swi-20220331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-38711

SolarWinds Corporation

(Exact name of registrant as specified in its charter)


Delaware						81-0753267
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

7171 Southwest Parkway

Building 400

Austin, Texas 78735

(512) 682.9300

(Address and telephone number of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, $0.001 par value	SWI	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes þ No

On May 2, 2022, 160,513,119 shares of common stock, par value $0.001 per share, were outstanding.

SOLARWINDS CORPORATION

Table of Contents


PART I - FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements	6
	Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	6
	Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2022 and 2021	7
	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three month periods ended March 31, 2022 and 2021	8
	Condensed Consolidated Statements of Stockholders' Equity for the three month periods ended March 31, 2022 and 2021	9
	Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2022 and 2021	10
	Notes to the Condensed Consolidated Financial Statements	11
	1. Organization and Nature of Operations
	2. Summary of Significant Accounting Policies
	3. Discontinued Operations
	4. Goodwill
	5. Fair Value Measurements
	6. Debt
	7. Earnings (Loss) Per Share
	8. Income Taxes
	9. Commitment and Contingencies
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures of Market Risk	33
Item 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	37
	Signatures	38
	Certifications

Safe Harbor Cautionary Statement

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such statements may be signified by terms such as “aim,” “anticipate,” “believe,” “continue,” “expect,” “feel,” “intend,” “estimate,” “seek,” “plan,” “may,” “can,” “could,” “should,” “will,” “would” or similar expressions and the negatives of those terms. In this report, forward-looking statements include statements regarding our financial projections, future financial performance and plans and objectives for future operations including, without limitation, the following:

•expectations regarding our financial condition and results of operations, including revenue, revenue growth, revenue mix, cost of revenue, operating expenses, operating income, non-GAAP operating income, non-GAAP operating margin, adjusted EBITDA and adjusted EBITDA margin, cash flows and effective income tax rate;

•findings from our investigations into the cyberattack on our Orion Software Platform and internal systems (the "Cyber Incident"), including our understanding of the nature, source and duration of the attack and our plans to ensure our products and internal systems are secure and provide additional information regarding our findings, as well as our expectations regarding the impact of the Cyber Incident on our business and reputation, the success of our related mitigation and remediation efforts and the additional costs, liabilities and other adverse consequences that we may incur as a result of the Cyber Incident;

•expectations regarding the impact the government investigations and litigation resulting from the Cyber Incident may have on our business;

•expectations regarding the impact and benefits of the spin-off of the N-able business into a newly created and separately traded public company;

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

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

•expectations regarding our evolution from monitoring to observability;

•intentions regarding our international earnings and investment of those earnings in international operations;

•expectations regarding our capital expenditures;

•expectations concerning acquisitions and opportunities resulting from our acquisitions;

•expectations regarding the impact of the COVID-19 pandemic on our business, results of operations and financial condition; and

•our beliefs regarding the sufficiency of our cash and cash equivalents, cash flows from operating activities and borrowing capacity.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially and adversely different from any future results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following:

•numerous risks related to the Cyber Incident, including with respect to (1) the discovery of new or different information regarding the Cyber Incident, including with respect to its scope, the threat actor’s access to SolarWinds’ environments and its related activities during such period, and the related impact on SolarWinds’ systems, products, current or former employees and customers, (2) the possibility that our mitigation and remediation efforts with respect to the Cyber Incident may not be successful, (3) the possibility that additional confidential, proprietary, or personal information, including information of SolarWinds’ current or former employees and customers, was accessed and exfiltrated as a result of the Cyber Incident, (4) numerous financial, legal, reputational and other risks to us related to the Cyber Incident, including risks that the incident or SolarWinds’ response thereto, including with respect to providing notices to any impacted individuals, may result in the loss, compromise or corruption of data and proprietary information, loss of business as a result of termination or non-renewal of agreements or reduced purchases or upgrades of our products, reputational damage adversely affecting customer, partner and vendor relationships and investor confidence, increased attrition of personnel and distraction of key and other personnel, U.S. or foreign regulatory investigations and enforcement actions, litigation, indemnity obligations, damages for contractual breach, penalties for violation of applicable laws or regulations, significant costs for remediation and the incurrence of other liabilities, (5) risks that our insurance coverage, including coverage relating to certain security and privacy damages and claim expenses, may not be available or sufficient to compensate for all liabilities we incur related to these matters, (6) the possibility that our steps to secure our internal environment, improve our product development environment and ensure the security and integrity of the software that we deliver to our customers may not be successful or sufficient to protect against future threat actors or attacks or be

perceived by existing and prospective customers as sufficient to address the harm caused by Cyber Incident and (7) the risk that the impact of the Cyber Incident may be proportionally greater in future periods as a result of the spin-off of the N-able business;

•other risks related to cyber security, including that we may experience other security incidents or have vulnerabilities in our systems and services exploited, which may result in compromises or breaches of our and our customers’ systems or, theft or misappropriation of our and our customers’ confidential, proprietary or personal information, as well as exposure to legal and other liabilities, including the related risk of higher customer, employee and partner attrition and the loss of key personnel, as well as negative impacts to our sales, renewals and upgrades;

•risks related to the spin-off of the N-able business into a newly created and separately traded public company, including that we may not realize some or all of the anticipated strategic, financial, operational, marketing or other benefits from the separation, or such benefits may be delayed by a variety of circumstances, which may not be under our control, we may experience increased difficulties in attracting, retaining and motivating employees or maintaining or initiating relationships with partners, customers and other parties with which we currently do business, or may do business in the future, we could incur significant liability if the separation is determined to be a taxable transaction, potential indemnification liabilities incurred in connection with the separation could materially affect our business and financial results and N-able may fail to perform under various transaction agreements that were executed as part of the separation;

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

•the inability to sell products to new customers or to sell additional products or upgrades to our existing customers;

•any decline in our renewal or net retention rates;

•the evolving breadth of our sales motion and challenges, investments and additional costs associated with increased selling efforts toward enterprise customers and adopting a subscription first approach;

•the inability to generate significant volumes of high quality sales leads from our digital marketing initiatives and convert such leads into new business at acceptable conversion rates;

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

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

•our ability to attract, retain and motivate employees;

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

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

•risks associated with our international operations;

•our status as a controlled company;

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

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

•such other risks and uncertainties described more fully in documents filed with or furnished to the Securities and Exchange Commission, including the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021.

Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially and adversely from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Investors and others should note that we announce material information to our investors using our investor relations website (https://investors.solarwinds.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about our company, our business and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations website.

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

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

SolarWinds Corporation

Condensed Consolidated Balance Sheets

(In thousands, except share and per share information)

(Unaudited)


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

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

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

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


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

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

SolarWinds Corporation

Condensed Consolidated Statements of Operations

(In thousands, except per share information)

(Unaudited)


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

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

SolarWinds Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)


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

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

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

SolarWinds Corporation

Condensed Consolidated Statements of Stockholders' Equity

(In thousands)

(Unaudited)


	Three Months Ended March 31, 2022
	Common Stock			Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders’ Equity
	Shares	Amount
Balance at December 31, 2021	159,176	$	159	$	2,566,783	$	1,306	$	(280,352)	$	2,287,896
Foreign currency translation adjustment	—	—		—		(16,895)		—		(16,895)
Net loss	—	—		—		—		(4,659)		(4,659)
Comprehensive loss										(21,554)
Exercise of stock options	16	—		12		—		—		12
Restricted stock units issued, net of shares withheld for taxes	1,063	1		(6,408)		—		—		(6,407)
Issuance of stock