Amortization of acquired intangibles	13,239		7.5		14,038		8.1		(799)
Total operating expenses	$	130,369	73.7	%	$	128,927	74.2	%	$	1,442

Sales and Marketing. Sales and marketing expenses increased $3.4 million, or 5.9%, primarily due to increases in personnel costs of $2.6 million, marketing program costs of $0.6 million and travel costs of $0.3 million. These increases were partially offset by a decrease in public relation costs resulting from the Cyber Incident of $0.7 million. We have increased our sales and marketing employee headcount, and we expect to incur additional costs in future periods as we expand our international sales teams and focus on enterprise customers.

Research and Development. Research and development expenses decreased $2.9 million, or 11.1%, primarily due to a decrease in personnel costs of $5.2 million, partially offset by an increase in contract services of $1.5 million. The decrease in personnel costs, which includes a $1.1 million decrease in stock-based compensation expense, was primarily due to an increase in employee turnover, as well as a $1.6 million increase in capitalized employee costs primarily related to our work on our Observability platform.

General and Administrative. General and administrative expenses increased $1.8 million, or 5.8%, primarily due to a $2.5 million increase in personnel costs, which is primarily related to an increase in stock-based compensation expense, a $1.2 million increase in directors and officers liability and cybersecurity insurance costs and professional fees and a $0.7 million increase in restructuring costs. These increases were partially offset by a $3.1 million decrease in costs related to the Cyber Incident.

Amortization of Acquired Intangibles. Amortization of acquired intangibles decreased $0.8 million, or 5.7% primarily due to certain acquired intangibles being fully amortized during the period and the impact of changes in foreign currency exchange rates.

Interest Expense, Net


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)
Interest expense, net	$	(16,087)	(9.1)	%	$	(16,174)	(9.3)	%	$	87

Interest expense, net decreased by $0.1 million, or 0.5%, in the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The decrease in interest expense is primarily due the reduction in our outstanding debt balance related to quarterly principal repayments. The weighted-average effective interest rate on our debt was 2.9% for both the three months ended March 31, 2022 and 2021. See Note 6. Debt 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 our debt.

Other Income (Expense), Net


	Three Months Ended March 31,
	2022				2021
	Amount		Percentage of Revenue		Amount		Percentage of Revenue		Change

	(in thousands, except percentages)

Other income (expense), net	$	(169)	(0.1)	%	$	656	0.4	%	$	(825)

Other income (expense), net decreased by $0.8 million in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period.

Income Tax Expense (Benefit)


	Three Months Ended March 31,
	2022					2021
	Amount			Percentage of Revenue		Amount			Percentage of Revenue		Change

	(in thousands, except percentages)
Loss before income taxes	$	(4,815)		(2.7)	%	$	(26,660)		(15.3)	%	$	21,845
Income tax benefit	(156)			(0.1)		(4,880)			(2.8)		4,724
Effective tax rate	3.2		%			18.3		%			(15.1)		%

Our income tax benefit for the three months ended March 31, 2022 was $0.2 million as compared to $4.9 million for the three months ended March 31, 2021. The effective tax rate decreased to 3.2% for the period primarily due to the excess tax deficiency from stock-based compensation, partially offset by an increase in permanent differences. For additional discussion about our income taxes, see Note 8. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.

Discontinued Operations


		Three Months Ended March 31,
	2021
		Amount		Percentage of Revenue

		(in thousands, except percentages)
Total revenue		$	83,046	100.0	%
Total cost of revenue		14,008		16.9
Operating expenses		59,898		72.1
Income before income taxes		8,611		10.4
Income tax benefit		(6,009)		(7.2)
Income from discontinued operations, net of taxes		14,620		17.6

N‑able's historical financial results through the Separation date of July 19, 2021 are reflected in our condensed consolidated financial statements as discontinued operations.

Non-GAAP Financial Measures from Continuing Operations

In addition to financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding, and aid in the period-to-period comparison, of our performance. We believe that these non-GAAP financial measures provide supplemental information that is meaningful when assessing our operating performance because they exclude the impact of certain amounts that our management and board of directors do not consider part of core operating results when assessing our operational performance, allocating resources, preparing annual budgets and determining compensation. Accordingly, these non-GAAP financial measures may provide insight to investors into the motivation and decision-making of management in operating the business. Investors are encouraged to review the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure included below. Unless noted otherwise, all non-GAAP financial measures are derived from our GAAP financial measures from continuing operations.

While we believe that these non-GAAP financial measures provide useful supplemental information, non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, their most comparable GAAP measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be comparable to similarly titled measures of other companies due to potential differences in their financing and accounting methods, the book value of their assets, their capital structures, the method by which their assets were acquired and the manner in which they define non-GAAP measures. Items such as the amortization of intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition related adjustments, the Cyber Incident and restructuring costs, as well as the related tax impacts of these items can have a material impact on our GAAP financial results.

Non-GAAP Revenue from Continuing Operations

SolarWinds Corp [SWI] Filings
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]