UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20202021
or
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☐ | 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)
| | 81-0753267 | | | | | | |
Delaware | | 81-0753267 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification No.)
|
7171 Southwest Parkway
Building 400
Austin,, Texas78735
(512) (512) 682.9300
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | | | | |
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.
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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 3, 2020, 312,384,7952, 2021, 158,024,032 shares of common stock, par value $0.001 per share, were outstanding.
SOLARWINDS CORPORATION
Table of Contents
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PART I - FINANCIAL INFORMATION |
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Item 2. | | | |
Item 3. | | | |
Item 4. | | | |
PART II - OTHER INFORMATION |
Item 1. | | | |
Item 1A. | | | |
Item 2.6. | | | |
Item 5. | | | |
Item 6. | | | |
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| 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, non-GAAP 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 our 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 concerning acquisitions and opportunities resulting from our acquisitions;
•expectations regarding hiring additional personnel globally in the areas of sales and marketing and research and development;
•intentions regarding our international earnings;
•expectations regarding our capital expenditures;
•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; and
expectations regarding the potential spin-off of our MSP business into a newly created and separately traded public company.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 potentialCyber 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, severe 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 our MSPN-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 recently completed spin-off of our N-able business into a newly created and separately-traded public company, including that the process of exploring the spin-off and potentiallyrisk that completing the spin-off could disrupt or adversely affect the consolidated or separate businesses, results of operations and financial condition, and that the spin-off may not achieve some or all of any anticipated benefits with respect to either business, and that the spin-off may not be completed in accordance with our expected plans or anticipated timelines, or at all;business;
•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 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 COVID-19 pandemic;
•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 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 timing and success of new product introductions and product upgrades by SolarWinds or its competitors;
•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 this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10‑Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended December 31, 2019.2020.
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.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.
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, | | June 30, | | December 31, |
| 2020 | | 2019 | | 2021 | | 2020 |
Assets | | | | Assets | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 331,414 |
| | $ | 173,372 |
| Cash and cash equivalents | $ | 410,635 | | | $ | 370,498 | |
Accounts receivable, net of allowances of $3,735 and $3,171 as of June 30, 2020 and December 31, 2019, respectively | 104,281 |
| | 121,930 |
| |
| Accounts receivable, net of allowances of $2,876 and $2,736 as of June 30, 2021 and December 31, 2020, respectively | | Accounts receivable, net of allowances of $2,876 and $2,736 as of June 30, 2021 and December 31, 2020, respectively | 97,601 | | | 114,298 | |
Income tax receivable | 1,155 |
| | 1,117 |
| Income tax receivable | 4,677 | | | 2,273 | |
| Prepaid and other current assets | 22,228 |
| | 23,480 |
| Prepaid and other current assets | 31,450 | | | 25,664 | |
Total current assets | 459,078 |
| | 319,899 |
| Total current assets | 544,363 | | | 512,733 | |
Property and equipment, net | 43,497 |
| | 38,945 |
| Property and equipment, net | 66,153 | | | 58,649 | |
Operating lease assets | 108,099 |
| | 89,825 |
| Operating lease assets | 124,828 | | | 110,961 | |
Deferred taxes | 4,410 |
| | 4,533 |
| Deferred taxes | 144,753 | | | 149,455 | |
Goodwill | 4,058,287 |
| | 4,058,198 |
| Goodwill | 4,206,720 | | | 4,249,402 | |
Intangible assets, net | 644,361 |
| | 771,513 |
| Intangible assets, net | 466,667 | | | 592,985 | |
Other assets, net | 31,477 |
| | 27,829 |
| Other assets, net | 40,531 | | | 36,298 | |
Total assets | $ | 5,349,209 |
| | $ | 5,310,742 |
| Total assets | $ | 5,594,015 | | | $ | 5,710,483 | |
Liabilities and stockholders’ equity | | | | Liabilities and stockholders’ equity | | | |
Current liabilities: | | | | Current liabilities: | |
Accounts payable | $ | 11,071 |
| | $ | 13,796 |
| Accounts payable | $ | 10,369 | | | $ | 17,932 | |
Accrued liabilities and other | 47,118 |
| | 47,035 |
| Accrued liabilities and other | 64,145 | | | 72,971 | |
Current operating lease liabilities | 15,201 |
| | 14,093 |
| Current operating lease liabilities | 19,056 | | | 17,811 | |
| Accrued interest payable | 159 |
| | 248 |
| Accrued interest payable | 153 | | | 157 | |
Income taxes payable | 25,246 |
| | 15,714 |
| Income taxes payable | 6,787 | | | 16,358 | |
Current portion of deferred revenue | 314,105 |
| | 312,227 |
| Current portion of deferred revenue | 326,463 | | | 346,075 | |
Current debt obligation | 19,900 |
| | 19,900 |
| Current debt obligation | 19,900 | | | 19,900 | |
Total current liabilities | 432,800 |
| | 423,013 |
| Total current liabilities | 446,873 | | | 491,204 | |
Long-term liabilities: | | | | Long-term liabilities: | |
Deferred revenue, net of current portion | 32,314 |
| | 31,173 |
| Deferred revenue, net of current portion | 33,776 | | | 36,679 | |
Non-current deferred taxes | 82,332 |
| | 97,884 |
| Non-current deferred taxes | 38,852 | | | 59,149 | |
Non-current operating lease liabilities | 111,537 |
| | 93,084 |
| Non-current operating lease liabilities | 132,680 | | | 115,071 | |
Other long-term liabilities | 116,488 |
| | 122,660 |
| Other long-term liabilities | 92,901 | | | 115,021 | |
Long-term debt, net of current portion | 1,888,026 |
| | 1,893,406 |
| Long-term debt, net of current portion | 1,877,220 | | | 1,882,672 | |
Total liabilities | 2,663,497 |
| | 2,661,220 |
| Total liabilities | 2,622,302 | | | 2,699,796 | |
Commitments and contingencies (Note 8) |
| |
| Commitments and contingencies (Note 8) | 0 | | 0 |
| Stockholders’ equity: | | | | Stockholders’ equity: | |
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 310,571,064 and 308,290,310 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | 311 |
| | 308 |
| |
Preferred stock, $0.001 par value: 50,000,000 shares authorized and no shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | — |
| | — |
| |
Common stock, $0.001 par value: 1,000,000,000 shares authorized and 158,014,531 and 156,519,611 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | | Common stock, $0.001 par value: 1,000,000,000 shares authorized and 158,014,531 and 156,519,611 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 158 | | | 157 | |
Preferred stock, $0.001 par value: 50,000,000 shares authorized and 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | | Preferred stock, $0.001 par value: 50,000,000 shares authorized and 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 0 | | | 0 | |
Additional paid-in capital | 3,067,458 |
| | 3,041,880 |
| Additional paid-in capital | 3,140,176 | | | 3,112,262 | |
Accumulated other comprehensive loss | (7,898 | ) | | (5,247 | ) | |
Accumulated other comprehensive income | | Accumulated other comprehensive income | 79,107 | | | 127,212 | |
Accumulated deficit | (374,159 | ) | | (387,419 | ) | Accumulated deficit | (247,728) | | | (228,944) | |
Total stockholders’ equity | 2,685,712 |
| | 2,649,522 |
| Total stockholders’ equity | 2,971,713 | | | 3,010,687 | |
Total liabilities and stockholders’ equity | $ | 5,349,209 |
| | $ | 5,310,742 |
| Total liabilities and stockholders’ equity | $ | 5,594,015 | | | $ | 5,710,483 | |
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, |
| 2021 | | 2020 | | 2021 | | 2020 |
Revenue: | | | | | | | |
Subscription | $ | 112,429 | | | $ | 95,840 | | | $ | 221,417 | | | $ | 189,475 | |
Maintenance | 122,867 | | | 116,498 | | | 245,907 | | | 232,847 | |
Total recurring revenue | 235,296 | | | 212,338 | | | 467,324 | | | 422,322 | |
License | 26,678 | | | 33,677 | | | 51,552 | | | 70,643 | |
Total revenue | 261,974 | | | 246,015 | | | 518,876 | | | 492,965 | |
Cost of revenue: | | | | | | | |
Cost of recurring revenue | 27,516 | | | 21,822 | | | 54,474 | | | 44,323 | |
Amortization of acquired technologies | 41,135 | | | 44,834 | | | 84,256 | | | 89,326 | |
Total cost of revenue | 68,651 | | | 66,656 | | | 138,730 | | | 133,649 | |
Gross profit | 193,323 | | | 179,359 | | | 380,146 | | | 359,316 | |
Operating expenses: | | | | | | | |
Sales and marketing | 82,371 | | | 70,712 | | | 165,668 | | | 143,090 | |
Research and development | 39,106 | | | 30,745 | | | 76,867 | | | 62,590 | |
General and administrative | 50,397 | | | 24,467 | | | 98,107 | | | 54,222 | |
Amortization of acquired intangibles | 18,158 | | | 18,294 | | | 38,215 | | | 36,590 | |
Total operating expenses | 190,032 | | | 144,218 | | | 378,857 | | | 296,492 | |
Operating income | 3,291 | | | 35,141 | | | 1,289 | | | 62,824 | |
Other income (expense): | | | | | | | |
Interest expense, net | (16,191) | | | (18,313) | | | (32,365) | | | (42,408) | |
Other income (expense), net | (321) | | | 363 | | | (194) | | | (395) | |
Total other income (expense) | (16,512) | | | (17,950) | | | (32,559) | | | (42,803) | |
Income (loss) before income taxes | (13,221) | | | 17,191 | | | (31,270) | | | 20,021 | |
Income tax expense (benefit) | (1,597) | | | 4,346 | | | (12,486) | | | 6,761 | |
Net income (loss) | $ | (11,624) | | | $ | 12,845 | | | $ | (18,784) | | | $ | 13,260 | |
Net income (loss) available to common stockholders | $ | (11,624) | | | $ | 12,772 | | | $ | (18,784) | | | $ | 13,169 | |
Net income (loss) available to common stockholders per share: | | | | | | | |
Basic earnings (loss) per share | $ | (0.07) | | | $ | 0.08 | | | $ | (0.12) | | | $ | 0.09 | |
Diluted earnings (loss) per share | $ | (0.07) | | | $ | 0.08 | | | $ | (0.12) | | | $ | 0.08 | |
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 | 157,854 | | | 155,122 | | | 157,491 | | | 154,795 | |
Shares used in computation of diluted earnings (loss) per share | 157,854 | | | 157,449 | | | 157,491 | | | 156,937 | |
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Revenue: | | | | | | | |
Subscription | $ | 95,840 |
| | $ | 78,780 |
| | $ | 189,475 |
| | $ | 150,345 |
|
Maintenance | 116,498 |
| | 110,793 |
| | 232,847 |
| | 217,085 |
|
Total recurring revenue | 212,338 |
| | 189,573 |
| | 422,322 |
| | 367,430 |
|
License | 33,677 |
| | 39,175 |
| | 70,643 |
| | 77,110 |
|
Total revenue | 246,015 |
| | 228,748 |
| | 492,965 |
| | 444,540 |
|
Cost of revenue: | | | | | | | |
Cost of recurring revenue | 21,822 |
| | 19,386 |
| | 44,323 |
| | 37,545 |
|
Amortization of acquired technologies | 44,834 |
| | 43,972 |
| | 89,326 |
| | 87,789 |
|
Total cost of revenue | 66,656 |
| | 63,358 |
| | 133,649 |
| | 125,334 |
|
Gross profit | 179,359 |
| | 165,390 |
| | 359,316 |
| | 319,206 |
|
Operating expenses: | | | | | | | |
Sales and marketing | 70,712 |
| | 64,813 |
| | 143,090 |
| | 125,408 |
|
Research and development | 30,745 |
| | 27,705 |
| | 62,590 |
| | 52,893 |
|
General and administrative | 24,467 |
| | 25,241 |
| | 54,222 |
| | 46,977 |
|
Amortization of acquired intangibles | 18,294 |
| | 17,301 |
| | 36,590 |
| | 33,803 |
|
Total operating expenses | 144,218 |
| | 135,060 |
| | 296,492 |
| | 259,081 |
|
Operating income | 35,141 |
| | 30,330 |
| | 62,824 |
| | 60,125 |
|
Other income (expense): | | | | | | | |
Interest expense, net | (18,313 | ) | | (28,177 | ) | | (42,408 | ) | | (55,559 | ) |
Other income (expense), net | 363 |
| | (1,078 | ) | | (395 | ) | | 219 |
|
Total other income (expense) | (17,950 | ) | | (29,255 | ) | | (42,803 | ) | | (55,340 | ) |
Income before income taxes | 17,191 |
| | 1,075 |
| | 20,021 |
| | 4,785 |
|
Income tax expense | 4,346 |
| | 3,194 |
| | 6,761 |
| | 3,759 |
|
Net income (loss) | $ | 12,845 |
| | $ | (2,119 | ) | | $ | 13,260 |
| | $ | 1,026 |
|
Net income (loss) available to common stockholders | $ | 12,772 |
| | $ | (2,119 | ) | | $ | 13,169 |
| | $ | 1,014 |
|
Net income (loss) available to common stockholders per share: | | | | | | | |
Basic earnings (loss) per share | $ | 0.04 |
| | $ | (0.01 | ) | | $ | 0.04 |
| | $ | — |
|
Diluted earnings (loss) per share | $ | 0.04 |
| | $ | (0.01 | ) | | $ | 0.04 |
| | $ | — |
|
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 | 310,244 |
| | 306,587 |
| | 309,591 |
| | 306,122 |
|
Shares used in computation of diluted earnings (loss) per share | 314,898 |
| | 306,587 |
| | 313,874 |
| | 310,353 |
|
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, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income (loss) | $ | (11,624) | | | $ | 12,845 | | | $ | (18,784) | | | $ | 13,260 | |
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment | 17,645 | | | 27,778 | | | (48,105) | | | (2,651) | |
| | | | | | | |
Other comprehensive income (loss) | 17,645 | | | 27,778 | | | (48,105) | | | (2,651) | |
Comprehensive income (loss) | $ | 6,021 | | | $ | 40,623 | | | $ | (66,889) | | | $ | 10,609 | |
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, 2021 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
Shares | | Amount | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at March 31, 2021 | 157,702 | | | $ | 158 | | | $ | 3,124,650 | | | $ | 61,462 | | | $ | (236,104) | | | $ | 2,950,166 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 17,645 | | | — | | | 17,645 | |
Net loss | — | | | — | | | — | | | — | | | (11,624) | | | (11,624) | |
Comprehensive income | | | | | | | | | | | 6,021 | |
Exercise of stock options | 88 | | | — | | | 390 | | | — | | | — | | | 390 | |
Restricted stock units issued, net of shares withheld for taxes | 189 | | | — | | | (1,471) | | | — | | | — | | | (1,471) | |
Issuance of stock | 36 | | | — | | | 29 | | | — | | | — | | | 29 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 16,578 | | | — | | | — | | | 16,578 | |
Balance at June 30, 2021 | 158,015 | | | $ | 158 | | | $ | 3,140,176 | | | $ | 79,107 | | | $ | (247,728) | | | $ | 2,971,713 | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 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 | — | | | — | | | — | | | (48,105) | | | | | (48,105) | |
Net loss | — | | | — | | | — | | | | | (18,784) | | | (18,784) | |
Comprehensive loss | | | | | | | | | | | (66,889) | |
Exercise of stock options | 92 | | | — | | | 401 | | | — | | | — | | | 401 | |
Restricted stock units issued, net of shares withheld for taxes | 848 | | | 1 | | | (9,869) | | | — | | | — | | | (9,868) | |
Issuance of stock | 447 | | | — | | | 492 | | | — | | | — | | | 492 | |
Issuance of stock under employee stock purchase plan | 108 | | | — | | | 3,129 | | | — | | | — | | | 3,129 | |
Stock-based compensation | — | | | — | | | 33,761 | | | — | | | — | | | 33,761 | |
Balance at June 30, 2021 | 158,015 | | | $ | 158 | | | $ | 3,140,176 | | | $ | 79,107 | | | $ | (247,728) | | | $ | 2,971,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
Shares | | Amount | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance at March 31, 2020 | 154,946 | | | $ | 155 | | | $ | 3,054,889 | | | $ | (35,676) | | | $ | (387,004) | | | $ | 2,632,364 | |
Foreign currency translation adjustment | — | | | — | | | — | | | 27,778 | | | — | | | 27,778 | |
Net income | — | | | — | | | — | | | — | | | 12,845 | | | 12,845 | |
Comprehensive income | | | | | | | | | | | 40,623 | |
Exercise of stock options | 112 | | | — | | | 258 | | | — | | | — | | | 258 | |
Restricted stock units issued, net of shares withheld for taxes | 190 | | | 1 | | | (804) | | | — | | | — | | | (803) | |
Issuance of stock | 38 | | | — | | | 31 | | | — | | | — | | | 31 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 13,239 | | | — | | | — | | | 13,239 | |
Balance at June 30, 2020 | 155,286 | | | $ | 156 | | | $ | 3,067,613 | | | $ | (7,898) | | | $ | (374,159) | | | $ | 2,685,712 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
SolarWinds Corporation
Condensed Consolidated Statements of Stockholders' Equity (Continued)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
| Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
Shares | | Amount | |
Balance at December 31, 2019 | 154,145 | | | $ | 154 | | | $ | 3,042,034 | | | $ | (5,247) | | | $ | (387,419) | | | $ | 2,649,522 | |
Foreign currency translation adjustment | — | | | — | | | — | | | (2,651) | | | — | | | (2,651) | |
Net income | — | | | — | | | — | | | — | | | 13,260 | | | 13,260 | |
Comprehensive income | | | | | | | | | | | 10,609 | |
Exercise of stock options | 141 | | | — | | | 309 | | | — | | | — | | | 309 | |
Restricted stock units issued, net of shares withheld for taxes | 329 | | | 1 | | | (2,352) | | | — | | | — | | | (2,351) | |
Issuance of stock | 591 | | | 1 | | | 659 | | | — | | | — | | | 660 | |
Issuance of stock under employee stock purchase plan | 80 | | | — | | | 2,357 | | | — | | | — | | | 2,357 | |
| | | | | | | | | | | |
Stock-based compensation | — | | | — | | | 24,606 | | | — | | | — | | | 24,606 | |
Balance at June 30, 2020 | 155,286 | | | $ | 156 | | | $ | 3,067,613 | | | $ | (7,898) | | | $ | (374,159) | | | $ | 2,685,712 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
SolarWinds Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss)Cash Flows
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) | $ | 12,845 |
| | $ | (2,119 | ) | | $ | 13,260 |
| | $ | 1,026 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustment | 27,778 |
| | 21,160 |
| | (2,651 | ) | | (6,548 | ) |
Other comprehensive income (loss) | 27,778 |
| | 21,160 |
| | (2,651 | ) | | (6,548 | ) |
Comprehensive income (loss) | $ | 40,623 |
| | $ | 19,041 |
| | $ | 10,609 |
| | $ | (5,522 | ) |
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Cash flows from operating activities | | | |
Net income (loss) | $ | (18,784) | | | $ | 13,260 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 135,297 | | | 136,015 | |
Provision for losses on accounts receivable | 895 | | | 2,960 | |
Stock-based compensation expense | 33,522 | | | 24,245 | |
| | | |
Amortization of debt issuance costs | 4,498 | | | 4,570 | |
| | | |
| | | |
Deferred taxes | (17,527) | | | (16,032) | |
| | | |
| | | |
(Gain) loss on foreign currency exchange rates | (674) | | | 1,639 | |
Other non-cash expenses (benefits) | 1,033 | | | (900) | |
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: | | | |
Accounts receivable | 15,455 | | | 13,854 | |
Income taxes receivable | (2,446) | | | (104) | |
Prepaid and other assets | (8,492) | | | (1,224) | |
Accounts payable | (7,441) | | | (2,794) | |
Accrued liabilities and other | (2,791) | | | 1,239 | |
Accrued interest payable | (4) | | | (89) | |
Income taxes payable | (30,491) | | | 4,022 | |
Deferred revenue | (18,736) | | | 3,363 | |
Other long-term liabilities | (276) | | | 66 | |
Net cash provided by operating activities | 83,038 | | | 184,090 | |
Cash flows from investing activities | | | |
| | | |
| | | |
Purchases of property and equipment | (18,124) | | | (12,123) | |
Purchases of intangible assets | (3,823) | | | (4,182) | |
Acquisitions, net of cash acquired | 447 | | | 0 | |
| | | |
| | | |
Net cash used in investing activities | (21,500) | | | (16,305) | |
Cash flows from financing activities | | | |
| | | |
| | | |
Proceeds from issuance of common stock under employee stock purchase plan | 3,129 | | | 2,357 | |
Repurchase of common stock and incentive restricted stock | (10,059) | | | (2,376) | |
Exercise of stock options | 401 | | | 309 | |
| | | |
| | | |
| | | |
Repayments of borrowings from credit agreement | (9,950) | | | (9,950) | |
Payment of debt issuance costs | (903) | | | 0 | |
| | | |
Net cash used in financing activities | (17,382) | | | (9,660) | |
Effect of exchange rate changes on cash and cash equivalents | (4,019) | | | (83) | |
Net increase in cash and cash equivalents | 40,137 | | | 158,042 | |
Cash and cash equivalents | | | |
Beginning of period | 370,498 | | | 173,372 | |
End of period | $ | 410,635 | | | $ | 331,414 | |
| | | |
Supplemental disclosure of cash flow information | | | |
Cash paid for interest | $ | 27,995 | | | $ | 38,149 | |
Cash paid for income taxes | $ | 35,715 | | | $ | 16,755 | |
| | | |
| | | |
| | | |
| | | |
| | | |
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, 2020 |
|
Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
Shares | | Amount | |
Balance at March 31, 2020 | 309,891 |
| | $ | 310 |
| | $ | 3,054,734 |
| | $ | (35,676 | ) | | $ | (387,004 | ) | | $ | 2,632,364 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | 27,778 |
| | — |
| | 27,778 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 12,845 |
| | 12,845 |
|
Comprehensive income | | | | | | | | | | | 40,623 |
|
Exercise of stock options | 223 |
| | — |
| | 258 |
| | — |
| | — |
| | 258 |
|
Restricted stock units issued, net of shares withheld for taxes | 381 |
| | 1 |
| | (804 | ) | | — |
| | — |
| | (803 | ) |
Issuance of stock | 76 |
| | — |
| | 31 |
| | — |
| | — |
| | 31 |
|
Stock-based compensation | — |
| | — |
| | 13,239 |
| | — |
| | — |
| | 13,239 |
|
Balance at June 30, 2020 | 310,571 |
| | $ | 311 |
| | $ | 3,067,458 |
| | $ | (7,898 | ) | | $ | (374,159 | ) | | $ | 2,685,712 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
|
Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
Shares | | Amount | |
Balance at December 31, 2019 | 308,290 |
| | $ | 308 |
| | $ | 3,041,880 |
| | $ | (5,247 | ) | | $ | (387,419 | ) | | $ | 2,649,522 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | (2,651 | ) | | — |
| | (2,651 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 13,260 |
| | 13,260 |
|
Comprehensive income | | | | | | | | | | | 10,609 |
|
Exercise of stock options | 282 |
| | — |
| | 309 |
| | — |
| | — |
| | 309 |
|
Restricted stock units issued, net of shares withheld for taxes | 657 |
| | 1 |
| | (2,352 | ) | | — |
| | — |
| | (2,351 | ) |
Issuance of stock | 1,181 |
| | 2 |
| | 658 |
| | — |
| | — |
| | 660 |
|
Issuance of stock under employee stock purchase plan | 161 |
| | — |
| | 2,357 |
| | — |
| | — |
| | 2,357 |
|
Stock-based compensation | — |
| | — |
| | 24,606 |
| | — |
| | — |
| | 24,606 |
|
Balance at June 30, 2020 | 310,571 |
| | $ | 311 |
| | $ | 3,067,458 |
| | $ | (7,898 | ) | | $ | (374,159 | ) | | $ | 2,685,712 |
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
|
Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
Shares | | Amount | |
Balance at March 31, 2019 | 306,405 |
| | $ | 306 |
| | $ | 3,019,652 |
| | $ | (10,665 | ) | | $ | (402,916 | ) | | $ | 2,606,377 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | 21,160 |
| | — |
| | 21,160 |
|
Net loss | — |
| | — |
| | — |
| | — |
| | (2,119 | ) | | (2,119 | ) |
Comprehensive income | | | | | | | | | | | 19,041 |
|
Exercise of stock options | 239 |
| | — |
| | 221 |
| | — |
| | — |
| | 221 |
|
Restricted stock units issued, net of shares withheld for taxes | 18 |
| | — |
| | (101 | ) | | — |
| | — |
| | (101 | ) |
Issuance of stock | 86 |
| | 1 |
| | 38 |
| | — |
| | — |
| | 39 |
|
Equity awards assumed in acquisition | — |
| | — |
| | 595 |
| | — |
| | — |
| | 595 |
|
Stock-based compensation | — |
| | — |
| | 7,444 |
| | — |
| | — |
| | 7,444 |
|
Balance at June 30, 2019 | 306,748 |
| | $ | 307 |
| | $ | 3,027,849 |
| | $ | 10,495 |
| | $ | (405,035 | ) | | $ | 2,633,616 |
|
SolarWinds Corporation
Condensed Consolidated Statements of Stockholders' Equity (Continued)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
|
Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Accumulated Deficit | | Total Stockholders’ Equity |
Shares | | Amount | |
Balance at December 31, 2018 | 304,942 |
| | $ | 305 |
| | $ | 3,011,080 |
| | $ | 17,043 |
| | $ | (412,328 | ) | | $ | 2,616,100 |
|
Foreign currency translation adjustment | — |
| | — |
| | — |
| | (6,548 | ) | | — |
| | (6,548 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 1,026 |
| | 1,026 |
|
Comprehensive loss | | | | | | | | | | | (5,522 | ) |
Exercise of stock options | 286 |
| | — |
| | 257 |
| | — |
| | — |
| | 257 |
|
Restricted stock units issued, net of shares withheld for taxes | 18 |
| | — |
| | (101 | ) | | — |
| | — |
| | (101 | ) |
Issuance of stock | 1,502 |
| | 2 |
| | 786 |
| | — |
| | — |
| | 788 |
|
Equity awards assumed in acquisition | — |
| | — |
| | 595 |
| | — |
| | — |
| | 595 |
|
Stock-based compensation | — |
| | — |
| | 15,232 |
| | — |
| | — |
| | 15,232 |
|
Cumulative effect adjustment of adoption of revenue recognition accounting standard | — |
| | — |
| | — |
| | — |
| | 6,267 |
| | 6,267 |
|
Balance at June 30, 2019 | 306,748 |
| | $ | 307 |
| | $ | 3,027,849 |
| | $ | 10,495 |
| | $ | (405,035 | ) | | $ | 2,633,616 |
|
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, |
| 2020 | | 2019 |
Cash flows from operating activities | | | |
Net income | $ | 13,260 |
| | $ | 1,026 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 136,015 |
| | 130,040 |
|
Provision for losses on accounts receivable | 2,960 |
| | 951 |
|
Stock-based compensation expense | 24,245 |
| | 15,085 |
|
Amortization of debt issuance costs | 4,570 |
| | 4,591 |
|
Deferred taxes | (16,032 | ) | | (20,352 | ) |
(Gain) loss on foreign currency exchange rates | 1,639 |
| | (100 | ) |
Other non-cash benefits | (900 | ) | | (414 | ) |
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in business combinations: | | | |
Accounts receivable | 13,854 |
| | 7,289 |
|
Income taxes receivable | (104 | ) | | 149 |
|
Prepaid and other assets | (1,224 | ) | | (6,172 | ) |
Accounts payable | (2,794 | ) | | 1,442 |
|
Accrued liabilities and other | 1,239 |
| | (5,009 | ) |
Accrued interest payable | (89 | ) | | 556 |
|
Income taxes payable | 4,022 |
| | (4,385 | ) |
Deferred revenue | 3,363 |
| | 16,735 |
|
Other long-term liabilities | 66 |
| | 220 |
|
Net cash provided by operating activities | 184,090 |
| | 141,652 |
|
Cash flows from investing activities | | | |
Purchases of property and equipment | (12,123 | ) | | (8,774 | ) |
Purchases of intangible assets | (4,182 | ) | | (2,480 | ) |
Acquisitions, net of cash acquired | — |
| | (349,504 | ) |
Other investing activities | — |
| | 1,662 |
|
Net cash used in investing activities | (16,305 | ) | | (359,096 | ) |
Cash flows from financing activities | | | |
Proceeds from issuance of common stock under employee stock purchase plan | 2,357 |
| | — |
|
Repurchase of common stock and incentive restricted stock | (2,376 | ) | | (141 | ) |
Exercise of stock options | 309 |
| | 257 |
|
Proceeds from credit agreement | — |
| | 35,000 |
|
Repayments of borrowings from credit agreement | (9,950 | ) | | (44,950 | ) |
Net cash used in financing activities | (9,660 | ) | | (9,834 | ) |
Effect of exchange rate changes on cash and cash equivalents | (83 | ) | | (52 | ) |
Net increase (decrease) in cash and cash equivalents | 158,042 |
| | (227,330 | ) |
Cash and cash equivalents | | | |
Beginning of period | 173,372 |
| | 382,620 |
|
End of period | $ | 331,414 |
| | $ | 155,290 |
|
| | | |
Supplemental disclosure of cash flow information | | | |
Cash paid for interest | $ | 38,149 |
| | $ | 51,749 |
|
Cash paid for income taxes | $ | 16,755 |
| | $ | 26,467 |
|
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, infrastructure management software. Our productssolutions give organizations worldwide, regardless of type, size or IT infrastructure complexity, the power to monitor and manage the performance of theiraccelerate business transformation in today's hybrid IT environments, whether on-premise, in the cloud, or in hybrid infrastructure models.environments. Our approach, which we refer to as the SolarWinds Model, combines powerful, scalable, affordable, easy to use products with high-velocity, low-touch sales.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 and service desk professionals, as well as managed service providers, or MSPs. Our SolarWinds Model enables us to sell our products for use in organizations 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, or GAAP, and the reporting regulations of the Securities and Exchange Commission, or 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, 2019.2020.
Spin-Off of N-able Business
On July 19, 2021, we completed the previously announced separation and distribution of our managed service provider (“MSP” or “N-able”) business into a newly created and separately traded public company, N-able, Inc. We refer to this transaction as the “Separation.” The Separation was completed by means of a tax-free, pro-rata distribution in which each holder of our common stock, par value $0.001 per share, received one share of N-able’s common stock, par value $0.001, for every two shares of our common stock held of record as of the close of business on July 12, 2021. The standalone N-able entity will provide broad cloud-based software solutions for MSPs, enabling them to support digital transformation and growth within small and medium-sized enterprises, or SMEs. SolarWinds retained its Core IT Management business focused primarily on selling software and cloud-based services to corporate IT organizations. We believe that the Separation will allow each company to more effectively pursue its distinct operating priorities, strategies and capital allocation policies, while also allowing stockholders to separately evaluate and value the companies on their distinct markets, strategies and performance. Upon completion of the Separation, SolarWinds stockholders owned shares of both companies.
Spin-off costs incurred were $13.2 million and $23.1 million during the three and six months ended June 30, 2021, respectively, which are primarily included in general and administrative expense in the condensed consolidated statements of operations. Spin-off 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 spin-off of the N-able business.
Reverse Stock Split
Effective July 30, 2021, SolarWinds also effected a 2:1 reverse stock split of its 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 impact from the rapidly changing market and economic conditions due to the coronavirus disease 2019, or COVID-19, pandemic on our business, results of operations and financial condition is uncertain. We have made estimates of the impact of the COVID-19 pandemic within our financial statements as of and for the three and six months ended June 30, 2020 which did not result in material adjustments. The estimates assessed included, but were not limited to, allowances for credit losses, the carrying values of goodwill and intangible assets and other long-lived assets, valuation allowances for tax assets and revenue recognition and may change in future 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;
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
•stock-based compensation; and
income taxes.
•income taxes; and
•loss contingencies.
Recently Adopted Accounting Pronouncements
On January 1, 2020 we adopted the Financial Accounting Standards Board,There have been no recent accounting pronouncements or FASB, Accounting Standards Codification ("ASC") No. 2017-04 "Intangibles-Goodwill and Other," or ASC 350, which simplifies thechanges in accounting for goodwill impairment. The new guidance removes step two of the two-step quantitative goodwill impairment test, which requires a hypothetical purchase price allocation. The standard did notpronouncements that are expected to have a material impact on our condensed consolidated financial statements for the six months ended June 30, 2020.position, results of operations, or cash flows.
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.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 4. 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 | | Accumulated Other Comprehensive Income (Loss) |
| | | |
| (in thousands) |
Balance at December 31, 2019 | $ | (5,247 | ) | | $ | (5,247 | ) |
Other comprehensive gain (loss) before reclassification | (2,651 | ) | | (2,651 | ) |
Amount reclassified from accumulated other comprehensive income (loss) | — |
| | — |
|
Net current period other comprehensive income (loss) | (2,651 | ) | | (2,651 | ) |
Balance at June 30, 2020 | $ | (7,898 | ) | | $ | (7,898 | ) |
| | | | | | | | | | | | | |
| | | Foreign Currency Translation Adjustments | | Accumulated Other Comprehensive Income (Loss) |
| | | | | |
| | | (in thousands) |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Balance at December 31, 2020 | | | $ | 127,212 | | | $ | 127,212 | |
Other comprehensive gain (loss) before reclassification | | | (48,105) | | | (48,105) | |
Amount reclassified from accumulated other comprehensive income (loss) | | | 0 | | | 0 | |
Net current period other comprehensive income (loss) | | | (48,105) | | | (48,105) | |
Balance at June 30, 2021 | | | $ | 79,107 | | | $ | 79,107 | |
Deferred Revenue
Details of our total deferred revenue balance was as follows:
|
| | | |
| Total Deferred Revenue |
| |
| (in thousands) |
Balance at December 31, 2019 | $ | 343,400 |
|
Deferred revenue recognized | (245,284 | ) |
Additional amounts deferred | 248,303 |
|
Balance at June 30, 2020 | $ | 346,419 |
|
| | | | | |
| Total Deferred Revenue |
| |
| (in thousands) |
Balance at December 31, 2020 | $ | 382,754 | |
| |
Deferred revenue recognized | (266,089) | |
Additional amounts deferred | 243,574 | |
| |
Balance at June 30, 2021 | $ | 360,239 | |
We expect to recognize revenue related to these remaining performance obligations as of June 30, 2021 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 | $ | 346,419 |
| | $ | 314,105 |
| | $ | 31,985 |
| | $ | 329 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenue Recognition Expected by Period |
| Total | | Less than 1 year | | 1-3 years | | More than 3 years |
| | | | | | | |
| (in thousands) |
Expected recognition of deferred revenue | $ | 360,239 | | | $ | 326,463 | | | $ | 33,408 | | | $ | 368 | |
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
Deferred Commissions
Details of our deferred commissions balance was as follows:
| | | | | | | | | | | |
| | | (in thousands) |
Balance at December 31, 2020 | | $ | 14,801 | |
| | | |
Commissions capitalized | | 4,137 | |
Amortization recognized | | (2,363) | |
Balance at June 30, 2021 | | $ | 16,575 | |
| | | |
| June 30, | | December 31, |
| 2021 | | 2020 |
| | | |
| (in thousands) |
Classified as: | | | |
Current | $ | 4,474 | | | $ | 3,824 | |
Non-current | 12,101 | | | 10,977 | |
Total deferred commissions | $ | 16,575 | | | $ | 14,801 | |
|
| | | | | | | |
| | (in thousands) |
Balance at December 31, 2019 | | $ | 10,624 |
|
Commissions capitalized | | 3,882 |
|
Amortization recognized | | (1,723 | ) |
Balance at June 30, 2020 | | $ | 12,783 |
|
| | | |
| June 30, | | December 31, |
| 2020 | | 2019 |
| | | |
Classified as: | (in thousands) |
Current | $ | 3,159 |
| | $ | 2,543 |
|
Non-current | 9,624 |
| | 8,081 |
|
Total deferred commissions | $ | 12,783 |
| | $ | 10,624 |
|
Disaggregation of Revenue
The following table summarizes our revenue by product group:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| (in thousands) |
Core IT Management product revenue | $ | 176,788 | | | $ | 172,665 | | | $ | 350,644 | | | $ | 346,403 | |
N-able product revenue | 85,186 | | | 73,350 | | | 168,232 | | | 146,562 | |
Total revenue | $ | 261,974 | | | $ | 246,015 | | | $ | 518,876 | | | $ | 492,965 | |
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 June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (in thousands) |
Amortization of acquired license technologies | $ | 35,554 |
| | $ | 35,741 |
| | $ | 71,126 |
| | $ | 71,578 |
|
Amortization of acquired subscription technologies | 9,280 |
| | 8,231 |
| | 18,200 |
| | 16,211 |
|
Total amortization of acquired technologies | $ | 44,834 |
| | $ | 43,972 |
| | $ | 89,326 |
| | $ | 87,789 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| (in thousands) |
Amortization of acquired license technologies | $ | 37,328 | | | $ | 35,554 | | | $ | 74,664 | | | $ | 71,126 | |
Amortization of acquired subscription technologies | 3,807 | | | 9,280 | | | 9,592 | | | 18,200 | |
Total amortization of acquired technologies | $ | 41,135 | | | $ | 44,834 | | | $ | 84,256 | | | $ | 89,326 | |
3. Goodwill
The following table reflects the changes in goodwill for the six months ended June 30, 2020:2021:
| | | | | |
| (in thousands) |
Balance at December 31, 2020 | $ | 4,249,402 | |
| |
Foreign currency translation and other adjustments | (42,682) | |
Balance at June 30, 2021 | $ | 4,206,720 | |
|
| | | |
| (in thousands) |
Balance at December 31, 2019 | $ | 4,058,198 |
|
Foreign currency translation and other adjustments | 89 |
|
Balance at June 30, 2020 | $ | 4,058,287 |
|
13
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
4. 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, 20202021 and December 31, 2019.2020. There have been no transfers between fair value measurement levels during the six months ended June 30, 2020.2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at June 30, 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 | $ | 265,000 | | | $ | 0 | | | $ | 0 | | | $ | 265,000 | |
Trading security | 0 | | | 0 | | | 5,337 | | | 5,337 | |
| | | | | | | |
Total assets | $ | 265,000 | | | $ | 0 | | | $ | 5,337 | | | $ | 270,337 | |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at June 30, 2020 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 | $ | 145,000 |
| | $ | — |
| | $ | — |
| | $ | 145,000 |
|
Trading security | — |
| | — |
| | 5,137 |
| | 5,137 |
|
Total assets | $ | 145,000 |
| | $ | — |
| | $ | 5,137 |
| | $ | 150,137 |
|
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2019 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 | $ | 4,559 |
| | $ | — |
| | $ | — |
| | $ | 4,559 |
|
Trading security | — |
| | — |
| | 5,000 |
| | 5,000 |
|
Total assets | $ | 4,559 |
| | $ | — |
| | $ | 5,000 |
| | $ | 9,559 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2020 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 | $ | 160,000 | | | $ | 0 | | | $ | 0 | | | $ | 160,000 | |
Trading security | 0 | | | 0 | | | 5,238 | | | 5,238 | |
| | | | | | | |
Total assets | $ | 160,000 | | | $ | 0 | | | $ | 5,238 | | | $ | 165,238 | |
As of June 30, 20202021 and December 31, 2019,2020, 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 5. Debt for additional information regarding our debt.
5. Debt
The following table summarizes information relating to our debt:
|
| | | | | | | | | | | | | |
| June 30, | | December 31, |
| 2020 | | 2019 |
| Amount | | Effective Rate | | Amount | | Effective Rate |
| | | | | | | |
| (in thousands, except interest rates) |
Revolving credit facility | $ | — |
| | — | % | | $ | — |
| | — | % |
First Lien Term Loan (as amended) due Feb 2024 | 1,940,250 |
| | 2.93 | % | | 1,950,200 |
| | 4.55 | % |
Total principal amount | 1,940,250 |
| | | | 1,950,200 |
| | |
Unamortized discount and debt issuance costs | (32,324 | ) | | | | (36,894 | ) | | |
Total debt | 1,907,926 |
| | | | 1,913,306 |
| | |
Less: Current portion of long-term debt | (19,900 | ) | | | | (19,900 | ) | | |
Total long-term debt | $ | 1,888,026 |
| | | | $ | 1,893,406 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, | | December 31, |
| 2021 | | 2020 |
| Amount | | Effective Rate | | Amount | | Effective Rate |
| | | | | | | |
| (in thousands, except interest rates) |
Revolving credit facility | $ | 0 | | | 0 | % | | $ | 0 | | | 0 | % |
First Lien Term Loan (as amended) due Feb 2024 | 1,920,350 | | | 2.85 | % | | 1,930,300 | | | 2.90 | % |
| | | | | | | |
| | | | | | | |
Total principal amount | 1,920,350 | | | | | 1,930,300 | | | |
Unamortized discount and debt issuance costs | (23,230) | | | | | (27,728) | | | |
Total debt | 1,897,120 | | | | | 1,902,572 | | | |
Less: Current portion of long-term debt | (19,900) | | | | | (19,900) | | | |
Total long-term debt | $ | 1,877,220 | | | | | $ | 1,882,672 | | | |
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 June 30, 2020:2021:
•a $1.99 billion U.S. dollar term loan, or First Lien Term Loan, with a final maturity date of February 5, 2024; and
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
•a $125.0$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 $25.0$17.5 million tranche available only in U.S. dollars, of which $7.5 million haswith a final maturity date of February 5, 2021 and $17.5 million has a final maturity date of February 5, 2022.
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.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 June 30, 2020,2021, we were in compliance with all covenants of the First Lien Credit Agreement.
6. 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 June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| (in thousands) |
Basic earnings (loss) per share | | | | | | | |
Numerator: | | | | | | | |
Net income (loss) | $ | (11,624) | | | $ | 12,845 | | | $ | (18,784) | | | $ | 13,260 | |
| | | | | | | |
Earnings allocated to unvested restricted stock | 0 | | | (73) | | | 0 | | | (91) | |
Net income (loss) available to common stockholders | $ | (11,624) | | | $ | 12,772 | | | $ | (18,784) | | | $ | 13,169 | |
Denominator: | | | | | | | |
Weighted-average common shares outstanding used in computing basic earnings (loss) per share | 157,854 | | | 155,122 | | | 157,491 | | | 154,795 | |
| | | | | | | |
Diluted earnings (loss) per share | | | | | | | |
Numerator: | | | | | | | |
Net income (loss) available to common stockholders | $ | (11,624) | | | $ | 12,772 | | | $ | (18,784) | | | $ | 13,169 | |
Denominator: | | | | | | | |
Weighted-average shares used in computing basic earnings (loss) per share | 157,854 | | | 155,122 | | | 157,491 | | | 154,795 | |
Add dilutive impact of employee equity plans | 0 | | | 2,327 | | | 0 | | | 2,142 | |
Weighted-average shares used in computing diluted earnings (loss) per share | 157,854 | | | 157,449 | | | 157,491 | | | 156,937 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (in thousands) |
Basic earnings (loss) per share | | | | | | | |
Numerator: | | | | | | | |
Net income (loss) | $ | 12,845 |
| | $ | (2,119 | ) | | $ | 13,260 |
| | $ | 1,026 |
|
Earnings allocated to unvested restricted stock | (73 | ) | | — |
| | (91 | ) | | (12 | ) |
Net income (loss) available to common stockholders | $ | 12,772 |
| | $ | (2,119 | ) | | $ | 13,169 |
| | $ | 1,014 |
|
Denominator: | | | | | | | |
Weighted-average common shares outstanding used in computing basic earnings (loss) per share | 310,244 |
| | 306,587 |
| | 309,591 |
| | 306,122 |
|
| | | | | | | |
Diluted earnings (loss) per share | | | | | | | |
Numerator: | | | | | | | |
Net income (loss) available to common stockholders | $ | 12,772 |
| | $ | (2,119 | ) | | $ | 13,169 |
| | $ | 1,014 |
|
Denominator: | | | | | | | |
Weighted-average shares used in computing basic earnings (loss) per share | 310,244 |
| | 306,587 |
| | 309,591 |
| | 306,122 |
|
Add dilutive impact of employee equity plans | 4,654 |
| | — |
| | 4,283 |
| | 4,231 |
|
Weighted-average shares used in computing diluted earnings (loss) per share | 314,898 |
| | 306,587 |
| | 313,874 |
| | 310,353 |
|
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
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, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (in thousands) |
Stock options to purchase common stock | 234 |
| | 2,420 |
| | 241 |
| | 341 |
|
Performance-based stock options to purchase common stock | 74 |
| | 299 |
| | 79 |
| | 128 |
|
Non-vested restricted stock incentive awards | 1,544 |
| | 2,269 |
| | 1,844 |
| | 2,587 |
|
Performance-based non-vested restricted stock incentive awards | 235 |
| | 916 |
| | 302 |
| | 1,098 |
|
Restricted stock units | 8,193 |
| | 6,719 |
| | 6,928 |
| | 4,672 |
|
Performance stock units | 162 |
| | 885 |
| | 243 |
| | 921 |
|
Employee stock purchase plan | 205 |
| | 61 |
| | 188 |
| | 30 |
|
Total anti-dilutive shares | 10,647 |
| | 13,569 |
| | 9,825 |
| | 9,777 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| (in thousands) |
Stock options to purchase common stock | 534 | | | 154 | | | 575 | | | 160 | |
Non-vested restricted stock incentive awards | 126 | | | 772 | | | 229 | | | 922 | |
Performance-based non-vested restricted stock incentive awards | 0 | | | 118 | | | 0 | | | 151 | |
Restricted stock units | 6,206 | | | 4,097 | | | 5,716 | | | 3,464 | |
Performance stock units | 62 | | | 81 | | | 79 | | | 122 | |
Employee stock purchase plan | 143 | | | 102 | | | 14 | | | 94 | |
Total anti-dilutive shares | 7,071 | | | 5,324 | | | 6,613 | | | 4,913 | |
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, purchase of restricted stock or proceeds from the employee stock purchase plan.
7. Income Taxes
For the three months ended June 30, 20202021 and 2019,2020, we recorded income tax benefit of $1.6 million and income tax expense of $4.3 million and $3.2 million, respectively, resulting in an effective tax rate of 25.3%12.1% and 297.1%25.3%, respectively. For the six months ended June 30, 20202021 and 2019,2020, we recorded income tax benefit of $12.5 million and income tax expense of $6.8 million and $3.8 million, respectively, resulting in an effective tax rate of 33.8%39.9% and 78.6%33.8%, respectively. The decrease in the effective tax rate for the three and six months ended June 30, 20202021 compared to the same period in 20192020 was primarily due to an increasea decrease in income before income taxes and an increase in state taxes. The increase in the impact of having a full valuation allowance againsteffective tax rate for the deferred tax assets relatedsix months ended June 30, 2021 compared to the currentsame period losses relatedin 2020 was primarily due to the entities acquiredreversal of uncertain tax positions in the SAManage Ltd., or Samanage, acquisition completedamount of $6.1 million and related accrued interest in April 2019.the amount of $2.7 million resulting from an IRS settlement agreement entered into during the six months ended June 30, 2021.
Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. At June 30, 2020,2021, we had accrued interest and penalties related to unrecognized tax benefits of approximately $6.1$2.9 million.
We file U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. The 20112012 through 20182020 tax years generally remain open and subject to examination by federal, and state tax authorities. The 2011 through 2019 tax years generally remain open and subject to examination by foreign tax authorities. We are currently under examination by the IRS for the tax years 20112013 through the period ending February 2016. During the three months ended March 31, 2021, we finalized a settlement agreement with the IRS for the tax years 2011 to 2012. We are under audit by the Indian Tax Authority for the 2014 and 2017 tax years.year. 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. The Massachusetts Department of Revenue audit for the 2015 through February 2016 tax years. We were notified in February 2020 that the Texas Comptroller would audit the 2015 through 2018 tax years.years closed with immaterial adjustments. We are not currently under audit in any other taxing jurisdictions.
On July 27, 2015,
8. Commitments and Contingencies
Cyber Incident
As previously disclosed, we were the U.S. Tax Court issued an opinionvictim 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. As we disclosed in Altera Corp. v. Commissionerour investigatory update, we have substantially completed this process and believe the threat actor is no longer active in our environments.
Expenses Incurred
For the three months ended June 30, 2021, we recorded pretax gross expenses related to the treatmentCyber Incident of stock-based compensation expense in an intercompany cost-sharing arrangement. In February 2016, the U.S. Internal Revenue Service appealed the decision to the U.S. Court of Appeals$13.6 million, partially offset by insurance receipts and expected insurance proceeds for the Ninth Circuit. On June 7, 2019, the Ninth Circuit reversed the 2015 decision of the U.S. Tax Court. On February 10, 2020, Altera Corp. submitted a petition for writ of certiorari to the U.S. Supreme Court. On June 22, 2020, the Supreme Court of the United States denied Altera's petition to review the Ninth Circuit’s decision. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits or obligations,costs we believe are reimbursable and the risk of the Tax Court's decision being overturned upon appeal, we have not recorded any benefit or expense as of June 30, 2020. We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.
Governments in certain countries where we do business have enacted legislation in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security Act, or “CARES Act," enacted by the United States on March 27, 2020. We are continuing to analyze these legislative developments and believe they have not had a material impact on our provision for income taxes for the three and six months ended June 30, 2020.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
probable of recovery under our insurance coverage of $2.9 million, for pretax net expenses of $10.7 million. For the three months ended June 30, 2021, we have included $0.7 million of these gross expenses in cost of recurring revenue, $0.8 million in sales and marketing expense and $12.2 million in general and administrative expense in the condensed consolidated statements of operations.
For the six months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $34.0 million, partially offset by insurance receipts and expected insurance proceeds for costs we believe are reimbursable and probable of recovery under our insurance coverage of $13.1 million, for pretax net expenses of $20.9 million. For the six months ended June 30, 2021, we have included $1.5 million of these gross expenses in cost of recurring revenue, $1.5 million in sales and marketing expense and $31.0 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.
Litigation, Claims and Government Investigations
As a result of the Cyber Incident, we are subject to numerous lawsuits and investigations. Multiple class action lawsuits alleging, among other things, violations of the federal securities laws are 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 during set periods of time and 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 consolidated class action complaint which is pending before the court. In addition, a shareholder derivative action, purportedly on behalf of the Company, is pending in the Western District of Texas asserting breach of duty and other claims against certain of our current and former officers and directors in connection with the cyberattack. 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.
8. Commitments and ContingenciesInsurance Coverage
Legal ProceedingsWe maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident. As of June 30, 2021, we recorded a loss recovery asset of $2.1 million for insurance proceeds deemed probable of recovery which is included in prepaid and other current assets in our condensed consolidated balance sheet and received payments of $11.0 million for costs incurred.
FromOther Matters
In addition to the Cyber Incident described above, from time to time we have been and may beare involved in various legal proceedingslitigation arising in our ordinaryfrom the normal course of business. In themanagement's opinion, of management, resolution of any pending claims (either individually or in the aggregate)this litigation is not expected to have a material adverse impacteffect on our consolidated financial statements, cash flows or financial position and it is not possible to provide an estimated amount of any such loss. However, the outcome of disputes is inherently uncertain. Therefore, although management considers the likelihood of such an outcome to be remote, an unfavorable resolution of one or more matters could materially affect our futurecondition, results of operations or cash flows, or both, in a particular period.flows.
SolarWinds Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
9. Subsequent Events
Potential Spin-OffOn July 19, 2021, we completed the Separation of MSP Business
On August 6, 2020, the Company announced that its board of directors has authorized management to explore a potential spin-off of its MSPour N-able business into a newly created and separately traded public company. Ifcompany, N-able, Inc. The Separation was completed the standalone entity would provide broad and scalable IT service management solutions designed to enable managed service providers, or MSPs, to deliver outsourced IT services for their small and medium size business end-customers and more efficiently manage their own businesses. We would retain our Core IT Management business focused primarily on corporate IT organizations. If we proceed with the spin-off, it would be structured asby means of a tax-free, pro-rata distribution to all Company shareholders asin which each holder of a record date to be determined by the boardour common stock, par value $0.001 per share, received one share of directors of the Company. If completed, upon effectiveness of the transaction, the Company’s shareholders would ownN-able’s common stock, par value $0.001, for every two shares of both companies. Completionour common stock held of any spin-off would be subject to various conditions, including final approval of our board of directors, and there can be no assurance that the potential spin-off will be completed in the manner described above, or at all.
Amendment of Chief Executive Officer Employment Documents
On August 6, 2020, the Company entered into an Omnibus Amendment to Employee Documents (the “Omnibus Amendment”) with Kevin B. Thompson, the Company’s President and Chief Executive Officer. The Omnibus Amendment amends each agreement between the Company and Mr. Thompson including the Second Amended and Restated Employment Agreement between SolarWinds, Inc. and Mr. Thompson, dated as of September 30, 2016 (the “Employment Agreement”) and certain outstanding equity agreements. Among other changes, the Omnibus Amendment, amends the Employment Agreement to provide that Mr. Thompson’s Employment Agreement will terminaterecord as of the earlierclose of (i)business on July 12, 2021. In connection with the Separation, N‑able closed a private placement of its common stock and entered into a credit facility. Upon the closing of a divestituresuch private placement and such credit facility, and prior to the completion of the Company’s MSP business (by spin-off or otherwise)Separation, on July 19, 2021, N-able distributed the net proceeds from the private placement of approximately $216.0 million as well as the net proceeds of the term loan of approximately $16.5 million to us.
After the distribution, we do not beneficially own any shares of common stock in N-able and (ii)will no longer consolidate N‑able into our financial results for periods ending after July 19, 2021. As a result, beginning in the eventthird quarter of 2021, N‑able's historical financial results through the Separation will be reflected in our consolidated financial statements as a discontinued operation.
On July 26, 2021, we announced that the Company appointsintended to effect a new Chief Executive Officer while Mr. Thompson is still employed byreverse stock split of its common stock at a ratio of one post-split share for every 2 pre-split shares. The reverse stock split became effective on Friday, July 30, 2021 at 5:00pm ET. SolarWinds common stock continued to trade on the NYSE under the symbol SWI and began trading on a split-adjusted basis on Monday, August 2, 2021. As a result of the reverse stock split, all share and per share figures contained in the financial statements have been retroactively restated as if the reverse stock split occurred at the beginning of the periods presented.
On July 27, 2021, we entered into Amendment No. 5 to our First Lien Credit Agreement to extend the maturity date of our Revolving Credit Facility to August 5, 2023. The borrowing capacity under the amended Revolving Credit Facility was unchanged.
On July 30, 2021, the Board declared a special one-time cash dividend, to be paid following the effectiveness of, and after giving effect to, the reverse stock split, equal to $1.50 per share of common stock issued and outstanding as of August 9, 2021, to be paid on August 24, 2021 (the “Special Dividend”). The Special Dividend will be funded primarily from the net proceeds distributed to the Company a date mutually agreed in writing by the Company and Mr. Thompson no later than two weeks following the appointment date of such newly appointed Chief Executive Officer (the “Termination Date”). Mr. Thompson will not be entitled to any severance paymentsN-able in connection with any such termination except as set forth in the Omnibus Amendment. If the Termination Date occurs prior to December 31, 2020, Mr. Thompson will be entitled to receive the payment of his bonus compensation in respect of calendar year 2020 pro-rated for the percentage of calendar year 2020 that he was employed by the Company, so long as the termination is not for Cause (as defined in the Employment Agreement). Certain non-competition and non-solicit provisions under Mr. Thompson’s Employment Agreement were also extended to be in effect until the later of April 1, 2022 and 12 months following the Termination Date. The Omnibus Amendment also amends certain of Mr. Thompson's outstanding equity awards to, among other things, eliminate performance based vesting conditions, reduce the maximum number of shares subject to certain awards and provide for accelerated vesting in certain circumstances.Separation.
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 this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the year ended December 31, 20192020 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, infrastructure management software. Our productssolutions give organizations worldwide, regardless of type, size or IT infrastructure complexity, the power to monitor and manage the performance of theiraccelerate business transformation in today's hybrid IT environments, whether on-premise, in the cloud, or in hybrid models.environments. We combine powerful, scalable, affordable, easy to use products with a high-velocity, low-touchan "inside-first" sales model to grow our business while also generating significant cash flow.
We offer over 50 infrastructure-location agnostic productsa broad portfolio of solutions designed to help technology professionals to monitor, manage and manage network,optimize networks, systems, desktop, application,desktops, applications, storage, database,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. IPO, and once again become a publicly traded company. On July 19, 2021, we completed the previously announced separation and distribution of our managed service provider (“MSP” or “N-able”) business into a newly created and separately traded public company, N-able, Inc.
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. As we disclosed in our investigatory update, we have substantially completed this process and believe the threat actor is no longer active in our environments. 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
For the three months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $13.6 million, partially offset by insurance receipts and expected insurance proceeds for costs we believe are reimbursable and probable of recovery under our insurance coverage of $2.9 million, for pretax net expenses of $10.7 million. For the three months ended June 30, 2021, we have included $0.7 million of these gross expenses in cost of recurring revenue, $0.8 million in sales and marketing expense and $12.2 million in general and administrative expense in the condensed consolidated statements of operations.
For the six months ended June 30, 2021, we recorded pretax gross expenses related to the Cyber Incident of $34.0 million, partially offset by insurance receipts and expected insurance proceeds for costs we believe are reimbursable and probable of recovery under our insurance coverage of $13.1 million, for pretax net expenses of $20.9 million. For the six months ended June 30, 2021, we have included $1.5 million of these gross expenses in cost of recurring revenue, $1.5 million in sales and marketing expense and $31.0 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, will increase our expenses. We currently estimate that the costs associated with our "Secure By Design" initiatives will be approximately $20 million on an annual basis. These costs will primarily be 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 Part I, Item 1A. Risk Factors – Risks Related to Cybersecurity and the Cyber Incident in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 andNote 8. 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 will 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. We expect to incur increased expenses for insurance, finance, compliance activities, and to meet increased legal and regulatory requirements. We are also providing, at our cost, free third-party support services to customers related to the Cyber Incident. 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. We also expect to incur increased expenses and capital investments related to our “Secure By Design” initiatives.
Insurance Coverage
We maintain $15 million of cybersecurity insurance coverage to limit our exposure to losses such as those related to the Cyber Incident. As of June 30, 2021, we recorded a loss recovery asset of $2.1 million for insurance proceeds deemed probable of recovery which is included in prepaid and other current assets in our condensed consolidated balance sheet and received payments of $11.0 million for costs incurred.
Impacts of COVID-19
The impact from the rapidly changing market and economic conditions due to the COVID-19 pandemic on our business is uncertain. We initially responded to the COVID-19 pandemic by executing our business continuity plan and transitioning nearly all of our workforce to a remote working environment to prioritize the safety of our personnel. Substantially all of our workforce is currently working remotely. Due to the nature of our business, at this time, we have seen a minimalan impact on our financial results, andincluding a decline in license revenue, but do not expect to experience a significant long-term impact on our financial results due to the COVID-19 pandemic, butpandemic. However, we are unable to predict with a level of precision the longer term impact it may have on our business, results of operations and financial condition due to numerous uncertainties, including the duration of the pandemic, actions that may be taken by governmental authorities in response to the pandemic, its impact to the business of our customers and their end-customers and other factors identified in Part II,I, Item 1A “Risk Factors” in our Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020. 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.
Potential Spin-Off of MSPN-able Business
On August 6, 2020,July 19, 2021, we completed the previously announced that our board of directors has authorized management to explore a potential spin-offseparation of our MSP business into a newly created and separately traded public company. Ifcompany, N-able, Inc. We refer to this transaction as the “Separation.” The Separation was completed by means of a distribution in which each holder of our common stock, par value $0.001 per share, received one share of N‑able’s common stock, par value $0.001, for every two shares of our common stock held of record as of the close of business on July 12, 2021. The standalone N-able entity wouldwill provide broad and scalable IT service managementcloud-based software solutions designed to enablefor managed service providers, or MSPs, enabling them to deliver outsourced IT services for theirsupport digital transformation and growth within small and medium size business end-customers and more efficiently manage their own businesses.medium-sized enterprises, or SMEs. SolarWinds would retainretained its Core IT Management business focused primarily on selling software and cloud-based services to corporate IT organizations. We believe that if completed, the potential spin-off would enable shareholdersSeparation will allow each company to more clearly evaluate the performance and future potential of each entity on a standalone basis, while allowing each toeffectively pursue its own distinct business strategyoperating priorities, strategies and capital allocation policy. If we proceed withpolicies, while also allowing stockholders to separately evaluate and value the spin-off, it would becompanies on their distinct markets, strategies and performance. The Separation was structured as a tax-free, pro-rata
distribution to all SolarWinds shareholdersstockholders as of a record date to be determined by the board of directors of SolarWinds. If completed, upon effectivenessJuly 12, 2021. Upon completion of the transaction,Separation, SolarWinds shareholders would ownstockholders owned shares of both companies. CompletionWe have incurred significant costs in connection with the Separation which we refer to as “spin-off costs.” Spin-off costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions and information technology systems, employee and contractor costs and other incremental separation costs related to the spin-off of any spin-offthe N‑able business. The Separation has resulted in operating expenses that would be subject to various conditions, including final approvalnot otherwise have been incurred by us in the normal course of our board of directors,organic business operations. Spin-off costs incurred were $13.2 million and there can be no assurance that$23.1 million during the potentialthree and six months ended June 30, 2021, respectively. We expect spin-off will be completedcosts to subside in the manner described above, or at all.second half of 2021.
Second Quarter Financial Highlights
Our approach, which we call the “SolarWinds Model,” is based on our commitment to building a business that is focused on growth and profitability. Below are our key financial highlights for the three months ended June 30, 20202021 as compared to the three months ended June 30, 2019.
2020.
Revenue
Our total revenue was $246.0$262.0 million and $228.7$246.0 million for the three months ended June 30, 20202021 and 2019,2020, respectively. Our non-GAAP total revenue, which excludes the impact of purchase accounting, was $246.6$262.0 million and $230.6$246.6 million for the three months ended June 30, 20202021 and 2019,2020, respectively. Recurring revenue, which consists of subscription and maintenance revenue, represented approximately 86%90% of our total revenue for the three months ended June 30, 20202021 compared to 83%86% for the three months ended June 30, 2019.2020. We have increased our recurring revenue as a result of the growth in our subscription sales and the continued growth of our maintenance revenue.
Our Core IT Management products are targeted for ITOps,IT service and operations professionals, DevOps and IT security ProfessionalsSecOps professionals, and Database Administrators (DBAs) and provide hybrid IT performance management with a deep visibility into applications, databases, IT infrastructures, and the full IT stack, while remaining infrastructure-location agnostic. Our Core IT Management products include the products categorized as ITOM in our Annual Report on Form 10-K for the period ended December 31, 2019. Core IT Management product revenue was $172.7$176.8 million and $163.2$172.7 million for the three months ended June 30, 20202021 and 2019,2020, respectively.
Our MSP products deliver broad, scalable IT service management solutions to enable MSPs to deliver outsourced IT services for their small and medium size business end-customers and more efficiently manage their own businesses. MSPN‑able product revenue was $73.3$85.2 million and $65.5$73.4 million for the three months ended June 30, 2021 and 2020, and 2019, respectively. We did not retain any N-able products following the Separation.
We use Subscription Annual Recurring Revenue, or Subscription ARR, and Total Annual Recurring Revenue, or Total ARR, to evaluate the results of our recurring revenue model. Subscription ARR represents the annualized recurring value of all active subscription contracts at the end of a reporting period. As of June 30, 2020,2021, Subscription ARR was $393.6$463.3 million, up from $337.3$393.6 million as of June 30, 2019.2020. 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. As of June 30, 2020,2021, Total ARR was $872.5$992.5 million, up from $789.8$872.5 million as of June 30, 2019.
2020, reflecting an increase of 13.8%. As of June 30, 2021, Core IT Management Total ARR was $639.7 million, up from $570.6 million as of June 30, 2020, reflecting an increase of 12.1%.
As of June 30, 2021, we had over 320,000 customers. We have a broad and diverse customer base that is not concentrated in any segment or vertical industry. 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.
The SolarWinds Model allows us to both sell to a broad group of potential customers and close large transactions with significant customers. While some customers may spend as little as $100 with us over a twelve-month period, we had 9581,107 customers who had spent more than $100,000 with us for the trailing twelve-month period ended June 30, 20202021 as compared to 780958 for the twelve-month period ended June 30, 2019.2020.
We expect that the continued growth in the use of public and private clouds increased outsourcing of IT management services to MSPs and cross-selling of subscription products into our existing customer base could result in an increase in our subscription revenue. Our subscription revenue as a percentage of total revenue will decrease as a result of the Separation of the N-able business. We believe thisexpect that our continued efforts to increase subscription revenue, coupled with continued growth inour maintenance revenue, could cause ourwill result in recurring revenue continuing to increase as a percentage of total revenue over time.revenue.
Our license revenue has declined as a percentage of total revenue primarily due to the higher growth of our recurring revenue and the impact of the Cyber Incident on our second quarter results and represented approximately 13.7%10.2% of our total
revenue in the three months ended June 30, 2020.2021. We expect license revenue to increase as a percentage of revenue as a result of the Separation of the N-able business. However, over time license revenue as a percentage of total revenue may decline or fluctuate as we grow our recurring revenue.
Profitability
We have grown while maintaining high levels of operating efficiency. Our net incomeloss for the three months ended June 30, 20202021 was $12.8$11.6 million compared to a net lossincome of $2.1$12.8 million for the three months ended June 30, 2019.2020. Our Adjusted EBITDA was $119.1$111.1 million and $110.9$119.1 million for the three months ended June 30, 20202021 and 2019,2020, respectively.
Cash Flow
We have built our business to generate strong cash flow over the long term. For the three months ended June 30, 20202021 and 2019,2020, cash flows from operations were $105.7$56.1 million and $78.3$105.7 million, respectively. During those periods, our cash flows from operations were reduced by cash payments for interest on our long-term debt of $16.2$14.0 million and $26.3$16.2 million, respectively and cash payments for income taxes of $21.3 million and $10.7 million, respectively. The Cyber Incident and $17.8 million, respectively.the spin-off of our N-able business have negatively impacted our cash flows in 2021.
The Cyber Incident is expected to negatively impact revenue, profitability and cash flows in 2021 and beyond. Certain of our customers have, and others may, defer renewals or cancel subscriptions which would have a negative impact on our revenue. In addition, we expect to incur significant expenses associated with the Cyber Incident in future periods, primarily related to legal proceedings and regulatory investigations, increased customer support activities and other related matters, and increased costs and expenses for insurance, compliance activities, and to meet increased legal and regulatory requirements. We also expect to incur increased expenses and capital investments associated with our “Secure By Design” initiatives in 2021. See Note 8. 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 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.
Components of Our Results of Operations
Revenue
Our revenue consists of recurring revenue and perpetual license revenue.
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• | Recurring Revenue.The significant majority of our revenue is recurring and consists of subscription and maintenance revenue.
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▪ | 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. Subscription revenue includes sales of our MSP•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. Subscription revenue includes sales of our N‑able products as well as our cloud infrastructure, database, application performance management and IT service management, or ITSM products. We generally recognize revenue ratably over the subscription term once the service is made available to the customer or when we have the right to invoice for services performed. We generally invoice subscription agreements monthly based on usage or in advance over the subscription period on either a monthly or annual basis. 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. Our revenue from MSP products increases with the addition of end customers served by our MSP customers, the proliferation of devices managed by those MSPs and the expansion of products used by those MSPs to manage end customers’ IT infrastructures. |
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• | 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. 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.
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• | License Revenue.We derive license revenue from sales of perpetual licenses of our 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.
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In April 2020, we launched subscription pricing options for certain of our network, systems and database management products that have historically been sold as perpetual licenses. The new on-premise subscription option gives customers additional flexibility when purchasing our products. The on-premise subscription offerings are time-based revenue arrangements recognized at a point in time upon delivery of the software and support is recognized ratably over the contract period. On-premise subscription offerings are recorded
•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 subscriptionadvance.
•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 consolidated statement of operations. 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 theseour network, systems and database management products and not require customers to transition to a subscription pricing model. Customer adoption of themodel discussed above. The subscription pricing option 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 the impact toa gradual shift in the mix between license and recurring revenue will be immaterial in the short-termeach quarter as customer adoption ramps up.new customers purchase these on-premise subscription offerings.
Cost of Revenue
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• | Cost of Recurring Revenue.Cost of recurring revenue consists of technical support personnel costs, royalty fees, 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.
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• | Amortization of Acquired Technologies.We amortize•Cost of Recurring Revenue.Cost of recurring revenue consists of technical support personnel costs, royalty fees, 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. •Amortization of Acquired Technologies.Amortization of acquired technologies primarily consists of amortization related to cost of revenue the capitalized costs of technologies acquired in connection with the Take Private, and to a lesser extent, acquired technologies from our 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 June 30, 20202021 was 3,274,3,443, as compared to 3,0253,274 as of June 30, 2019.2020.
We expect our operating expenses to continue to increase in absolute dollars as we make long-term investments in our business. 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 will result in dis-synergies associated with increased overhead costs and duplicate hiring for the remainder of 2021. We intend to continue to grant equity awards to employees and directors, which will result in additional stock-based compensation expense has increased duein 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. We expect to equity awards grantedcontinue to hire personnel globally to drive new sales and maintenance renewals.
•Research and Development. Research and development expenses primarily consist of related personnel costs. We expect to continue to grow our employeesresearch and directors. Due to modifications duringdevelopment organization, particularly internationally.
•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 and spin-off costs, professional fees and other general corporate expenses. As a result of the second quarter to certain awards to eliminate performance vesting conditions applicable to such awards,Cyber Incident, we expect our stock-based compensation expense toan increase in future quarters. Our travel costs have declinedgeneral and administrative expenses in 2020 due to COVID-19 and we expect this to continue for the duration of the pandemic.near term.
| |
• | 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. We expect to continue to grow our research and development organization, particularly internationally.
|
| |
• | 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 and other acquisition-related costs, professional fees and other general corporate expenses.
|
| |
• | 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 to decrease as we repay indebtedness.
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 may 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, 20202021 and 20192020
Revenue
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Subscription | $ | 95,840 |
| | 39.0 | % | | $ | 78,780 |
| | 34.4 | % | | $ | 17,060 |
|
Maintenance | 116,498 |
| | 47.4 |
| | 110,793 |
| | 48.4 |
| | 5,705 |
|
Total recurring revenue | 212,338 |
| | 86.3 |
| | 189,573 |
| | 82.9 |
| | 22,765 |
|
License | 33,677 |
| | 13.7 |
| | 39,175 |
| | 17.1 |
| | (5,498 | ) |
Total revenue | $ | 246,015 |
| | 100.0 | % | | $ | 228,748 |
| | 100.0 | % | | $ | 17,267 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Subscription | $ | 112,429 | | | 42.9 | % | | $ | 95,840 | | | 39.0 | % | | $ | 16,589 | |
Maintenance | 122,867 | | | 46.9 | | | 116,498 | | | 47.4 | | | 6,369 | |
Total recurring revenue | 235,296 | | | 89.8 | | | 212,338 | | | 86.3 | | | 22,958 | |
License | 26,678 | | | 10.2 | | | 33,677 | | | 13.7 | | | (6,999) | |
Total revenue | $ | 261,974 | | | 100.0 | % | | $ | 246,015 | | | 100.0 | % | | $ | 15,959 | |
Total revenue increased $17.3$16.0 million, or 7.5%6.5%, for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019.2020. Revenue from North America was approximately 66%63% and 65%66% of total revenue for the three months ended June 30, 20202021 and 2019,2020, respectively. 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. Core IT Management product revenue was $176.8 million for the three months ended June 30, 2021 compared to $172.7 million for the three months ended June 30, 2020, compared to $163.2representing an increase of 2.4%. N‑able product revenue was $85.2 million for the three months ended June 30, 2019, representing an increase of 5.8%. MSP product revenue was $73.32021 compared to $73.4 million for the three months ended June 30, 2020, compared to $65.5 million for the three months ended June 30, 2019, representing an increase of 11.9%16.1%.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $17.1$16.6 million, or 21.7%17.3%, for the three months ended June 30, 20202021 compared to the three months ended June 30, 2019,2020, primarily due to sales of additional MSPN‑able products with additional contribution from our acquired SolarWinds Service Desk product. These increases were partially offset byand the effect of the weakeningstrengthening of most foreign currencies relative to the U.S. dollar. OurN‑able subscription revenue increased as a percentage of our total revenuewas $82.8 million for the three months ended June 30, 2021 compared to $70.8 million for the three months ended June 30, 2020, compared torepresenting an increase of 16.9%. Core IT Management subscription revenue was $29.6 million for the three months ended June 30, 2019.2021 compared to $25.0 million for the three months ended June 30, 2020, representing an increase of 18.4%.
Our net retention rate for our subscription products was approximately 104% and 105% for each of the trailing twelve-month periods ended June 30, 2021 and 2020, and 2019respectively, and was driven primarily by strong customer retention and expansion in our MSPN‑able products. We define our net retention rate for subscription products as 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 calculation for that same customer base.
Maintenance Revenue. Maintenance revenue increased $5.7$6.4 million, or 5.1%5.5%, for the three months ended June 30, 20202021 compared to the three months ended June 30, 20192020 primarily due to a growing maintenance renewal customer base from sales of our perpetual license products, strong maintenance renewal rates and annual maintenance price increases.rates.
Our maintenance renewal rate for our perpetual license products was approximately 92%90% and 97%92%, respectively, for the trailing twelve-month periods ended June 30, 20202021 and 2019.2020. The decrease in the maintenance renewal rate for the trailing twelve-month period ended June 30, 20202021 was primarily due to a planned downgrade on one large U.S. Federaldecline in renewals due to the Cyber Incident. We expect our maintenance renewal rates may decline or fluctuate in the first quarter of 2020 and the strengtheningfuture periods as a result of the U.S. dollar against other foreign currencies.Cyber Incident and as customers transition to our subscription offerings. We define our maintenance renewal rate as 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. 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 $5.5$7.0 million, or 14.0%20.8%, primarily due to decreased sales of our licensed products resulting from inconsistent demand throughout the quarter as a result of the global recessionCyber Incident, the continuing impact of the difficult economic environment caused by COVID-19 and an increase in the effectsubscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses. We expect our license sales may decline or fluctuate in future periods as a result of the weakening of most foreign currencies relativeCyber Incident and as customers transition to the U.S. dollar.our subscription offerings.
Cost of Revenue
| | | Three Months Ended June 30, | | | | Three Months Ended June 30, | |
| 2020 | | 2019 | | | | 2021 | | 2020 | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | | | | (in thousands, except percentages) | |
Cost of recurring revenue | $ | 21,822 |
| | 8.9 | % | | $ | 19,386 |
| | 8.5 | % | | $ | 2,436 |
| Cost of recurring revenue | $ | 27,516 | | | 10.5 | % | | $ | 21,822 | | | 8.9 | % | | $ | 5,694 | |
Amortization of acquired technologies | 44,834 |
| | 18.2 |
| | 43,972 |
| | 19.2 |
| | 862 |
| Amortization of acquired technologies | 41,135 | | | 15.7 | | | 44,834 | | | 18.2 | | | (3,699) | |
Total cost of revenue | $ | 66,656 |
| | 27.1 | % | | $ | 63,358 |
| | 27.7 | % | | $ | 3,298 |
| Total cost of revenue | $ | 68,651 | | | 26.2 | % | | $ | 66,656 | | | 27.1 | % | | $ | 1,995 | |
Total cost of revenue increased in the three months ended June 30, 20202021 compared to the three months ended June 30, 20192020 primarily due to increases in public cloud infrastructure and hosting fees related to our subscription products of $1.1$2.6 million, personnel costs to support new customers and additional product offerings of $0.8$1.6 million, which includes a $0.1$0.2 million increase in stock-based compensation expense, and depreciation and other amortization of $0.8 million and costs related to the Cyber Incident of $0.7 million. The increaseThese increases were partially offset by a decrease in amortization of acquired technologies is primarily related to intangibles acquired in the Samanage acquisition completed in April 2019. Amortization of acquired technologies includes $40.7 million and $41.0 million of amortization related to the Take Private for the three months ended June 30, 2020 and 2019, respectively.
subscription technologies.
Operating Expenses
| | | Three Months Ended June 30, | | | | Three Months Ended June 30, | |
| 2020 | | 2019 | | | | 2021 | | 2020 | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | | | | (in thousands, except percentages) | |
Sales and marketing | $ | 70,712 |
| | 28.7 | % | | $ | 64,813 |
| | 28.3 | % | | $ | 5,899 |
| Sales and marketing | $ | 82,371 | | | 31.4 | % | | $ | 70,712 | | | 28.7 | % | | $ | 11,659 | |
Research and development | 30,745 |
| | 12.5 |
| | 27,705 |
| | 12.1 |
| | 3,040 |
| Research and development | 39,106 | | | 14.9 | | | 30,745 | | | 12.5 | | | 8,361 | |
General and administrative | 24,467 |
| | 9.9 |
| | 25,241 |
| | 11.0 |
| | (774 | ) | General and administrative | 50,397 | | | 19.2 | | | 24,467 | | | 9.9 | | | 25,930 | |
Amortization of acquired intangibles | 18,294 |
| | 7.4 |
| | 17,301 |
| | 7.6 |
| | 993 |
| Amortization of acquired intangibles | 18,158 | | | 6.9 | | | 18,294 | | | 7.4 | | | (136) | |
Total operating expenses | $ | 144,218 |
| | 58.6 | % | | $ | 135,060 |
| | 59.0 | % | | $ | 9,158 |
| Total operating expenses | $ | 190,032 | | | 72.5 | % | | $ | 144,218 | | | 58.6 | % | | $ | 45,814 | |
Sales and Marketing. Sales and marketing expenses increased $5.9$11.7 million, or 9.1%16.5%, primarily due to increases in personnel costs of $6.2$7.1 million, which includes an increase of $2.2$1.5 million in stock-based compensation expense, and increases in marketing program costs of $1.1 million. These increases were partially offset by reductions in travel and acquisition relatedpublic relation costs of $1.5resulting from the Cyber Incident increased $3.6 million. We increased our sales and marketing employee headcount and marketing program costs through the acquisitions of Samanage and VividCortex in 2019 and, to a lesser extent, to support the growth in the business. We acquired Samanage on April 30, 2019business and VividCortex on December 10, 2019.through the acquisitions.
Research and Development. Research and development expenses increased $3.0$8.4 million, or 11.0%27.2%, primarily due to increasesan increase in personnel costs of $3.9$5.3 million, which includes ana $1.0 million increase in stock-based compensation expensecontract services and $0.7 million of $1.7 million, partially offset by reductions in travel and acquisitioncosts related coststo the spin-off of $0.6 million. The increase in our N-able business. We increased our worldwide research and development personnel costs is primarily due to the acquisitions of Samanage and VividCortex in 2019 andemployee headcount to expedite delivery of product enhancements and new product offerings to our customers.customers as well as through acquisitions.
General and Administrative. General and administrative expenses decreased $0.8increased $25.9 million, or 3.1%106.0%, primarily due to decreases in offering, travel $12.4 million of costs related to the spin-off of our N‑able business, $9.3 million of costs related to the Cyber Incident, net of insurance proceeds, and acquisition related costs of $2.1 million and restructuring costs of $1.7 million. These decreases were partially offset by a $3.4$3.2 million increase in personnel costs, which includes a $1.5$2.3 million increase in stock-based compensation expense. As a result of the Cyber Incident, we expect an increase in general and administrative expenses for the remainder of 2021.
Amortization of Acquired Intangibles. Amortization of acquired intangibles increased $1.0decreased $0.1 million, or 5.7%,0.7% primarily due to amortization related to the Samanage acquisitionimpact of changes in April 2019. Amortization of intangible assets includes $11.8 million and $11.9 million of amortization related to the Take Privateforeign currency exchange rates.
for the three months ended June 30, 2020 and 2019, respectively, with the remaining balance related primarily to the LOGICnow acquisition in May 2016.
Interest Expense, Net
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Interest expense, net | $ | (18,313 | ) | | (7.4 | )% | | $ | (28,177 | ) | | (12.3 | )% | | $ | 9,864 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Interest expense, net | $ | (16,191) | | | (6.2) | % | | $ | (18,313) | | | (7.4) | % | | $ | 2,122 | |
Interest expense, net decreased by $9.9$2.1 million, or 35.0%11.6%, in the three months ended June 30, 20202021 compared to the three months ended June 30, 2019.2020. The decrease in interest expense is primarily due to decreases in interest rates on our debt and the reduction in our outstanding debt balance related to quarterly principal repayments. The weighted-average effective interest rate on our debt for the three months ended June 30, 20202021 was 3.26%2.85% compared to 5.21%3.26% for the three months ended June 30, 2019.2020. See Note 5. 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 June 30, | | |
| 2020 | | 2019 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Other income (expense), net | $ | 363 |
| | 0.1 | % | | $ | (1,078 | ) | | (0.5 | )% | | $ | 1,441 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
| | | | | | | | | |
Other income (expense), net | $ | (321) | | | (0.1) | % | | $ | 363 | | | 0.1 | % | | $ | (684) | |
| | | | | | | | | |
Other income (expense), net increaseddecreased by $1.4$0.7 million in the three months ended June 30, 20202021 compared to the three months ended June 30, 20192020 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 June 30, | | |
| 2020 | | 2019 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Income before income taxes | $ | 17,191 |
| | 7.0 | % | | $ | 1,075 |
| | 0.5 | % | | $ | 16,116 |
|
Income tax expense | 4,346 |
| | 1.8 |
| | 3,194 |
| | 1.4 |
| | 1,152 |
|
Effective tax rate | 25.3 | % | | | | 297.1 | % | | | | (271.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Income (loss) before income taxes | $ | (13,221) | | | (5.0) | % | | $ | 17,191 | | | 7.0 | % | | $ | (30,412) | |
Income tax expense (benefit) | (1,597) | | | (0.6) | | | 4,346 | | | 1.8 | | | (5,943) | |
Effective tax rate | 12.1 | % | | | | 25.3 | % | | | | (13.2) | % |
Our income tax expensebenefit for the three months ended June 30, 2020 increased by $1.22021 was $1.6 million as compared to income tax expense of $4.3 million for the three months ended June 30, 2019.2020. The effective tax rate decreased to 25.3%12.1% for the period primarily due to an increasea decrease in income before income taxes and the impact of having a full valuation allowance against the deferred tax assets related to the current period losses related to the entities acquiredan increase in the Samanage acquisition completed in April 2019.state taxes. For additional discussion about our income taxes, see Note 7. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Form 10-Q.
Comparison of the Six Months Ended June 30, 20202021 and 20192020
Revenue
| | | Six Months Ended June 30, | | | | Six Months Ended June 30, | |
| 2020 | | 2019 | | | | 2021 | | 2020 | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | | | | (in thousands, except percentages) | |
Subscription | $ | 189,475 |
| | 38.4 | % | | $ | 150,345 |
| | 33.8 | % | | $ | 39,130 |
| Subscription | $ | 221,417 | | | 42.7 | % | | $ | 189,475 | | | 38.4 | % | | $ | 31,942 | |
Maintenance | 232,847 |
| | 47.2 |
| | 217,085 |
| | 48.8 |
| | 15,762 |
| Maintenance | 245,907 | | | 47.4 | | | 232,847 | | | 47.2 | | | 13,060 | |
Total recurring revenue | 422,322 |
| | 85.7 |
| | 367,430 |
| | 82.7 |
| | 54,892 |
| Total recurring revenue | 467,324 | | | 90.1 | | | 422,322 | | | 85.7 | | | 45,002 | |
License | 70,643 |
| | 14.3 |
| | 77,110 |
| | 17.3 |
| | (6,467 | ) | License | 51,552 | | | 9.9 | | | 70,643 | | | 14.3 | | | (19,091) | |
Total revenue | $ | 492,965 |
| | 100.0 | % | | $ | 444,540 |
| | 100.0 | % | | $ | 48,425 |
| Total revenue | $ | 518,876 | | | 100.0 | % | | $ | 492,965 | | | 100.0 | % | | $ | 25,911 | |
Total revenue increased $48.4$25.9 million, or 10.9%5.3%, for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.2020. Revenue from North America was approximately 66%63% and 65%66% of total revenue for the six months ended June 30, 20202021 and 2019,2020, respectively. 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. Core IT Management product revenue was $350.6 million for the six months ended June 30, 2021 compared to $346.4 million for the six months ended June 30, 2020, compared to $317.7representing an increase of 1.2%. N-able product revenue was $168.2 million for the six months ended June 30, 2019, representing an increase of 9.0%. Our MSP product revenue was2021 compared to $146.6 million for the six months ended June 30, 2020, compared to $126.8 million for the six months ended June 30, 2019, representing an increase of 15.6%14.8%.
Recurring Revenue
Subscription Revenue. Subscription revenue increased $39.1$31.9 million, or 26.0%16.9%, for the six months ended June 30, 20202021 compared to the six months ended June 30, 2019,2020, primarily due to sales of additional MSPN-able products with additional contribution from our acquired SolarWinds Service Desk product. These increases were partially offset byand the effect of the weakeningstrengthening of most foreign currencies relative to the U.S. dollar. OurN‑able subscription revenue increased as a percentage of our total revenuewas $163.5 million for the six months ended June 30, 2021 compared to $141.0 million for the six months ended June 30, 2020, compared torepresenting an increase of 15.9%. Core IT Management subscription revenue was $58.0 million for the six months ended June 30, 2019.2021 compared to $48.5 million for the six months ended June 30, 2020, representing an increase of 19.5%.
Our net retention rate for our subscription products was approximately 104% and 105% for each of the trailing twelve-month periods ended June 30, 2021 and 2020, and 2019respectively, and was driven primarily by strong customer retention and expansion in our MSPN-able products. We define our net retention rate for subscription products as 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 calculation for that same customer base.
Maintenance Revenue. Maintenance revenue increased $15.8$13.1 million, or 7.3%5.6%, for the six months ended June 30, 20202021 compared to the six months ended June 30, 20192020 primarily due to a growing maintenance renewal customer base from sales of our perpetual license products, strong maintenance renewal rates and annual maintenance price increases.rates.
Our maintenance renewal rate for our perpetual license products was approximately 92%90% and 97%92%, respectively for the trailing twelve-month periods ended June 30, 20202021 and 2019.2020. The decrease in the maintenance renewal rate for the trailing twelve-month period ended June 30, 20202021 was primarily due to a planned downgrade on one large U.S. Federaldecline in renewals due to the Cyber Incident. We expect our maintenance renewal rates may decline or fluctuate in the first quarter of 2020 and the strengtheningfuture periods as a result of the U.S. dollar against other foreign currencies.Cyber Incident and as customers transition to our subscription offerings. We define our maintenance renewal rate as 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. 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 $6.5$19.1 million, or 8.4%27.0%, primarily due to decreased sales of our licensed products resulting from inconsistent demand throughout the second quarter of 2020 as a result of the global recessionCyber Incident, the continuing impact of the difficult economic environment caused by COVID-19 and an increase in the effectsubscription sales of our network, systems and database management products that have historically been sold only as perpetual licenses. We expect our license sales may decline or fluctuate in future periods as a result of the weakening of most foreign currencies relativeCyber Incident and as customers transition to the U.S. dollar.our subscription offerings.
Cost of Revenue
| | | Six Months Ended June 30, | | | | Six Months Ended June 30, | |
| 2020 | | 2019 | | | | 2021 | | 2020 | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | | | | (in thousands, except percentages) | |
Cost of recurring revenue | $ | 44,323 |
| | 9.0 | % | | $ | 37,545 |
| | 8.4 | % | | $ | 6,778 |
| Cost of recurring revenue | $ | 54,474 | | | 10.5 | % | | $ | 44,323 | | | 9.0 | % | | $ | 10,151 | |
Amortization of acquired technologies | 89,326 |
| | 18.1 |
| | 87,789 |
| | 19.7 |
| | 1,537 |
| Amortization of acquired technologies | 84,256 | | | 16.2 | | | 89,326 | | | 18.1 | | | (5,070) | |
Total cost of revenue | $ | 133,649 |
| | 27.1 | % | | $ | 125,334 |
| | 28.2 | % | | $ | 8,315 |
| Total cost of revenue | $ | 138,730 | | | 26.7 | % | | $ | 133,649 | | | 27.1 | % | | $ | 5,081 | |
Total cost of revenue increased in the six months ended June 30, 20202021 compared to the six months ended June 30, 20192020 primarily due to increases in public cloud infrastructure and hosting fees related to our subscription products of $3.1$4.2 million, personnel costs to support new customers and additional product offerings of $2.4$2.7 million, which includes a $0.2$0.3 million increase in stock-based compensation expense, and depreciation and other amortization of $1.6$1.7 million and costs related to the Cyber Incident of $1.5 million. The increaseThese increases were partially offset by a decrease in amortization of acquired technologies is primarily related to intangibles acquired through the acquisition of Samanage in April 2019. Amortization of acquired technologies includes $81.4 million and $82.0 million of amortization related to the Take Private for the six months ended June 30, 2020 and 2019, respectively.subscription technologies.
Operating Expenses
| | | Six Months Ended June 30, | | | | Six Months Ended June 30, | |
| 2020 | | 2019 | | | | 2021 | | 2020 | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change | | Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | | | | | | | | | | | |
| (in thousands, except percentages) | | | | (in thousands, except percentages) | |
Sales and marketing | $ | 143,090 |
| | 29.0 | % | | $ | 125,408 |
| | 28.2 | % | | $ | 17,682 |
| Sales and marketing | $ | 165,668 | | | 31.9 | % | | $ | 143,090 | | | 29.0 | % | | $ | 22,578 | |
Research and development | 62,590 |
| | 12.7 |
| | 52,893 |
| | 11.9 |
| | 9,697 |
| Research and development | 76,867 | | | 14.8 | | | 62,590 | | | 12.7 | | | 14,277 | |
General and administrative | 54,222 |
| | 11.0 |
| | 46,977 |
| | 10.6 |
| | 7,245 |
| General and administrative | 98,107 | | | 18.9 | | | 54,222 | | | 11.0 | | | 43,885 | |
Amortization of acquired intangibles | 36,590 |
| | 7.4 |
| | 33,803 |
| | 7.6 |
| | 2,787 |
| Amortization of acquired intangibles | 38,215 | | | 7.4 | | | 36,590 | | | 7.4 | | | 1,625 | |
Total operating expenses | $ | 296,492 |
| | 60.1 | % | | $ | 259,081 |
| | 58.3 | % | | $ | 37,411 |
| Total operating expenses | $ | 378,857 | | | 73.0 | % | | $ | 296,492 | | | 60.1 | % | | $ | 82,365 | |
Sales and Marketing. Sales and marketing expenses increased $17.7$22.6 million, or 14.1%15.8%, primarily due to increases in personnel costs of $13.0$16.1 million, which includes an increase of $2.8$5.0 million in stock-based compensation expense, and marketing program costs of $5.7 million. These increases were partially offset by reductions in travel and acquisition relatedpublic relation costs of $1.9resulting from the Cyber Incident increased $5.6 million. We increased our sales and marketing employee headcount and marketing program costs through the acquisition of Samanage and, to a lesser extent, to support the growth in the business.business and through the acquisitions.
Research and Development. Research and development expenses increased $9.7$14.3 million, or 18.3%22.8%, primarily due to an increase in personnel costs of $9.9$11.3 million, which includes an increase of $3.1$0.7 million in stock-based compensation expense, partially offset by a reduction in travel and acquisition related costs of $0.6 million. The$1.3 million increase in contract services and $0.9 million of costs related to the spin-off of our N-able business. We increased our worldwide research and development personnel costs is primarily due to the acquisition of Samanage in 2019 andemployee headcount to expedite delivery of product enhancements and new product offerings to our customers.customers as well as through acquisitions.
General and Administrative. General and administrative expenses increased $7.2$43.9 million, or 15.4%80.9%, primarily due to a $7.1$21.6 million increase in costs related to the spin-off of our N-able business, $17.9 million of costs related to the Cyber Incident, net of insurance proceeds, and a $6.8 million increase in personnel costs, which includes an increase of $2.9$4.1 million in stock-based compensation expense,expense. These increases were partially offset by a $2.0 million increasedecrease in our provision for losses on accounts receivables andof $2.1 million. As a $1.3 millionresult of the Cyber Incident, we expect an increase in professional feesgeneral and other public company costs. These increases were partially offset by decreases in restructuring costsadministrative expenses for the remainder of $1.8 million and offering, travel and acquisition related costs of $1.2 million. The increase in our provision for losses on accounts receivables is primarily related to a settlement with a distributor, from customers acquired in recent acquisitions and customers potentially impacted by the current economic uncertainty resulting from the COVID-19 pandemic.2021.
Amortization of Acquired Intangibles. Amortization of acquired intangibles increased $2.8$1.6 million, or 8.2%4.4%, primarily due to amortization related to intangibles acquired in the Samanage acquisition completed in April 2019. Amortizationfourth quarter of intangible assets includes $23.6 million and $23.8 million of amortization related to the Take Private2020.
for the six months ended June 30, 2020 and 2019, respectively, with the remaining balance related primarily to the LOGICnow acquisition in May 2016.
Interest Expense, Net
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Interest expense, net | $ | (42,408 | ) | | (8.6 | )% | | $ | (55,559 | ) | | (12.5 | )% | | $ | 13,151 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Interest expense, net | $ | (32,365) | | | (6.2) | % | | $ | (42,408) | | | (8.6) | % | | $ | 10,043 | |
Interest expense, net decreased by $13.2$10.0 million, or 23.7%, in the six months ended June 30, 20202021 compared to the six months ended June 30, 2019.2020. The decrease in interest expense is primarily due to decreases in interest rates on our debt and the reduction in our outstanding debt balance related to quarterly principal repayments. The weighted-average effective interest rate on our debt for the six months ended June 30, 20202021 was 3.84%2.87% compared to 5.23%3.84% for the six months ended June 30, 2019.2020. See Note 5. 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
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Other income (expense), net | $ | (395 | ) | | (0.1 | )% | | $ | 219 |
| | — | % | | $ | (614 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
| | | | | | | | | |
| | | | | | | | | |
Other income (expense), net | $ | (194) | | | — | % | | $ | (395) | | | (0.1) | % | | $ | 201 | |
| | | | | | | | | |
Other income (expense), net decreased by $0.6$0.2 million in the six months ended June 30, 20202021 compared to the six months ended June 30, 20192020 primarily due to the impact of changes in foreign currency exchange rates related to various accounts for the period.
Income Tax Expense (Benefit)
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Income before income taxes | $ | 20,021 |
| | 4.1 | % | | $ | 4,785 |
| | 1.1 | % | | $ | 15,236 |
|
Income tax expense | 6,761 |
| | 1.4 |
| | 3,759 |
| | 0.8 |
| | 3,002 |
|
Effective tax rate | 33.8 | % | | | | 78.6 | % | | | | (44.8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2021 | | 2020 | | |
| Amount | | Percentage of Revenue | | Amount | | Percentage of Revenue | | Change |
| | | | | | | | | |
| (in thousands, except percentages) | | |
Income (loss) before income taxes | $ | (31,270) | | | (6.0) | % | | $ | 20,021 | | | 4.1 | % | | $ | (51,291) | |
Income tax expense (benefit) | (12,486) | | | (2.4) | | | 6,761 | | | 1.4 | | | (19,247) | |
Effective tax rate | 39.9 | % | | | | 33.8 | % | | | | 6.1 | % |
Our income tax expensebenefit for the six months ended June 30, 2020 increased by $3.02021 was $12.5 million as compared to income tax expense of $6.8 million for the six months ended June 30, 2019.2020. The effective tax rate decreasedincreased to 33.8%39.9% for the period primarily due to an increase in income before income taxes and the impactreversal of having a full valuation allowance against the deferreduncertain tax assets related to the current period losses related to the entities acquiredpositions in the Samanage acquisition completedamount of $6.1 million and related accrued interest in April 2019.the amount of $2.7 million due to an IRS settlement agreement entered into during the first quarter of 2021. For additional discussion about our income taxes, see Note 7. Income Taxes in the Notes to Condensed Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
In addition to financial measures prepared in accordance with GAAP, we use certain non-GAAP financial measures to clarify and enhance our understanding, and aid in the period-to-period comparison, of our performance. We believe that these non-GAAP financial measures provide supplemental information that is meaningful when assessing our operating performance because they exclude the impact of certain amounts that our management and board of directors do not consider part of core operating results when assessing our operational performance, allocating resources, preparing annual budgets and determining compensation. Accordingly, these non-GAAP financial measures may provide insight to investors into the motivation and decision-making of management in operating the business. Investors are encouraged to review the reconciliation of each of these non-GAAP financial measures to its most comparable GAAP financial measure included below.
While we believe that these non-GAAP financial measures provide useful supplemental information, non-GAAP financial measures have limitations and should not be considered in isolation from, or as a substitute for, their most comparable GAAP measures. These non-GAAP financial measures are not prepared in accordance with GAAP, do not reflect a comprehensive system of accounting and may not be comparable to similarly titled measures of other companies due to potential differences in their financing and accounting methods, the book value of their assets, their capital structures, the method by which their assets were acquired and the manner in which they define non-GAAP measures. Items such as the amortization of intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition related adjustments, costs related to the spin-off of our N‑able business, 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
We define non-GAAP subscription revenue, non-GAAP maintenance revenue, non-GAAP license revenue and non-GAAP total revenue, as subscription revenue, maintenance revenue, license revenue and total revenue, respectively, excluding the impact of purchase accounting from our acquisitions. We monitor these measures to assess our performance because we believe our revenue growth rates would be overstated without these adjustments. We believe presenting non-GAAP subscription revenue, non-GAAP maintenance revenue, non-GAAP license revenue and non-GAAP total revenue aids in the comparability between periods and in assessing our overall operating performance.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| | | | | | | |
| (in thousands) |
Revenue: | | | | | | | |
GAAP subscription revenue | $ | 112,429 | | | $ | 95,840 | | | $ | 221,417 | | | $ | 189,475 | |
Impact of purchase accounting | 55 | | | 560 | | | 134 | | | 2,073 | |
Non-GAAP subscription revenue | 112,484 | | | 96,400 | | | 221,551 | | | 191,548 | |
GAAP maintenance revenue | 122,867 | | | 116,498 | | | 245,907 | | | 232,847 | |
Impact of purchase accounting | — | | | — | | | — | | | — | |
Non-GAAP maintenance revenue | 122,867 | | | 116,498 | | | 245,907 | | | 232,847 | |
GAAP total recurring revenue | 235,296 | | | 212,338 | | | 467,324 | | | 422,322 | |
Impact of purchase accounting | 55 | | | 560 | | | 134 | | | 2,073 | |
Non-GAAP total recurring revenue | 235,351 | | | 212,898 | | | 467,458 | | | 424,395 | |
GAAP license revenue | 26,678 | | | 33,677 | | | 51,552 | | | 70,643 | |
Impact of purchase accounting | — | | | — | | | — | | | — | |
Non-GAAP license revenue | 26,678 | | | 33,677 | | | 51,552 | | | 70,643 | |
Total GAAP revenue | $ | 261,974 | | | $ | 246,015 | | | $ | 518,876 | | | $ | 492,965 | |
Impact of purchase accounting | $ | 55 | | | $ | 560 | | | $ | 134 | | | $ | 2,073 | |
Total non-GAAP revenue | $ | 262,029 | | | $ | 246,575 | | | $ | 519,010 | | | $ | 495,038 | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (in thousands) |
Revenue: | | | | | | | |
GAAP subscription revenue | $ | 95,840 |
| | $ | 78,780 |
| | $ | 189,475 |
| | $ | 150,345 |
|
Impact of purchase accounting | 560 |
| | 1,819 |
| | 2,073 |
| | 1,819 |
|
Non-GAAP subscription revenue | 96,400 |
| | 80,599 |
| | 191,548 |
| | 152,164 |
|
GAAP maintenance revenue | 116,498 |
| | 110,793 |
| | 232,847 |
| | 217,085 |
|
Impact of purchase accounting | — |
| | — |
| | — |
| | — |
|
Non-GAAP maintenance revenue | 116,498 |
| | 110,793 |
| | 232,847 |
| | 217,085 |
|
GAAP total recurring revenue | 212,338 |
| | 189,573 |
| | 422,322 |
| | 367,430 |
|
Impact of purchase accounting | 560 |
| | 1,819 |
| | 2,073 |
| | 1,819 |
|
Non-GAAP total recurring revenue | 212,898 |
| | 191,392 |
| | 424,395 |
| | 369,249 |
|
GAAP license revenue | 33,677 |
| | 39,175 |
| | 70,643 |
| | 77,110 |
|
Impact of purchase accounting | — |
| | — |
| | — |
| | — |
|
Non-GAAP license revenue | 33,677 |
| | 39,175 |
| | 70,643 |
| | 77,110 |
|
Total GAAP revenue | $ | 246,015 |
| | $ | 228,748 |
| | $ | 492,965 |
| | $ | 444,540 |
|
Impact of purchase accounting | $ | 560 |
| | $ | 1,819 |
| | $ | 2,073 |
| | $ | 1,819 |
|
Total non-GAAP revenue | $ | 246,575 |
| | $ | 230,567 |
| | $ | 495,038 |
| | $ | 446,359 |
|
Non-GAAP Operating Income and Non-GAAP Operating Margin
We provide non-GAAP operating income and related non-GAAP margin using non-GAAP revenue as discussed above and excluding such items as the write-down of deferred revenue related to purchase accounting, amortization of acquired intangible assets, stock-based compensation expense and related employer-paid payroll taxes, acquisition and other costs, spin-off costs, restructuring costs and restructuringCyber Incident costs. Management believes these measures are useful for the following reasons:
| |
• | •Amortization of Acquired Intangible Assets. We provide non-GAAP information that excludes expenses related to purchased intangible assets associated with our acquisitions. We believe that eliminating this expense from our non-GAAP measures is useful to investors, because the amortization of acquired intangible assets can be inconsistent in amount and frequency and is significantly impacted by the timing and magnitude of our acquisition transactions, which also vary in frequency from period to period. Accordingly, we analyze the performance of our operations in each period without regard to such expenses. •Stock-Based Compensation Expense and Related Employer-Paid Payroll Taxes. We provide non-GAAP information that excludes expenses related to stock-based compensation and related employer-paid payroll taxes. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock-based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and related employer-paid payroll taxes, management excludes these expenses when analyzing the organization’s business performance. •Acquisition and Other Costs. We exclude certain expense items resulting from acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. In addition, we exclude certain other costs including expense related to our offerings. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing these non-GAAP measures that exclude acquisition and other costs, allows users of our financial statements to better review and understand the historical and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments. •Spin-off Costs. We exclude certain expense items resulting from the Separation. These costs include legal, accounting and advisory fees, implementation and integration costs, duplicative costs for subscriptions and information technology systems, employee and contractor costs and other incremental separation costs related to the spin-off of the N‑able business. The Separation has resulted in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing non-GAAP measures that exclude these costs facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. •Restructuring Costs. We provide non-GAAP information that excludes restructuring costs such as severance and the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit activities and costs related to the separation of employment with executives of the Company. These costs are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these costs for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. •Cyber Incident Costs. We exclude certain expenses resulting from the Cyber Incident. Expenses include 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. Cyber Incident costs are provided net of expected and received insurance reimbursements, although the timing of recognizing insurance reimbursements may differ from the timing of recognizing the associated expenses. We expect to incur significant legal and other professional services expenses associated with the Cyber Incident in future periods. The Cyber Incident results in operating expenses that would not have otherwise been incurred by us in the normal course of our organic business operations. We believe that providing non-GAAP measures that exclude these costs facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance. We continue to invest significantly in cybersecurity and expect to |
| |
• | Stock-Based Compensation Expense and Related Employer-Paid Payroll Taxes. We provide non-GAAP information that excludes expenses related to stock-based compensation and related employer-paid payroll taxes. We believe that the exclusion of stock-based compensation expense provides for a better comparison of our operating results to prior periods and to our peer companies as the calculations of stock-based compensation vary from period to period and company to company due to different valuation methodologies, subjective assumptions and the variety of award types. Employer-paid payroll taxes on stock-based compensation is dependent on our stock price and the timing of the taxable events related to the equity awards, over which our management has little control, and does not correlate to the core operation of our business. Because of these unique characteristics of stock-based compensation and related employer-paid payroll taxes, management excludes these expenses when analyzing the organization’s business performance.
|
| |
• | Acquisition and Other Costs. We exclude certain expense items resulting from the Take Private and other acquisitions, such as legal, accounting and advisory fees, changes in fair value of contingent consideration, costs related to integrating the acquired businesses, deferred compensation, severance and retention expense. In addition, we exclude certain other costs including expense related to our offerings. We consider these adjustments, to some extent, to be unpredictable and dependent on a significant number of factors that are outside of our control. Furthermore, acquisitions result in operating expenses that would not otherwise have been incurred by us in the normal course of our organic business operations. We believe that providing these non-GAAP measures that exclude acquisition and other costs, allows users of our financial statements to better review and understand the historical and current results of our continuing operations, and also facilitates comparisons to our historical results and results of less acquisitive peer companies, both with and without such adjustments.
|
| |
• | Restructuring Costs. We provide non-GAAP information that excludes restructuring costs such as severance and the estimated costs of exiting and terminating facility lease commitments, as they relate to our corporate restructuring and exit activities and costs related to the separation of employment with executives of the Company. These costs are inconsistent in amount and are significantly impacted by the timing and nature of these events. Therefore, although we may incur these types of expenses in the future, we believe that eliminating these costs for purposes of calculating the non-GAAP financial measures facilitates a more meaningful evaluation of our operating performance and comparisons to our past operating performance.
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (in thousands, except margin data) |
GAAP operating income | $ | 35,141 |
| | $ | 30,330 |
| | $ | 62,824 |
| | $ | 60,125 |
|
Impact of purchase accounting | 560 |
| | 1,819 |
| | 2,073 |
| | 1,819 |
|
Stock-based compensation expense and related employer-paid payroll taxes | 13,152 |
| | 7,540 |
| | 24,635 |
| | 15,258 |
|
Amortization of acquired technologies | 44,834 |
| | 43,972 |
| | 89,326 |
| | 87,789 |
|
Amortization of acquired intangibles | 18,294 |
| | 17,301 |
| | 36,590 |
| | 33,803 |
|
Acquisition and other costs | 878 |
| | 3,499 |
| | 2,821 |
| | 5,757 |
|
Restructuring costs | (9 | ) | | 1,872 |
| | 213 |
| | 2,396 |
|
Non-GAAP operating income | $ | 112,850 |
|
| $ | 106,333 |
|
| $ | 218,482 |
|
| $ | 206,947 |
|
GAAP operating margin | 14.3 | % | | 13.3 | % | | 12.7 | % | | 13.5 | % |
Non-GAAP operating margin | 45.8 | % | | 46.1 | % | | 44.1 | % | | 46.4 | % |
make additional investments. These estimated investments are in addition to the Cyber Incident costs and not included in the net Cyber Incident costs reported.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| (in thousands, except margin data) |
GAAP operating income | $ | 3,291 | | | $ | 35,141 | | | $ | 1,289 | | | $ | 62,824 | |
Impact of purchase accounting | 55 | | | 560 | | | 134 | | | 2,073 | |
Stock-based compensation expense and related employer-paid payroll taxes | 16,667 | | | 13,152 | | | 34,779 | | | 24,635 | |
Amortization of acquired technologies | 41,135 | | | 44,834 | | | 84,256 | | | 89,326 | |
Amortization of acquired intangibles | 18,158 | | | 18,294 | | | 38,215 | | | 36,590 | |
Acquisition and other costs | 245 | | | 878 | | | 1,171 | | | 2,821 | |
Spin-off costs | 13,197 | | | — | | | 23,092 | | | — | |
Restructuring costs | 1,173 | | | (9) | | | 1,582 | | | 213 | |
Cyber Incident costs, net | 10,732 | | | — | | | 20,895 | | | — | |
Non-GAAP operating income | $ | 104,653 | | | $ | 112,850 | | | $ | 205,413 | | | $ | 218,482 | |
GAAP operating margin | 1.3 | % | | 14.3 | % | | 0.2 | % | | 12.7 | % |
Non-GAAP operating margin | 39.9 | % | | 45.8 | % | | 39.6 | % | | 44.1 | % |
Adjusted EBITDA and Adjusted EBITDA Margin
We regularly monitor adjusted EBITDA and adjusted EBITDA margin, as it is a measure we use to assess our operating performance. We define adjusted EBITDA as net income or loss, excluding the impact of purchase accounting on total revenue, amortization of acquired intangible assets and developed technology, depreciation expense, stock-based compensation expense and related employer-paid payroll taxes, restructuring costs, acquisition and other costs, spin-off costs, Cyber Incident costs, interest expense, net, debt related costs including fees related to our credit agreements, debt extinguishment and refinancing costs, unrealized foreign currency (gains) losses, and income tax expense (benefit). We define adjusted EBITDA margin as adjusted EBITDA divided by non-GAAP revenue. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; adjusted EBITDA excludes the impact of the write-down of deferred revenue due to purchase accounting in connection with our acquisitions, and therefore includes revenue that will never be recognized under GAAP; adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and other companies, including companies in our industry, may calculate adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other GAAP results. In evaluating adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the types of items excluded from the calculation of adjusted EBITDA. Adjusted EBITDA is not a presentation made in accordance with GAAP and the use of the term varies from others in our industry.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | | | | | | | | | |
| (in thousands, except margin data) | | (in thousands, except margin data) |
Net income (loss) | $ | 12,845 |
| | $ | (2,119 | ) | | $ | 13,260 |
| | $ | 1,026 |
| Net income (loss) | $ | (11,624) | | | $ | 12,845 | | | $ | (18,784) | | | $ | 13,260 | |
Amortization and depreciation | 68,247 |
| | 65,577 |
| | 136,015 |
| | 130,040 |
| Amortization and depreciation | 65,612 | | | 68,247 | | | 135,297 | | | 136,015 | |
Income tax expense | 4,346 |
| | 3,194 |
| | 6,761 |
| | 3,759 |
| |
Income tax expense (benefit) | | Income tax expense (benefit) | (1,597) | | | 4,346 | | | (12,486) | | | 6,761 | |
Interest expense, net | 18,313 |
| | 28,177 |
| | 42,408 |
| | 55,559 |
| Interest expense, net | 16,191 | | | 18,313 | | | 32,365 | | | 42,408 | |
Impact of purchase accounting on total revenue | 560 |
| | 1,819 |
| | 2,073 |
| | 1,819 |
| Impact of purchase accounting on total revenue | 55 | | | 560 | | | 134 | | | 2,073 | |
Unrealized foreign currency (gains) losses | 656 |
| | 1,208 |
| | 1,639 |
| | (100 | ) | Unrealized foreign currency (gains) losses | 367 | | | 656 | | | (674) | | | 1,639 | |
Acquisition and other costs | 878 |
| | 3,499 |
| | 2,821 |
| | 5,757 |
| Acquisition and other costs | 245 | | | 878 | | | 1,171 | | | 2,821 | |
Spin-off costs | | Spin-off costs | 13,197 | | | — | | | 23,092 | | | — | |
Debt related costs | 91 |
| | 95 |
| | 184 |
| | 196 |
| Debt related costs | 93 | | | 91 | | | 192 | | | 184 | |
Stock-based compensation expense and related employer-paid payroll taxes | 13,152 |
| | 7,540 |
| | 24,635 |
| | 15,258 |
| Stock-based compensation expense and related employer-paid payroll taxes | 16,667 | | | 13,152 | | | 34,779 | | | 24,635 | |
Restructuring costs | (9 | ) | | 1,872 |
| | 213 |
| | 2,396 |
| Restructuring costs | 1,173 | | | (9) | | | 1,582 | | | 213 | |
Cyber Incident costs, net | | Cyber Incident costs, net | 10,732 | | | — | | | 20,895 | | | — | |
Adjusted EBITDA | $ | 119,079 |
| | $ | 110,862 |
| | $ | 230,009 |
| | $ | 215,710 |
| Adjusted EBITDA | $ | 111,111 | | | $ | 119,079 | | | $ | 217,563 | | | $ | 230,009 | |
Adjusted EBITDA margin | 48.3 | % | | 48.1 | % | | 46.5 | % | | 48.3 | % | Adjusted EBITDA margin | 42.4 | % | | 48.3 | % | | 41.9 | % | | 46.5 | % |
Liquidity and Capital Resources
Cash and cash equivalents were $331.4$410.6 million as of June 30, 2020.2021. Our international subsidiaries held approximately $153.7$79.8 million of cash and cash equivalents, of which 59.7%30.6% were held in Euros. We intend either to invest our foreign earnings permanently in foreign operations or to remit these earnings to our U.S. entities in a tax-free manner with the exception for immaterial state income taxes. The Tax Act imposed a mandatory transition tax on accumulated foreign earnings and eliminates U.S. federal income taxes on foreign subsidiary distribution.
Our primary source of cash for funding operations and growth has been through cash provided by operating activities. WeGiven continue to evaluate the nature and extent of the impact of the Cyber Incident to our business and financial position. Currently it is not possible to estimate the amount of loss or range of possible loss that might result from adverse judgments, settlements, penalties, or other resolution of the proceedings and investigations resulting from the Cyber Incident. Such potential payments, if great enough, could have an adverse effect on our liquidity. In addition, there continues to be uncertainty in the rapidly changing market and economic conditions related to the ongoing COVID-19 pandemic, we continue to evaluate the nature and extent of the impact to our business and financial position.pandemic. However, despite this uncertainty,these uncertainties, we believe that our existing cash and cash equivalents, our cash flows from operating activities and our borrowing capacity under our credit facilities
will be sufficient to fund our operations, fund required debt repayments and meet our commitments for capital expenditures for at least the next 12 months.
Although we are not currently a party to any material definitive agreement regarding potential investments in, or acquisitions of, complementary businesses, applications or technologies, we may enter into these types of arrangements, which could reduce our cash and cash equivalents, require us to seek additional equity or debt financing or repatriate cash generated by our international operations that could cause us to incur withholding taxes on any distributions. Additional funds from financing arrangements may not be available on terms favorable to us or at all.
Indebtedness
As of June 30, 2020,2021, our total indebtedness was $1.9 billion, with up to $125.0$117.5 million of available borrowings under our revolving credit facility. See Note 5. 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.
First Lien Credit Agreement
The First Lien Credit Agreement, as amended, provides for a senior secured revolving credit facility in an aggregate principal amount of $125.0$117.5 million, or the Revolving Credit Facility, consisting of a $25.0$17.5 million U.S. dollar revolving credit facility, or the U.S. Dollar Revolver, and a $100.0 million multicurrency revolving credit facility, or the Multicurrency Revolver. The Revolving Credit Facility includes a $35.0 million sublimit for the issuance of letters of credit. The First Lien Credit Agreement also contains a term loan facility (which we refer to as the First Lien Term Loan, and together with the Revolving Credit Facility, as the First Lien Credit Facilities) in an original aggregate principal amount of $1,990.0 million.
The First Lien Credit Agreement provides us the right to request additional commitments for new incremental term loans and revolving loans, in an aggregate principal amount not to exceed (a) the greater of (i) $400.0 million and (ii) 100% of our
consolidated EBITDA, as defined in the First Lien Credit Agreement (calculated on a pro forma basis), for the most recent four fiscal quarter period, or the First Lien Fixed Basket, plus (b) the amount of certain voluntary prepayments of the First Lien Credit Facilities, plus (c) an unlimited amount subject to pro forma compliance with a first lien net leverage ratio not to exceed 4.75 to 1.00.
Under the U.S. Dollar Revolver, $7.5 millionAs of commitments will mature on February 5,June 30, 2021, and $17.5 million along with all commitments under the Multicurrency Revolver will mature onRevolving Credit Facility have a maturity date of February 5, 2022. On July 27, 2021, we entered into Amendment No. 5 to our First Lien Credit Agreement to extend the maturity date of our Revolving Credit Facility to August 5, 2023. The borrowing capacity under the amended Revolving Credit Facility was unchanged.
The First Lien Term Loan will mature on February 5, 2024.
The First Lien Term Loan requires equal quarterly repayments equal to 0.25% of the original principal amount.
Summary of Cash Flows
Summarized cash flow information is as follows:
| | | Six Months Ended June 30, | | Six Months Ended June 30, |
| 2020 | | 2019 | | 2021 | | 2020 |
| | | | | | | |
| (in thousands) | | (in thousands) |
Net cash provided by operating activities | $ | 184,090 |
| | $ | 141,652 |
| Net cash provided by operating activities | $ | 83,038 | | | $ | 184,090 | |
Net cash used in investing activities | (16,305 | ) | | (359,096 | ) | Net cash used in investing activities | (21,500) | | | (16,305) | |
Net cash used in financing activities | (9,660 | ) | | (9,834 | ) | Net cash used in financing activities | (17,382) | | | (9,660) | |
Effect of exchange rate changes on cash and cash equivalents | (83 | ) | | (52 | ) | Effect of exchange rate changes on cash and cash equivalents | (4,019) | | | (83) | |
Net increase (decrease) in cash and cash equivalents | 158,042 |
| | (227,330 | ) | |
Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | 40,137 | | | 158,042 | |
Operating Activities
Our primary source of cash from operating activities is cash collections from our customers. We expect cash inflows from operating activities to be affected by the timing of our sales. Our primary uses of cash from operating activities are for personnel-related expenditures, and other general operating expenses, as well as payments related to taxes, interest and facilities.
For the six months ended June 30, 20202021 as compared to the six months ended June 30, 2019,2020, the increasedecrease in cash provided by operating activities was primarily due to decreased cash inflows resulting from the increasechanges in our operating assets and liabilities and a decrease in net income after adjustments for non-cash items including depreciation and amortization and stock-based compensation expense.the period. The net cash inflowoutflow resulting from the changes in our operating assets and liabilities was $55.2 million for the six months ended June 30, 2021 as compared to a net cash inflow $18.3 million for the six months ended June 30, 2020 as compared to $10.8 million for the six months ended June 30, 2019 and was primarily due to the timing of sales and cash payments and receipts. CashDuring the six months ended June 30, 2021, cash flow from operations was impacted by lower license sales and maintenance renewal bookings, as well as an increase in cash payments for expenses resulting from the spin-off of the N-able business and the Cyber Incident. In addition, cash flows from operations for the six months ended June 30, 2020 was2021 were reduced by $16.8 million ofan increase in cash paid for taxes.
Investing Activities
Investing cash flows consist primarily of cash used for acquisitions,purchases of capital expenditures and intangible assets.assets and acquisitions. Our capital expenditures primarily relate to purchases of leasehold improvements, computers, servers and equipment to support our domestic and international office locations. Purchases of intangible assets consist primarily of capitalized research and development costs.
Net cash used in investing activities decreasedincreased in the six months ended June 30, 20202021 as compared to the six months ended June 30, 20192020 primarily due to a decreasean increase in cash used for acquisitions. During the six months ended June 30, 2019, the cash used for acquisitionspurchases of $349.5 million primarily relatesproperty and equipment related to the acquisitionpurchases of Samanage completed in April 2019.leasehold improvements, equipment and furniture.
Financing Activities
Financing cash flows consist primarily of issuance and repayments associated with our long-term debt, the proceeds from the issuance of shares of common stock through equity incentive plans and the repurchase of unvested incentive restricted stock and common stock to satisfy withholding tax requirements related to the settlement of restricted stock units.
Net cash used in financing activities decreasedincreased in the six months ended June 30, 20202021 as compared to the six months ended June 30, 20192020 due to an increase in repurchases of common stock and payments for debt issuance costs, partially offset by an
increase in proceeds from issuance of common stock under our employee stock purchase plan and exercises of stock options, partially offset by an increase in repurchases of common stock.plan. In the six months ended June 30, 20202021 we withheld and retired shares of common stock to satisfy $2.4$9.9 million of statutory withholding tax requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees related to the settlement of restricted stock units during the period. These shares are treated as common stock repurchases in our condensed consolidated financial statements. Net cash used in financing activities for the six months ended June 30, 2019 includes the proceeds and repayment of $35.0 million in borrowings under our Revolving Credit Facility. For each period, we made quarterly principal payments of $10.0 million due under our First Lien Credit Agreement. In the six months ended June 30, 2021, we paid $0.9 million in debt issuance costs related to the credit facility N-able entered into at the separation and distribution in July 2021.
Contractual Obligations and Commitments
As of June 30, 2020,2021, there have been no material changes in our contractual obligations and commitments as of December 31, 20192020 that were disclosed in our Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in conformity with GAAP and require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The impact from the rapidly changing market and economic conditions due to the COVID-19 pandemic on our business, results of operations and financial condition is uncertain. We have made estimates of the impact of COVID-19 within our financial statements as of and for the three and six months ended June 30, 2020 which did not result in material adjustments. The estimates assessed included, but were not limited to, allowances for credit losses, the carrying values of goodwill and intangible assets and other long-lived assets, valuation allowances for tax assets and revenue recognition. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected, perhaps materially.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions. We believe that these accounting policies requiring significant management judgment and estimates are critical to understanding our historical and future performance, as these policies relate to the more significant areas of our financial results. These critical accounting policies are:
•the valuation of goodwill, intangibles, long-lived assets and contingent consideration;
•revenue recognition;
•stock-based compensation;
•income taxes; and
income taxes.•loss contingencies.
A full description of our critical accounting policies that involve significant management judgment appears in our Annual Report on Form 10-K for the year ended December 31, 20192020 filed with the SEC on February 24, 2020.March 1, 2021. There have been no material changes to our critical accounting policies and estimates since that time.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q, for a full description of recent accounting pronouncements, if any, which is incorporated herein by reference.
Off-Balance Sheet Arrangements
During the six months ended June 30, 2020,2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We had cash and cash equivalents of $331.4$410.6 million and $173.4$370.5 million at June 30, 20202021 and December 31, 2019,2020, respectively. Our cash and cash equivalents consist primarily of bank demand deposits and money market funds. We hold cash and cash equivalents and short-term investments for working capital purposes. Our investments are made for capital preservation purposes, and we do not enter into investments for trading or speculative purposes.
We do not have material exposure to market risk with respect to our cash and cash equivalents, as these consist primarily of highly liquid investments purchased with original maturities of three months or less at June 30, 2020.2021.
We had total indebtedness with an outstanding principal balance of $1.9 billion and $2.0 billion at each of June 30, 20202021 and December 31, 2019, respectively.2020. Borrowings outstanding under our various credit agreementsagreement bear interest at variable rates equal to applicable margins plus specified base rates or LIBOR-based rates with a 0% floor. As of June 30, 20202021 and December 31, 2019,2020, the annual weighted-average rate on borrowings was 2.93%2.85% and 4.55%2.90%, respectively. If there was a hypothetical 100 basis point increase in interest rates, the annual impact to interest expense would be approximately $19.5$19.3 million. This hypothetical change in interest expense has been calculated based on the borrowings outstanding at December 31, 20192020 and a 100 basis point per annum change in interest rate applied over a one-year period.
We do not have material exposure to fair value market risk with respect to our total long-term outstanding indebtedness which consists of $1.9 billion U.S. dollar term loans as of June 30, 2020,2021, not subject to market pricing.
See Note 5. Debt in the Notes to Condensed Consolidated Financial Statements in Item 1 of Part I of this Quarterly Report on Form 10-Q for additional information regarding our debt.
Foreign Currency Exchange Risk
As a global company, we face exposure to adverse movements in foreign currency exchange rates. We primarily conduct business in the following locations: the United States, Europe, Canada, South America and Australia. This exposure is the result of selling in multiple currencies, growth in our international investments, additional headcount in foreign countries and operating in countries where the functional currency is the local currency. Specifically, our results of operations and cash flows are subject to fluctuations in the following currencies: the Euro, British Pound Sterling and Australian Dollar against the United States Dollar, or USD. These exposures may change over time as business practices evolve and economic conditions change, including as a result of the impact of the COVID-19 pandemic on the global economy or governmental actions taken in response to the COVID-19 pandemic. Changes in foreign currency exchange rates could have an adverse impact on our financial results and cash flows.
Our condensed consolidated statements of operations are translated into USD at the average exchange rates in each applicable period. Our international revenue, operating expenses and significant balance sheet accounts denominated in currencies other than the USD primarily flow through our United Kingdom and European subsidiaries, which have British Pound Sterling and Euro functional currencies, respectively. This results in a two-step currency exchange process wherein the currencies other than the British Pound Sterling and Euro are first converted into those functional currencies and then translated into USD for our consolidated financial statements. As an example, revenue for sales in Australia is translated from the Australian Dollar to the Euro and then into the USD.
Our statement of operations and balance sheet accounts are also impacted by the re-measurement of non-functional currency transactions such as intercompany loans, cash accounts held by our overseas subsidiaries, accounts receivable denominated in foreign currencies, deferred revenue and accounts payable denominated in foreign currencies.
Foreign Currency Transaction Risk
Our foreign currency exposures typically arise from selling annual and multi-year maintenance contracts and subscriptions in multiple currencies, accounts receivable, intercompany transfer pricing arrangements and other intercompany transactions. Our foreign currency management objective is to minimize the effect of fluctuations in foreign exchange rates on selected assets or liabilities without exposing us to additional risk associated with transactions that could be regarded as speculative.
We utilize purchased foreign currency forward contracts to minimize our foreign exchange exposure on certain foreign balance sheet positions denominated in currencies other than the Euro. We do not enter into any derivative financial instruments for trading or speculative purposes. Our objective in managing our exposure to foreign currency exchange rate fluctuations is to reduce the impact of adverse fluctuations in such exchange rates on our earnings and cash flow. The notional amounts and currencies underlying our foreign currency forward contracts will fluctuate period to period as they are principally dependent on the balances of the balance sheet positions that are denominated in currencies other than the Euro held by our global entities. There can be no assurance that our foreign currency hedging activities will substantially offset the impact of fluctuation in currency exchange rates on our results of operations and functional positions. As of June 30, 20202021 and December 31, 2019,2020, we did not have any forward contracts outstanding and while we do not have a formal policy to settle all derivatives prior to the end of each quarter, our current practice is to do so. The effect of derivative instruments on our condensed consolidated statements of operations was insignificant for the three and six months ended June 30, 20202021 and 2019.2020.
We are exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but we do not expect any counterparties to fail to meet their obligations given their high credit ratings. In addition, we diversify this risk across several counterparties and actively monitor their ratings.
Foreign Currency Translation Risk
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. If there is a change in foreign currency exchange rates, the amounts of assets, liabilities, revenue, operating expenses and cash flows that we report in U.S. dollars for foreign subsidiaries that transact in international currencies may be higher or lower to what we would have reported using a constant currency rate. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transactions results in reduced assets, liabilities, revenue, operating expenses and cash flows for our international operations. Similarly, our assets, liabilities, revenue, operating expenses and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. The conversion of the foreign subsidiaries’ financial statements into U.S. dollars will also lead to remeasurement gains and losses recorded in income, or translation gains or losses that are recorded as a component of accumulated other comprehensive income (loss).
Item 4: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2020.2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2020,2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
FromFor a description of the lawsuits and government investigations or inquiries related to the Cyber Incident, see Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 8. 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, which description is incorporated herein by reference.
In addition, from time to time, we have been and may be involved in various legal proceedings and claims arising in our ordinary course of business. At this time,Other than with respect to the Cyber Incident, neither we nor any of our subsidiaries is a party to, and none of our respective property is the subject of, any material legal proceeding. However, the outcome of legal proceedings and claims brought against us are subject to significant uncertainty. Therefore, if one or more of these legal matters were resolved against us in the same reporting period for amounts in excess of management’s expectations, our consolidated financial statements for a particular period could be materially adversely affected.
Item 1A. Risk Factors
With the exception of the following updated risk factors, there have been no other material changes in our risk factors from those disclosed in Part I, Item 1A, under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20192020 and those disclosed in Part II, Item 1A, under the heading “Risk Factors”"Risk Factors" in our Quarterly Report on Form 10-Q for the quarteryear ended March 31, 2020.2021.
Risks Related to the N-able Spin-Off
The potential spin-off of our MSP business into a newly created and separately traded public company could involve significant time and expense, could disrupt or adversely affect the consolidated or separate businesses, results of operations and financial condition,N-able may not achieve some or all of itsthe anticipated benefits, with respect to either business andwhich may not be completed in accordance with the expected plansdisrupt or anticipated timelines, or at all.
On August 6, 2020, we announced that our board of directors authorized management to explore a potential spin-off of our MSP business into a newly created and separately traded public company. We expect that the process of exploring and, if approved, completing the potential spin-off of our MSP business could be time-consuming and involve significant costs and expenses, which could disrupt the ongoing businesses and adversely affect theour business, results of operations and financial conditioncondition.
We may not realize some or all of the consolidatedanticipated strategic, financial, operational, marketing or separate businesses.other benefits from the Separation, or such benefits may be delayed by a variety of circumstances, which may not be under our control. SolarWinds is smaller and less diversified after the Separation with a narrower business focus and may be more vulnerable to changing market conditions, which could materially and adversely affect our business, financial condition and results of operations. We may not be successful in achieving our business and operational objectives. We also 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, during the pendency of the potential spin-off and following its completion, which may adversely affect our business, results of operations and financial condition,condition.
We could incur significant liability if the Separation is determined to be a taxable transaction.
We received opinions of tax counsel and tax advisors regarding qualification of the Separation, together with certain related transactions, as transactions that are generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and/or 355 of the Code. These opinions are based upon and rely on, among other things, certain facts and assumptions, as well as certain representations, statements and undertakings of us and N-able, including those relating to the past and future conduct. If any of these representations, statements or undertakings are, or become, incomplete or inaccurate, or if we or N-able breaches any of the respective covenants in any of the Separation-related agreements, the opinion of tax counsel and tax advisors could be invalid and the conclusions reached therein could be jeopardized.
Notwithstanding any opinion of tax counsel and tax advisors, the Internal Revenue Service (the “IRS”) could determine that the Separation (and certain related transactions) should be treated as a taxable transaction if it were to determine that any of the facts, assumptions, representations, statements or undertakings upon which any opinion of tax counsel and tax advisors was based were false or had been violated, or if it were to disagree with the conclusions in the opinions of our tax counsel and tax advisors. The opinions of tax counsel and tax advisors are not binding on the IRS or the businesses, resultscourts, and we cannot assure that the IRS or a court would not assert a contrary position.
If the Separation (and certain related transactions) were to fail to qualify as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 368(a)(1)(D) and/or 355 of operationsthe Code, in general, we would recognize taxable gain as if we had sold N-able common stock in a taxable sale for its fair market value, and our stockholders who received shares of N-able common stock in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares.
Potential indemnification liabilities pursuant to the Separation could materially affect our business and financial condition of the separate businesses following the completion of the potential spin-off.statements.
In addition,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. These agreements provide for specific indemnity and liability obligations of each party that can lead to disputes between us and N-able. If we are currently exploringrequired to indemnify N-able under the spin-off. It has not been approved by our board of directors, and our statementscircumstances set forth in these agreements, we may be subject to substantial liabilities. In addition, with respect thereto are preliminary in nature and subject to change as additional information becomes available and as we consider and plan further the future strategic, operational, financial and capital objectives, profiles and structures of the two businesses.
Even if approved, we cannot ensure that we will be ableliabilities for which N-able has agreed to successfully complete the potential spin-off of our MSP business. Various factors, including changes in business or industry conditions and changes in global economic and financial market conditions, could delay or prevent the completion of the potential spin-off, or cause the potential spin-off to occur on terms or conditions that are different or less favorable than expected. Furthermore,indemnify us under these agreements, there can be no assurance that the spin-offindemnity rights we have against N-able will enablebe sufficient to protect us to realize some or all of its anticipated strategic, financial, operational or other benefits. If completed, followingagainst the potential spin-off, we or the newly independent MSP business, may not be successful in achieving our respective business and operational objectives and the combined valuefull amount of the common stockliabilities, or that N-able will be able to fully satisfy its indemnification obligations. It is also possible that a court could disregard the allocation of assets and liabilities agreed to between SolarWinds and N-able and require SolarWinds to assume responsibility for obligations allocated to N-able.
N-able may fail to perform under various transaction agreements that were executed as part of the two companies may not be equal to or greater than what the value of our common stock would have been had the proposed separation not occurred.
The global COVID-19 pandemic may adversely affect our business, results of operations and financial condition.
In March 2020, the World Health Organization declared the outbreak of coronavirus disease 2019, or COVID-19, a pandemic. The global COVID-19 pandemic has created significant volatility, uncertainty and disruption in the global economy. The extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition is uncertain and will depend on numerous evolving factors outside of our control that we are not able to accurately predict, including:
the duration and scope of the COVID-19 pandemic;
governmental actions taken in response to the COVID-19 pandemic that restrict or disrupt global economic activity, including restrictions imposed on the operation of our business in our U.S. and international locations;
business failures, reductions in information technology spending, late or missed payments, or delays in purchasing decisions by our customers, their end-customers and our prospective customers, in particular among small and medium size businesses that we or our MSP customers’ serve, and the resulting impact on demand for our products, our ability to collect payments for our products or our ability to add new customers and retain existing customers;
our ability to continue to effectively market, sell and support our products through disruptions to our operations, the operations of our customers and partners and the communities in which our and their employees are located, including disruptions resulting from the spread of the virus, quarantines, office closures, reallocation of internal resources and transitions to remote working arrangements;
the ability of our products to address our customers’ needs in a rapidly evolving business environment and any interruptions or performance problems associated with the increased use of our products as a result of the shift to more remote working environments, including disruptions at any third-party data centers upon which we rely;
our ability to develop new products, enhance our existing products and acquire new products in this uncertain business environment;
delays in the U.S. federal government’s budget and appropriations process and changes in spending priorities of the U.S. federal government that result in the loss or delay of sales of our products to the U.S. federal government; and
public and private litigation based upon, arising out of or related to COVID-19 and our actions and responses thereto. Separation.
In addition to indemnification obligations, the adverse impact any of these factors could have on our business, results of operationsseparation and financial condition, these factorsdistribution agreement and the other impacts of the COVID-19 pandemic also could cause, contribute to, or increase the likelihood of the risks and uncertainties identified in this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, any of which could materially adversely affect our business, results of operations and financial condition. Additionally, because an increasing portion of our business is based on a recurring revenue model, the effect of COVID-19 on our business will not be fully reflected in our financial results for some time.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
|
| | | | | | | | | | | | | |
Period | Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Plan or Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan or Program (in thousands) |
April 1-30, 2020 | — |
| | $ | — |
| | — |
| | $ | — |
|
May 1-31, 2020 | 5,600 |
| | 0.27 |
| | — |
| | — |
|
June 1-30, 2020 | 3,200 |
| | 0.27 |
| | — |
| | — |
|
Total | 8,800 |
| | | | — |
| | |
________________
| |
(1) | All repurchases relate to employee held restricted stock that is subject to vesting. Unvested shares are subject to a right of repurchase by us in the event the employee stockholder ceases to be employed or engaged (as applicable) by us prior to vesting. All shares in the above table were shares repurchased as a result of us exercising this right and not pursuant to a publicly announced plan or program. |
Item 5. Other Information
On August 6, 2020, the Company entered into an Omnibus Amendment to Employee Documents (“Omnibus Amendment”)related agreements with Kevin B. Thompson, the Company’s President and Chief Executive Officer. The Omnibus Amendment amends each agreement between the Company and Mr. Thompson including (i) the Second Amended and Restated Employment Agreement between SolarWinds, Inc. and Mr. Thompson, dated as of September 30, 2016 (the “Employment Agreement”), (ii) the Restricted Stock Purchase Agreement dated as of September 30, 2016 by and between SolarWinds Parent, Inc. and Mr. Thompson (the “RSPA”), (iii) the Notice of Grant of Performance Share Units (Shares) between Parent and Mr. Thompson dated as of March 16, 2020 in respect of a maximum of 62,001 shares (“2020 Grant 1”), and (iv) the Notice of Grant of Performance Share Units (Shares) between Parent and Mr. Thompson dated as of March 16, 2020 in respect of a maximum of 871,967 shares (“2020 Grant 2”) as follows:
Mr. Thompson’s Employment Agreement will terminate as of the earlier of (i) the closing of a divestiture of the Company’s MSP business (by spin-off or otherwise) and (ii) in the event that the Company appoints a new Chief Executive Officer while Mr. Thompson is still employed by the Company, a date mutually agreed in writing by the Company and Mr. Thompson no later than two weeks following the appointment date of such newly appointed Chief Executive Officer (the “Termination Date”). Mr. Thompson will not be entitled to any severance payments in connection with any such termination
except as set forth in the Omnibus Amendment. If the Termination Date occurs prior to December 31, 2020, Mr. Thompson will be entitled to receive the payment of his bonus compensation in respect of calendar year 2020 pro-rated for the percentage of calendar year 2020 that he was employed by the Company, so long as the termination is not for Cause (as defined in the Employment Agreement). Certain non-competition and non-solicit provisions under Mr. Thompson’s Employment Agreement were also extended to be in effect until the later of April 1, 2022 and 12 months following the Termination Date.
The performance metrics and targets for certain shares issued to Mr. Thompson under the RSPA were amended to vest on February 15, 2021, subject to a time-based vesting schedule rather than subject to vesting based on the Company’s performance for the fiscal year ended December 31, 2020.
Mr. Thompson’s 2020 Grant 1 was cancelled.
Mr. Thompson’s 2020 Grant 2 was amended such that the maximum number of shares subject to 2020 Grant 2 was reduced to 206,552 shares. 101,289 units subject to the revised 2020 Grant 2 will vest on February 15, 2021, subject to a time-based vesting schedule rather than subject to vesting based on the Company’s performance for the fiscal year ended December 31, 2020. In addition, the Board may in its reasonable discretion vest the additional 105,263 units based on the performance of Mr. Thompson between the date of the Omnibus Amendment and the Termination Date.
In the event that the date of termination (other than a termination for cause or resignation that does not constitute a constructive termination) of Mr. Thompson’s employment occurs prior to March 31, 2021, vestingN-able include arrangements with respect to all equity awards held by Mr. Thompson that are subject solelysupport services and a number of ongoing licensing relationships. We will rely on N-able to a time-based vesting schedule shall accelerate assatisfy its performance and payment obligations under these agreements. If N-able is unable or unwilling to vesting as if Mr. Thompson continued to be employed through March 31, 2021.satisfy its obligations under these agreements we could incur operational difficulties and/or losses.
The foregoing description of the Omnibus Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Omnibus Amendment, a copy of which is attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated by reference herein.
In addition, the board of directors of the Company approved the appointment of William Bock as chairman of the Board of Directors effective on August 5, 2020.
Item 6. Exhibits
EXHIBIT INDEX
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Exhibit Number | | Exhibit Title |
| | Third Amended and Restated Certificate of Incorporation as currently in effect (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018) |
| | Amended and Restated Bylaws as currently in effect (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 10-Q (File No. 001-38711), filed with the Securities and Exchange Commission on November 27, 2018) |
| | Omnibus Amendment to Employee Documents, dated as of August 6, 2020, between SolarWinds Corporation and Kevin B. Thompson |
| | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101* | | Interactive Data Files (formatted as Inline XBRL) |
104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
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* | Filed herewith | |
** | The certifications attached as Exhibit 32.1 accompanying this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing | |
SOLARWINDS CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | SOLARWINDS CORPORATION |
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Dated: | August 6, 2021 | SOLARWINDS CORPORATION |
By: | | | |
Dated: | August 10, 2020 | By: | /s/ J. Barton Kalsu |
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| | | J. Barton Kalsu |
| | | Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |